California hands out IOUs instead of cash

Source: Wall Street JournalLife Jul09.jpg
Everybody’s favourite Christmas film is ‘Its a Wonderful Life’, in which the hero rescues a failing US bank during the Depression. But until today, the blog had never realised that a major role model for the plot-line came from Chicago in 1932.
Nouriel Roubini’s blog notes that the city saw the largest and most important bank panic of the Depression, after Chicago ran out of money and had to start issuing IOUs to employees, creditors and others.
Fast forward 77 years, and the situation is now repeating itself in California. If independent, the State would be the 8th largest economy in the world. Yet it ran out of cash on 1 July, and has since had to start issuing IOU’s to employees and creditors, just as in Chicago.
The State has a budget deficit of $26.3bn, on revenues of $113bn, according to the Financial Times. And it is constitutionally unable to raise taxes in many obvious areas, due to voters’ reluctance to vote the necessary increases. Their ability to pay higher taxes is also questionable, with unemployment already at 11.5%, and house prices down c20%.
Nobody currently expects California to default on its $59bn debt load. The Federal Government would probably feel forced to intervene before that happened. But with Hollywood within the State’s border, no doubt President Obama is already nervously wondering if he will end up starring in ‘Its a Wonderful Life – 2’, this time in real-life.

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