In the most recent twist to the California budget story, Citigroup, Wells Fargo, and JPMorgan Chase and BOA refused California’s request for bad credit loans to tide it over until October. Till the State can get things fixed, it has started paying its creditors in bills (‘I Owe You’s’ or guarantees to pay bearing interest, technically called registered warrants ). Its Wall Street creditors , however , refused to take them.
California is expecting to need to distibute only about $13 billion in ious through September, and all its Governor has asked for in the way of a loan from the government is a guarantee for $6 billion. The total sum California wishes to balance its budget is $26.3 bln.
That is about the same sum given to Citigroup, Wells Fargo and JPMorgan in bailout money ; and it is just about one-tenth the sum given to AIG, a mere insurer. Firms apparently 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 planet’s eighth largest economy. Its 38.3 million folks are one-eighth of the nation’s population and a key catalyst for U.S. When the California consumer base fails, businesses are shaken nationwide. If AIG and the other Wall Street welfare recipients are too large to fail, California is far too enormous to fail.
Why? AIG and lehman brothers had A ratings right up until they announced bankruptcy. California hasn’t defaulted on its bonds, and it will not randomly decide to default ; the State Constitution mandates that debt principal and interest must be paid as guaranteed.
Considering the gigantic importance of the California economy to the country, and the comparatively small sum it needs in loans, the refusal to support the State financially appears highly suspicious, particularly when much more has been given to less creditworthy private establishments. The banks say they want to keep the force 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 ; briefly the sort of austerity measures predicted of supplicants reduced to 3rd World debtor standing. State statesmans are understandably disinclined to move into that debt pit.
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.
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 each $1 or $1.50 which folk B or the govt. 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 money or demand deposits. It can lend all that $10 into circulation at interest just as long as it has the $1 or a bit more in reserve to back it up.’
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 personal banks to loan cash to farmers, property developers, faculties and small businesses. It makes one percent debt solutions to startup farms, has a thriving student loan business, and purchases city bonds from public institutions.