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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 (NYSE:BAC) issued a statement saying they will honor the IOUs through July 10. Wells Fargo (NYSE:WFC) and JP Morgan (NYSE: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.

Source: Move Over Fed, California's Now Printing Its Own Money