- Four Wall Street banks, which received $15-25 billion
each from the taxpayers, have rejected California's IOUs because the State
is supposedly a bad credit risk. The bailed out banks would seem to have
a duty to lend a helping hand, but they say they don't want to delay an
agreement on further austerity measures. State legislators are not bowing
quickly to the pressure, but what is the alternative?
-
- Four Wall Street banks, which received $15-25 billion
each from the taxpayers, have rejected California's IOUs because the State
is supposedly a bad credit risk. The bailed out banks would seem to have
a duty to lend a helping hand, but they say they don't want to delay an
agreement on further austerity measures. State legislators are not bowing
quickly to the pressure, but what is the alternative?
-
- In the latest twist to the California budget saga, Citigroup,
Wells Fargo, and JPMorgan Chase (which each got $25 billion in bailout
money from the taxpayers) and Bank of America (which got $15 billion) have
refused California's request for a loan to tide it over until October.
Until the State can get things sorted out, it has started paying its creditors
in IOUs ("I Owe You's" or promises to pay bearing interest, technically
called registered warrants). Its Wall Street creditors, however, have refused
to take them. Why? The pot says the kettle is a poor credit risk!
-
- California expects to need to issue only about $13 billion
in IOUs through September, and all its Governor has asked for in the way
of a loan from the federal government is a guarantee for $6 billion. Total
loans, commitments and guarantees to rescue the financial sector and stem
the credit crisis have been estimated at $12.8 trillion. But California
has not been invited to the banquet. The total sum California needs to
balance its budget is $26.3 billion. That is about the same sum given to
Citigroup, Wells Fargo and JPMorgan in bailout money; and it is only about
one-tenth the sum given to AIG, a mere insurance company. Corporations
evidently trump States and their citizens in the eyes of the powers controlling
the purse strings. California has a gross domestic product of $1.7 trillion
annually and has been rated the world's eighth largest economy. Its 38.3
million people are one-eighth of the nation's population and a key catalyst
for U.S. retail sales. When the California consumer base falters, businesses
are shaken nationwide. If AIG and the other Wall Street welfare recipients
are too big to fail, California is way too big to fail.
-
- Fitch Rating Agency has downgraded California's municipal
bonds to junk bond status,triple B. Why? AIG and Lehman Brothers had A
ratings right up until they declared bankruptcy. California has never defaulted
on its bonds, and it cannot arbitrarily decide to default; the State Constitution
mandates that debt principal and interest must be paid as promised. California
bonds lost their triple A rating only when the municipal bond insurers
(Ambac and MBIA) lost theirs. It was these insurers, not the State of California,
that got into hot water gambling in derivatives. The State Attorney General
has opined that California's IOUs are valid and binding obligations of
the State. In rejecting them, however, Wall Street may have ulterior motives.
A lower credit rating can justify investors in demanding higher interest
rates. The interest offered on the IOUs is substantially lower than the
interest banks can get on triple B rated municipal bonds.
-
- There may be deeper motives than that. Considering the
enormous importance of the California economy to the country, and the relatively
small sum it needs in loans, the refusal to support the State financially
seems highly suspicious, especially when much more has been given to less
creditworthy private institutions. The banks say they want to keep the
pressure on California legislators to work it out among themselves, but
what does that mean? The options are even higher taxes, even more cuts
in services, or even more fire sales of public assets; in short, the sort
of austerity measures expected of supplicants reduced to Third World debtor
status. State legislators are understandably reluctant to crawl into that
debt pit. Governor Schwarzenegger has refused to approve higher taxes,
while Democratic leaders say further cuts in services could leave some
Californians starving in the streets.
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- The Sun Could Shine Again on the Sunshine State
-
- There is an alternative to that dark future, and perhaps
it is to keep the public from waking up to it that arms are being twisted
to accept the new burdens quickly. If Wall Street and the Feds won't extend
credit to California on reasonable terms, the State could simply walk away
and create its own credit machine. California could put its revenues in
its own state-owned bank and fan these "reserves" into many times
their face value in loans, using the same "fractional reserve"
system that private banks use. Many authorities have attested that banks
simply create the money they lend on their books. Congressman Jerry Voorhis,
writing in 1973, explained it like this:
-
- "[F]or every $1 or $1.50 which people, or the government,
deposit in a bank, the banking system can create out of thin air and by
the stroke of a pen some $10 of checkbook money or demand deposits. It
can lend all that $10 into circulation at interest just so long as it has
the $1 or a little more in reserve to back it up."
-
- President Obama himself has acknowledged this "multiplier
effect." In a speech at Georgetown University on April 14, 2009, he
said:
-
- "[A]lthough there are a lot of Americans who understandably
think that government money would be better spent going directly to families
and businesses instead of banks; where's our bailout?,' they ask, the truth
is that a dollar of capital in a bank can actually result in eight or ten
dollars of loans to families and businesses, a multiplier effect that can
ultimately lead to a faster pace of economic growth."
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- If private banks can leverage deposits into multiple
amounts of "credit" on their books, a state-owned bank could
do the same thing, and return the profits to the public purse. One State
already does this. North Dakota boasts the only state-owned bank in the
nation. It is also one of only two states (along with Montana) that are
currently able to meet their budgets. The Bank of North Dakota was established
by the legislature in 1919 to free farmers and small businessmen from the
clutches of out-of-state bankers and railroad men. By law, the State must
deposit all its funds in the bank, and the State guarantees its deposits.
The bank's surplus profits are returned to the State's coffers. The bank
operates as a bankers' bank, partnering with private banks to lend money
to farmers, real estate developers, schools and small businesses. It makes
1% loans to startup farms, has a thriving student loan business, and purchases
municipal bonds from public institutions.
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- North Dakota is not suffering from unemployment or feeling
the pinch of the economic downturn. Rather, it sports the largest surplus
it has ever had. If this isolated farming State can escape Wall Street's
credit crisis, the world's eighth largest economy can do it too!
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