In the newest twist to the California budget saga, Citigroup, Wells Fargo, and JPMorgan Chase and B. O. A have declined California's request for bad credit loans to tide it over till October. Until the State can get things sorted, it has started paying its creditors in markers ('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 announces the kettle is a poor credit risk!
Total loans, commitments and guarantees to save the financial sector and stem the credit crisis have been conjectured at $12.8 trillion. But California hasn't been invited to the banquet.
That is about the same sum given to Citigroup, Wells Fargo and JPMorgan in rescue money ; and it's only about one tenth the sum given to AIG, an insignificant insurer. Firms allegedly trump States and their voters in the eyes of the powers controlling the purse strings.
California has a gross domestic product of $1.7 trillion yearly and has been rated the world's eighth largest economy. Its 38.3 million folk are one-eighth of the state's population and a key catalyst for U.S. When the California shopper base falters, companies are shaken nationwide. If AIG and the other Wall Street welfare recipients are too big to fail, California is far too enormous to fail.
Fitch Rating Agency has downgraded California's borough bonds to junk bond status B triple B. California has never defaulted on its bonds, and it may not arbitrarily decide to default ; the State Constitution mandates that debt principal and interest must be paid as guaranteed. It was these insurers, not the State of California, that got into hot water betting in derivatives.
There may be deeper motives than that. Considering the gigantic importance of the California economy to the country, and the comparatively tiny sum
it wants 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 need to keep the stress on California baby-kissers 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 brief the type of austerity measures anticipated of supplicants reduced to third World debtor status. State statesmans are understandably reluctant to move 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.
If Wall Street and the Feds will not 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 government-owned bank and fan these'reserves' into many times their face worth in loans, using the same'fractional reserve' system that personal banks use. Many authorities have attested that banks simply create the money they lend on their books.
'[F]or each $1 or $1.50 which people B or the governing body B deposit in a bank, the bank system can create out of thin air and by the stroke of a pen some $10 of checkbook cash or demand deposits. It can lend all that $10 into circulation at interest just while it has the $1 or a little more in reserve to back it up.'
The bank's surplus profits are returned to the State's coffers. The bank operates as a bankers' bank, partnering with personal banks to lend money to farmers, property developers, faculties and home businesses. It makes 1% debt solutions to startup farms, has a thriving student loan business, and purchases city bonds from public institutions.
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