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Is Bailing Out California Necessary to Preserve the Union?
Posted Jul 14, 2009 01:18pm EDT by Joe Weisenthal in Newsmakers, Recession, HousingFrom The Business Insider, July 14, 2009:
Marshall Auerbuck at New Deal2.0, a blog for the Franklin and Eleanor Roosevelt Institute (just so you know where they stand), sees dramatic consequences if California is allowed to continue printing IOUs and then use them to collect taxes.
According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state - an action that effectively would mean that California is entering the currency business . . .
While it might appear that the new law seems merely to allow California to deficit spend just like the Federal Government - in actuality, the effect is far more profound than that. Allowing the IOUs to be an acceptable payment method for state taxes, instantly imparts value to them - in effect, what you have is a state creating a sovereign currency right under the noses of the Treasury. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.
...
It will be interesting to see what the exchange rate is between California IOU and US currency - the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.
This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the renter class above the vast majority of Americans by emphasizing “fiscal sustainability” and destroying aggregate demand in the process.
Now obviously this is hardcore Keynesian stuff -- putting "fiscal sustainability" in scare quotes, while claiming that government inaction is "destroying aggregate demand."
Basically, he's warning Obama: Forget this fiscal sustainability crap, if you don't bail out California, you risk ending the union. Do what Lincoln did, and keep the union together.
The problem with this line of thought -- which isn't totally ridiculous; we've said it ourselves that California is creating its own currency -- is that the state still needs to borrow and pay off its debt in dollars, which means there's an inherent limit on its ability to function solely with Arnie-bucks. It can accept them as taxes, but it can't pay muni holders with them.
Here's a thought experiment. Imagine a bomb landed on the rest of the world besides California, and all its debtholders were dead, so it could just tear up its obligations. That would obviously solve the debt problem. Also, since there wouldn't be a Federal Reserve or a Treasury, it would have to use Arnie-bucks, since there'd be no US currency issuer.
Would that solve its problems? Obviously not. You'd still have the fact that the state grew unsustainably, using too much of its resources for sprawl and other services, not to mention the toxic political atmosphere.
In situations like this, it can be useful to ignore money, which is a distraction. They can print and create IOUs all they want, but none address any of the fundamental problems with the state. Were Washington to bailout the state it would reasonably demand all kinds of concessions -- if for no other reason than to make an example for other states, so that they don't follow suit. Of course, that creates all kinds of fresh constitutional issues.
One cool thing: We're living history. The idea that we're talking about the dissolution of the union -- extremely remote -- is pretty interesting.
More from The Business Insider:
richard - Tuesday July 14, 2009 02:46PM EDT
As California represents a quarter of the U.S. economy, the welfare states like Utah and Idaho and Alabama and Alaska had better pray California does not fail - because if California really fails they can forget getting $1.30 back for every $1.00 they send to Washington. They can forget having a market for the few things they actually produce. They can forget having some place to criticize while going to church. They can forget having a place for their kids to run away too, to escape them.
Yahoo! Finance User - Tuesday July 14, 2009 02:51PM EDT
IF..."WE"...Go ahead and......"BAILOUT" The State of California.......WHOM IS...GOING TO ..."BAILOUT"....The U.S. GOVERMENT....When We GO-UNDER ???????Let Them Go Down....."THE TOILET" !!!!!!!
L D - Tuesday July 14, 2009 03:01PM EDT
America has been on drugs and now we have to go to rehab.The answer is simple.Stop printing money,stop all the bail outs and give away programs.Let every one fail thats in bad shape.Yes it will be painful and then let the free market system work things out.It will probally take years,but we will come out of this a strong country.This is the only soloution to this financial colapse of the US monetary system.
Ray - Tuesday July 14, 2009 03:02PM EDT
California will only be able to send the IOUs to Fed in exchange for dollars, the banks do not want the IOUs. Disneyland has had its own currency. California should talk to them about a logo.
Old Fart - Tuesday July 14, 2009 03:04PM EDT
BUY GUNS, AMMO AND A LOT OF WATER.............. THE REVOLUTION IS NEAR!-------------------------------------You forgot to mention silver, gold, dehydrated food. But the Guns, Ammo,and Water are right on.
Yahoo! Finance User - Tuesday July 14, 2009 03:10PM EDT
Screw California. Turn it into a military gunnery range.
Sblowmeh - Tuesday July 14, 2009 03:12PM EDT
maybe they should legalize prostitution there as well, collect taxes on it, ya they all got fakies already it would be great to legally bone some of those orange county bimbos and pay them a couple hundo and maybe get on their MTV show?
Harlequin - Tuesday July 14, 2009 03:19PM EDT
richard g: You are wrong about Proposition 13. It has not created a "tax haven for the very rich." The average property in California turns over every 5-7 years and is reassessed at that time. Also, California could never be called a "tax haven" because California's other taxes are the highest in the country -- the second highest income tax (actually the highest, because the top rate kicks in at a very low level) and the highest sales tax rate in the country. Also the state and the other government bodies in California tax everything else. If you live in California, take a look at your utility bill and your phone bill; see how many taxes are added. Rich folks are not flocking to California as a tax haven -- they are leaving California in droves.
Yahoo! Finance User - Tuesday July 14, 2009 03:19PM EDT
It's pretty obvious California simply spent more than they took in. I live within my means and the system is designed that all do likewise. I wish we had proposition 13 in our state, and the super majority vote for tax increases. I wish we had 3 choices each time the politicos tried raising our taxes. The choices should be raise taxes so much, not raise taxes, or reduce taxes by the same amount of the proposed raise. Every time we have a tax or create a loop hole, one group benefits at the expense of another group. Runaway spending kills most governments, and it looks like now it's California's turn. RIP.
dean - Tuesday July 14, 2009 03:21PM EDT
You want to give illegals free medical, schooling, welfare, go ahead. meanwhile my state lives within its means and only spends what it takes in. Why should California get bailed out? They voted for this crap, they can live with it.
holy smokes - Tuesday July 14, 2009 03:30PM EDT
Hey, this might be a problem- the Chinese said if we dont stop asking them to take Calif, they might declare war on us.
Yahoo! Finance User - Tuesday July 14, 2009 03:32PM EDT
The State Of California.....Is GOING.."UNDER"....Whom Do You THINK...That Is...."NEXT"..?????? OBAMANATION....Of Course !!!!!
Yahoo! Finance User - Tuesday July 14, 2009 03:37PM EDT
Perhaps The "Chinese" Will TAKE The...I.O.U...From...CALIFORNIA....In EXCHANGE For Their.....$$$ 3.8 TRILLION DOLLARS IN U.S. Treasury Bills...!!!!!!
Yahoo! Finance User - Tuesday July 14, 2009 03:38PM EDT
Quite simply, California couldn't live within its' means. I wish our state had proposition 13, and the super majority vote for tax increases. Actually, each tax increase on the ballot should give the voters 3 choices. Vote in favor of the increase, no change, or vote for a tax decrease of the same amount. Each time we have a tax increase or loop hole created, one group benefits at the expense of another. Runaway government spending put more than one government to rest. California, RIP.
Yahoo! Finance User - Tuesday July 14, 2009 03:40PM EDT
All I know is the USA cannot afford Californai any longer, they will bankrupt the rest of the country if we aren't careful! Maybe we can put California up for sale, and hopefully find a buyer rich enough to support their liberal society.
Yahoo! Finance User - Tuesday July 14, 2009 03:41PM EDT
Let California and for that matter anyone who want to print money, print money. That's how they did it in 19th century in the US, until the federal government decided to spoil the party with the banking act. Currencies backed by less or questionable capital (like CA) would be quickly discounted by the free market, just like what happened back in the 19th century.
mary w - Tuesday July 14, 2009 03:52PM EDT
California is a profligate state and it has chosen to live as such. Its demise should be a symbol for all to learn and deviate. They have created this and they need to correct it. They pride themselves in their state laws and now the world can witness their unsuccessful strategies. Blame the people of California since they continue to elect these incompetent office holders. If all else fails, give California back to Mexico, it will not be missed. Where are your electorates in a time of need? Yet, you send these people to run the federal government. I say die in your filth and bankruptcy. You the working and living poor look at who you have elected. Take stock in your vote and own up to their shortcomings and kick them out of office during the next election. If not, then continue to sink.
mary w - Tuesday July 14, 2009 04:02PM EDT
What about locals having to pay for Jackson's funeral, as opposed to the private industry and his family? Your local representatives should be impeached for their actions. Yet you will continue to reelect these incompetent people. I say to you the people why have you not stormed the gates and asked for accountability?
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GerritD - Tuesday July 14, 2009 02:45PM EDT
No more Bailouts! Deport all the illegal aliens in the us. it's the only way!