From Ryan Knutson at the WSJ:
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.
From commenter, Coffee Boy, at The Baseline Scenario:
What is a muni but another borrower? Can I issue IOUs to my bank for my mortgage? Until governments learn that there is a limit to deficit spending…there will never be an end to government debt and every currency will fail. It should be a constitutional law that governments cannot run deficits…fault the private sector all you want, but in the end, over-leveraged companies go bankrupt, and hence face the consequences of too much debt. There’s no similar consequence for governments…hence there’s no discipline. Fine…its ironic that these wards of the US government are holding a state government for ransom. But I’m more pissed off at my government (I’m a californian), than any of these banks.
From Bill Zielinski at Seeking Alpha:
The reality of the situation is that California has already defaulted since they have reneged on their obligations to creditors. I wonder what the State of California’s reaction will be when their citizens adopt the State’s method of bill payment and start sending in IOUs instead of cash for tax payments due?
Meanwhile, lamed duck Ahnold considers the nuclear option:
In his latest efforts to close the staggering $26.3 billion deficit, Schwarzenegger is demanding ever-deeper cuts that Democrats say will shred the social safety net. He is even entertaining what some Democrats regard as a “nuclear option” in California politics – the suspension of Prop. 98, the landmark initiative voters passed in 1988 to ensure that 40 percent of the general fund goes to public schools and community colleges.
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