Move Over Fed, California's Now Printing Its Own Money 20 comments
Michael Steinberg
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Watch out Ben Bernanke, the Federal Reserve now has competition in the currency game. California is planning to create its own money in the form of IOUs, just like the Fed. What is the California IOU – currency or an interest bearing note?
Officially the IUOs will be called “registered warrants”. State Controller John Chiang planned to issue $3.4 billion, maturing on Oct. 1 to replace state payments. The interest rate is set to be determined on Thursday, but cannot exceed the statutory limit of 5%.
The San Jose Business Journal “California banks ponder their stance on state IOUs” reports that banks are equally perplexed about whether to accept the IOUs and how to process them. But the banks are loath to upset the state with the largest economy in the nation; the state capable of generating the largest investment banking fees.
Bank of America (BAC) issued a statement saying they will honor the IOUs through July 10. Wells Fargo (WFC) and JP Morgan (JPM) have not decided. The smaller banks were mixed.
California’s ingenuity poses an interesting dilemma for the Fed. The IOUs would be structured as short-term tax-free bills, but trade like cash. Banks are being asked to accept the IOUs and advance customers interest. Should the Fed sanction alternate forms of money?
Disclosures: Author is long BAC and WFC.
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This article has 20 comments:
If the Federal government moves to bail them out we really could see a revolt in this country. I've already seen AP articles (communist press) suggesting the CA is too big to fail. I've read articles blaming taxpayers and govt leaders for failing to raise taxes. May the public in CA doesn't want to pay more taxes. Maybe they want less government. How come the politicians won't do what the public clearly wants? They want to spend the money for themselves and they want less government service. Its time to vote for a third party folks. Its time for both parties to be decimated.
One final thought. I live in Gainesville, FL which is like a little CA inside the state of Florida. Our city owns and runs a money losing golf course. They sink like 2-300,000 a year into that money loser. They canceled fireworks this year due to budget constraints yet somehow running a golf course is a primary service for the city. We have plenty of public courses too here so it not like we have a shortage of golf courses. Gainesville also flies the United Nations Flag. Our leaders wish they were in another country. I wish I could send them to California.
Here's a New York Times article on the situation in 1992:
nytimes.com/1992/0...
That's the distinction that makes "money".
There's a term of art that should be added to this discussion "Legal tender". "Legal tender" means an instrument which by law CANNOT be refused as payment of a debt.
Banks and others might _choose_ to accept the registered warrants, but they have no obligation to-- and hence they are not "legal tender" or "money".
warrants? I have my property taxes coming up in the
Fall...
> Why can't they just sell more bonds? Is
> it because no one will lend to them?
The California State Constitution forbids the selling of long-term bonds to fund deficits on current account - infrastructure bonds of any appeaciable size must be approved by a state wide ballot. The issue is not lack of bond buyers since no one is being asked or can be asked to buy a long term bond to close this budget deficit.
The State has Revenue of something like $90b this year down something like $20b from last year. Since a legal balanced budget has not yet been passed a good deal of that $90b cannot be spent. So until someone (the House or the Governor) "gives in" on spending or tax increases or a compromise is reached the $90b can only be paid to groups speciefied by law, which includes bond holders who will get (from revenue) the approximately $5b-$7b owed to them, regardless of whether the budget is passed yet.
This is a "crises" which is inevitable in a fluctuating economy when there is a legal requirement for a budget which is balanced on "current account" - just the sort of thing SA people should approve of - no Keynesian spending during recessions, but sackings or tax increases to add to the immediate depth of the recession (and thus decrease tax revenue even more).
But the State's voters might go Keynesian and bravely/foolishly/wisely approve new capital works or go ahead with already approved items (cuurently on hold) in an attempt to aleviate the recession.
It might take an outside agency to knock heads together to make the necessary compromise, like calling in a consultant to take the heat when you know hard decisions must be made.