Arnold's funny money

Short on Cash, California to Start Paying With I.O.U.’s

Excerpt:

Its budget gap growing and its political process for addressing the gap unhinged, California will begin Thursday to pay vendors and taxpayers with i.o.u.’s, only the second time the state has adopted the emergency payment method since the Great Depression.

By Thursday afternoon, state officials said, 28,742 warrants worth $53.3 million will be printed and readied for distribution. If the state’s fiscal crisis – which has left California unable to pay all of its bills – continues without a budget settlement, it would issue as much as $3.36 billion for the month of July.

The bulk of the warrants – which will offer recipients an interest rate of 3.75 percent -- will be issued to Californians waiting for their income tax refunds, though some will be issued to local governments as well as to vendors doing business with the state. Federal and state laws prohibit paying state employees, schools, or Medicaid recipients with the warrants.

The issuance of i.o.u.’s comes after state lawmakers and Gov. Arnold Schwarzenegger failed to agree on how to close a state budget hole — now roughly $27 billion — by the end of the fiscal year on Wednesday. The state is essentially too short on cash to pay its bills, and will continue to issue warrants — with potential long-term serious damage to the state’s credit rating — until the budget impasse is resolved.

Wells Fargo will accept California IOUs, for now

Excerpt:

Wells Fargo said Thursday it will accept California IOUs from its retail and business customers until no later than July 10.

“We’re very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of its payments to some businesses and individuals,” said Lisa Stevens, head of Community Banking for San Francisco-based Wells Fargo (NYSE: WFC) in California, in a statement announcing the move. “We are reluctant to take this step, but are doing so to help our customers who are not at fault.”

The decision was announced a day after Bank of America (NYSE: BAC), the North Carolina-based bank that is the largest banker in California, also said it would accept the state’s IOUs.

Comment: Arnold's not the only one to blame!

More detail here: requently Asked Questions about Registered Warrants (IOUs)

Wish I had an image!

California: More IOUs?

California is a greater risk than Greece

Excerpts:

Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state's $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

...

Earlier this week, John Chiang, the state's controller, said that if a workable plan to reduce the deficit and increase cash levels is not reached soon, he will have to return to issuing IOU's, forcing state workers to take additional unpaid leave and potentially freezing spending.

Last summer, California issued $3bn of IOU's to creditors including residents owed tax refunds as a way of staving off a cash crisis.

"I can't write checks without money; that's against the law. My main goal is to keep the state afloat, but I won't be able to do it without the help of new legislation," said Mr Chiang.

Comment: More

Economic Aftershocks in Greece and California

Excerpts:

Greece's economy comprises only 2% of the overall European economy -- about the same magnitude as Indiana's in the United States. Greece's deficit to GDP ratio, while high at about 12.5%, is not that much higher than that of both the US and Japan, around 10.5%. True, Greece has a sizable accumulated debt over many years, estimated at about 110 percent of its GDP, but even the U.S. has a debt to GDP estimated at 94 percent and projected to break 100 percent by 2012. And Greece is embedded within the euro zone which actually has a fairly low deficit to GDP ratio by today's post-collapse standards, only 6%. So there is little doubt that Europe has the capacity to absorb Greece's troubles. This is a matter of investor confidence, not economic fundamentals.

But California by comparison makes up 14% of the US economy, about the same magnitude as Germany's economy in Europe, truly "too big to fail." Yet when California threatened to default on its loan obligations last summer and Governor Arnold Schwarzenegger asked for a federal bailout, the Obama administration flatly rejected it. That caused California to have to issue IOUs as a way to pay its bills, and its bond rating plummeted.

California's situation in some ways is more worrisome than Greece's. Having a state that is one-seventh of the national economy in dire straits is a threat to the nation's economic recovery. It is analogous to having Germany struggling instead of Greece, striking at the heart of Europe. California has been shaken by widespread layoffs and furloughs -- the city of Los Angeles just laid off 1,000 more workers -- and core social programs have been slashed. Millions of low income children have lost access to meal programs, and community clinics have been closed. Almost three million low income adults have lost important benefits such as dental care, psychological services and mammograms.

California wimp out

Comment: Do many of my readers remember the Wimpy character of the Popeye cartoons? This slovenly slacker was known for his line, "I'll gladly pay you Tuesday for a hamburger today". More on J. Wellington Wimpy and some of his other famous lines here. Note the use of Wimpy in the following article.

California’s Nightmare Will Kill Obamanomics

Excerpt:

Last week, we discovered that the state of California will gladly pay you Tuesday for a hamburger today.

With California mired in a budget crisis, largely the result of a political impasse that makes spending cuts and tax increases impossible, Controller John Chiang said the state planned to issue $3.3 billion in IOU’s in July alone. Instead of cash, those who do business with California will get slips of paper.

The California morass has Democrats in Washington trembling. The reason is simple. If Obama’s health-care plan passes, then we may well end up paying for it with federal slips of paper worth less than California’s. Obama has bet everything on passing health care this year. The publicity surrounding the California debt fiasco almost assures his resounding defeat.

It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.

California has engaged in an orgy of spending, but, compared with our federal government, its legislators should feel chaste. The California deficit this year is now north of $26 billion. The U.S. federal deficit will be, according to the latest numbers, almost 70 times larger.

The federal picture is so bleak because the Obama administration is the most fiscally irresponsible in the history of the U.S. I would imagine that he would be the intergalactic champion as well, if we could gather the data on deficits on other worlds. Obama has taken George W. Bush’s inattention to deficits and elevated it to an art form.

And what it may look like:

US lurching towards 'debt explosion' with long-term interest rates on course to double

Excerpt:

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

Banks to CA: No more I.O.U.'s

Big Banks Don't Want California's IOUs

Excerpt:

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

The development is the latest twist in California's struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs -- or "individual registered warrants" -- to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July's end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.

Meanwhile, on Monday morning, a budget meeting between Gov. Arnold Schwarzenegger and legislative leaders failed to produce a result. Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

Ms. Mills of the CBA said some banks were concerned that there aren't processes in place to accept IOUs, and also worried about fraud issues. She noted that not all banks have set a July 10 deadline, and that dozens of credit unions in the state will keep accepting IOUs.

Wells Fargo's head of community banking, Lisa Stevens, said: "We're very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of payments to some businesses and individuals."

Comment: Time to pay for that hamburger today!