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posted on 29 December 2015

Money And Sovereignty In The US: The Case Of Puerto Rico

by Dirk Ehnts, Econoblog101

The New York Times reports on the financial situation in Puerto Rico, a Caribbean island that is a US unincorporated territory:

On the surface, it is a battle over whether Puerto Rico should be granted bankruptcy protections, putting at risk tens of billions of dollars from investors around the country. But it is also testing the power of an ascendant class of ultrarich Americans to steer the fate of a territory that is home to more than three million fellow citizens.

This is quite interesting because Puerto Rico is like Greece in Europe: it has debts in foreign currency but the central bank would not buy its liabilities in a way that ensures that solvency is not an issue. The US territories that are US states also could face bankruptcy, so this is not about Puerto Rico being a special case. The article continues:

To block proposals that would put their investments at risk, a coalition of hedge funds and financial firms has hired dozens of lobbyists, forged alliances with Tea Party activists and recruited so-called AstroTurf groups on the island to make their case. This approach - aggressive legal maneuvering, lobbying and the deployment of prodigious wealth - has proved successful overseas, in countries like Argentina and Greece, yielding billions in profit amid economic collapse.

There it is. Bankruptcy for profit, just as in the NBER paper by George Akerlof in 1994:

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

The world is an odd place, but this is one of the strangest plays in the capitalist playbook! For those interested in the topic, here is a link to Bill Black's testimony before the Oireachtas' Joint Committee of Inquiry into the Banking Crisis.

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