4 ms·

Who's lending California this money now? It seems quiet a risky deal.

by robryan 16y ago

yummyfajitas 16y ago
It's not that risky. The most likely outcome is simply that the fiscally responsible states will be forced to bail California out.
- jswinghammer 16y ago
  Depends on who holds the bonds. If the majority of those people are well connected a bailout is likely. It won't come without concessions though. Bondholders will be forced to take a haircut on their investment. Seems crazy to me.
- maxawaytoolong 16y ago
  Except aren't there only like 3 "fiscally responsible" states? I don't think Wyoming and North Dakota are going to be able to pull off such a bailout.
  - yummyfajitas 16y ago
    Perhaps I should have said "less fiscally irresponsible".
nlavezzo 16y ago
Everyone who buys California state bonds (which are income tax exempt) is loaning the money. The interest rate California has had to pay to entice people to buy these increasingly riskier bonds, has increased accordingly as the state's financial condition has deteriorated. It is a risky deal, and buying CA state bonds to hold until maturity is basically a bet that the state will get bailed out by the federal government.
- robryan 16y ago
  Yeah I knew it would be bonds, just seemed like a risky proposition. I guess any responsible economic action here isn't going to be popular so it's not going to happen? Hypothetically what would happen if the state decided to reform these pensions, slashing them right back to something they could realistically afford?
  - nlavezzo 16y ago
    I think responsible economic action is very popular with the population of California in general. Unfortunately, the general population of a given state doesn't get involved in local elections (what's the name of your local state delegate?) unless they work for the government they're voting in. Therefore even though the population in general might be howling for reform, the state delegates that have to push it through have no incentive to, since they know the great majority of people that actually know who they are and are going to vote in the next election, are against reform.
  - btilly 16y ago
    The fundamental problem is that a large amount of possible government action is hampered by a constitutional rule that says that 60% of the house has to agree on any budget. Structurally neither party has the power to get to 60% of the state legislature, voting for taxes is political suicide for Republicans, and voting to cut benefits is political suicide for Democrats. So we have permanent deadlock with no attempted solutions being politically viable. With your example, if California tried that before declaring bankruptcy, there would be court challenges that California would lose. Even if contracts going forward were amended, that wouldn't help the structural problems from what has already happened. Therefore California requires either bankruptcy or extraordinary assistance. And the Obama administration has indicated that no extraordinary assistance will be forthcoming. It is worth noting here that California is one of the few states that pays more into the federal government than we get out, and the amount extra we have paid in over the years is more than enough to rescue the state government.
    - ghshephard 16y ago
      s/60% of the house/66% of the house/ From: http://www.leginfo.ca.gov/.const/.article_4 http://www.leginfo.ca.gov/.const/.article_4 Const., Art. IV, Sec. 12 actually stipulates " (d) No bill except the budget bill may contain more than one item of appropriation, and that for one certain, expressed purpose. Appropriations from the General Fund of the State, except appropriations for the public schools, are void unless passed in each house by rollcall vote entered in the journal, two-thirds of the membership concurring."
Eliezer 16y ago
They're all betting they can sell those bonds on a liquid market a week before the market officially wakes up and realizes a disaster is coming.
korch 16y ago
The Federal gov't won't ever let California outright default on its debt. Why? It is the largest economy inside the US, it serves critical national security purposes, and being the biggest state debtor it will take dozens of other broke states down with it. A default would trigger a copycat landslide in the dozen other states who are also crippled with massive debt. If half the states default, all the dike holes the Fed has been filling with fingers over the past 2 years will have been for nought. It just can't be allowed to happen, period. At least in plain sight. It's exactly like how the banks are keeping their 1+ years worth of "shadow" housing inventory off the market, so as to keep a floor on prices and prevent everyone from panicking and running for the exits at once. And just like how the Federal bailouts were passed through back channels(i.e. Maiden Lane I & II, reserve swaps with foreign central banks, etc), and arcane accounting tricks that no congress-critter can comprehend, and the biggest political smoke & mirrors America has ever seen, so too will it go for the bailing out involvent states. It won't be Obama handing Schwarzenegger an oversized $30 billion dollar check on TV like a grinning Ed McMahon. No, it'll be a thousand tiny accounting tricks to prop up California, and keep the markets in perpetual doubt about the overall fiscal status of California. Our entire Federal fiscal and monetary policy is a waiting game. They don't know what will happen, but the thinking is if we can all just hang on long enough for everyone to adjust to the economic new normal, then we can at least avoid an outright national collapse. Nobody on the planet can even know if this will work, but there are zero alternatives.

Who's lending California this money now? It seems quiet a risky deal.

by robryan 16y ago

Who's lending California this money now? It seems quiet a risky deal.

It's not that risky. The most likely outcome is simply that the fiscally responsible states will be forced to bail California out.

jswinghammer 16y ago
Depends on who holds the bonds. If the majority of those people are well connected a bailout is likely. It won't come without concessions though. Bondholders will be forced to take a haircut on their investment. Seems crazy to me.
maxawaytoolong 16y ago
Except aren't there only like 3 "fiscally responsible" states? I don't think Wyoming and North Dakota are going to be able to pull off such a bailout.
- yummyfajitas 16y ago
  Perhaps I should have said "less fiscally irresponsible".

nlavezzo 16y ago

Everyone who buys California state bonds (which are income tax exempt) is loaning the money. The interest rate California has had to pay to entice people to buy these increasingly riskier bonds, has increased accordingly as the state's financial condition has deteriorated. It is a risky deal, and buying CA state bonds to hold until maturity is basically a bet that the state will get bailed out by the federal government.

robryan 16y ago
Yeah I knew it would be bonds, just seemed like a risky proposition. I guess any responsible economic action here isn't going to be popular so it's not going to happen? Hypothetically what would happen if the state decided to reform these pensions, slashing them right back to something they could realistically afford?
- nlavezzo 16y ago
  I think responsible economic action is very popular with the population of California in general. Unfortunately, the general population of a given state doesn't get involved in local elections (what's the name of your local state delegate?) unless they work for the government they're voting in. Therefore even though the population in general might be howling for reform, the state delegates that have to push it through have no incentive to, since they know the great majority of people that actually know who they are and are going to vote in the next election, are against reform.
- btilly 16y ago
  The fundamental problem is that a large amount of possible government action is hampered by a constitutional rule that says that 60% of the house has to agree on any budget. Structurally neither party has the power to get to 60% of the state legislature, voting for taxes is political suicide for Republicans, and voting to cut benefits is political suicide for Democrats. So we have permanent deadlock with no attempted solutions being politically viable. With your example, if California tried that before declaring bankruptcy, there would be court challenges that California would lose. Even if contracts going forward were amended, that wouldn't help the structural problems from what has already happened. Therefore California requires either bankruptcy or extraordinary assistance. And the Obama administration has indicated that no extraordinary assistance will be forthcoming. It is worth noting here that California is one of the few states that pays more into the federal government than we get out, and the amount extra we have paid in over the years is more than enough to rescue the state government.
  - ghshephard 16y ago
    s/60% of the house/66% of the house/ From: http://www.leginfo.ca.gov/.const/.article_4 http://www.leginfo.ca.gov/.const/.article_4 Const., Art. IV, Sec. 12 actually stipulates " (d) No bill except the budget bill may contain more than one item of appropriation, and that for one certain, expressed purpose. Appropriations from the General Fund of the State, except appropriations for the public schools, are void unless passed in each house by rollcall vote entered in the journal, two-thirds of the membership concurring."

Eliezer 16y ago

They're all betting they can sell those bonds on a liquid market a week before the market officially wakes up and realizes a disaster is coming.

korch 16y ago

The Federal gov't won't ever let California outright default on its debt. Why? It is the largest economy inside the US, it serves critical national security purposes, and being the biggest state debtor it will take dozens of other broke states down with it. A default would trigger a copycat landslide in the dozen other states who are also crippled with massive debt. If half the states default, all the dike holes the Fed has been filling with fingers over the past 2 years will have been for nought. It just can't be allowed to happen, period. At least in plain sight. It's exactly like how the banks are keeping their 1+ years worth of "shadow" housing inventory off the market, so as to keep a floor on prices and prevent everyone from panicking and running for the exits at once. And just like how the Federal bailouts were passed through back channels(i.e. Maiden Lane I & II, reserve swaps with foreign central banks, etc), and arcane accounting tricks that no congress-critter can comprehend, and the biggest political smoke & mirrors America has ever seen, so too will it go for the bailing out involvent states. It won't be Obama handing Schwarzenegger an oversized $30 billion dollar check on TV like a grinning Ed McMahon. No, it'll be a thousand tiny accounting tricks to prop up California, and keep the markets in perpetual doubt about the overall fiscal status of California. Our entire Federal fiscal and monetary policy is a waiting game. They don't know what will happen, but the thinking is if we can all just hang on long enough for everyone to adjust to the economic new normal, then we can at least avoid an outright national collapse. Nobody on the planet can even know if this will work, but there are zero alternatives.