by Andrew P. Napolitano, Lew Rockwell:
What happens when the government goes bankrupt? This question is one that sounds like a hypothetical exercise in a law school classroom from just a few years ago, where it might have been met with some derision. But today, it is a realistic and terrifying inquiry that many who have financial relationships with governments in America will need to make, and it will be answered with the gnashing of teeth.
Earlier this week, a federal judge accepted the bankruptcy petition of Stockton, Calif., a city of about 300,000 residents northeast of San Francisco, over the objections of those who had loaned money to the city. The lenders – called bondholders – and their insurers saw this coming when the city stopped paying interest on their loans – called bonds. In this connection, a bond is a loan made to a municipality, which pays the lender tax-free interest and returns the principal when it is due. Institutional lenders usually obtain insurance, which guarantees the repayment but puts the insurance carrier on the hook.
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