Creative bailing

4 October 2010 By Martin Hutchinson

Historically that hasn t happened, but the EU s example could make it more likely. Two possible structures for bailouts are budgetavoiding federal guarantees and regulationbending Federal Reserve bond purchases. Either way, politics may make rescues hard to resist.

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Analyst Meredith Whitney on Sept. 28 released a report on the possibility of default by the 15 U.S. states with the largest populations. Her analysis suggested that California was in the worst budget and debt position, in relation to its gross state product, with New Jersey, Illinois and Ohio tied for second place, followed by Michigan, Georgia and New York.

The Federal Reserve Act imposes limits on the U.S. central bank's purchases of state and municipal debt, including a sixmonth maximum maturity. In a letter to Representative Paul Kanjorski of the House banking Committee dated Oct. 28, 2008, Fed Chairman Ben Bernanke reiterated this limitation. He said the Fed had little or no authority to lend directly to a state or municipal government and that decisions on funding states are political and should be taken by elected officials.

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