Puerto Rico default possible, What to do?

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The refrain from politicians and Wall Street has now become all too familiar.

Bail us out or the world will blow up! Financial dysfunction will catch like wildfire. If you don’t give us piles and piles of money (taxpayer money of course) you may just wake up to a world which is a smoldering cinder. It will be Mad Max in the streets. The sun will go down and never come up. In short, do YOU Mr. Politician really want to be responsible for Armageddon?Just give us your billions so that we can be made whole even though we’ve made bad financial decision after bad financial decision for decades. It’s just the taxpayer’s money anyway. They, let’s be honest, won’t really care. They’re too busy hustling day to day to pay attention.

Let Puerto Rico default. Let the island feel the consequences of its profligate spending. Let the Wall Street banks feel the pain too. They knew what kind of bonds they were buying. It’s OK. They can get hammered and the world will go on. In fact the world will probably work just that much better because there will be a sense that the bailout culture which actually has infected the world economy will have been reined in a little. (This is important particularly as we look at big spending states which may go off the rails in the relatively near future.)

There will be pain. But markets don’t always go up. They go down too. The system actually doesn’t work as it should if markets aren’t allowed to clear. Why would we want to reward idiotic behavior on a mass scale? (That’s what we did in 2008 by the way.)

(From Bloomberg)

A GDB default would be the largest yet on Puerto Rico securities and would send a clear signal to investors and U.S. officials that the island doesn’t have enough money to keep paying its debts. Garcia Padilla will invoke a new debt moratorium law if the GDB is unable to delay the entire $422 million, Jesus Manuel Ortiz, a spokesman for the governor, said this week.

Puerto Rico and its agencies owe $70 billion after years of borrowing to fill budget shortfalls as the island’s economy contracted. Garcia Padilla is seeking to cut that debt load by asking investors to accept losses on their securities. The governor in June 2015 said the commonwealth was unable to repay all of its obligations. Since then, two agencies have defaulted on smaller debt payments.

Yes, default may send large numbers of Puerto Ricans to the mainland. Yes, they have a legal right to come anytime they want. This is the strongest argument for a bail out. But it isn’t a strong enough argument. Puerto Rico actually has tremendous economic potential. It could become the Singapore of the Caribbean. But it won’t ever change if we bail them out. And we won’t change either.

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