2. icarus said...

Californis has $55 bn on deposit ($17.6 bn) or in investments ($37.4 bn). The whole of the deposit money, some of the investment money and state-owned assets could provide the capital base for a state bank in California.

The budget deficit ($26 bn or so) is small compared to Californis'a $1.7 trillion GDP.

If Cal pulled out its deposits (held mainly at banks which refuse to honour its IOUs) that sum alone in a fractional reserve system could be multiplied to the best part of $200 bn credit. With those deposits and the other equity mentioned enough credit could be generated to fund the state's short-term budget requirements and to buy back its bonds, which currently cost the state $5bn a year in interest. The state would then pay that interest to itself. The state would deposit its revenues (currently $128 bn a year) in the bank and its payroll would go through the bank, generating an even larger deposit base. It could fund a stimulus package to keep its schools open etc.

The banks which refuse to honour the state's IOUs have been recipients of tens of billions (each) of bailout money and, in some cases, over $100 bn govt guarantees. Yet the cheeky b'stards are making noises about Cal's relatively small funding failure. The state's bonds were downgraded from AAA to BBB, mainly because of the municipal bond insurers' collapse (remember Ambac and MBNA?), itself caused by derivatives gambling. Of course the interest on those BBB state bonds is much higher than on Arnie's IOUs - could this be a reason for eschewing the latter?

None of the above is new. The idea has been suggested to Arnie. Why is he pulling this stunt instead.