This may come as quite the shocker, but California has bigger problems right now than its wayward Miss USA contestant. The treasurer of the State of California has asked U.S. Treasury Secretary Tim Geithner to use TARP to guarantee the state’s debts.
California faces a budget shortfall of $13 billion next year. There’s a state constitutional amendment that says California must always balance its budget, and the state got into a DEFCON-1 fight this year because no one will raise taxes. Bill Lockyer, the California Treasurer, predicted that the state will be out of money by July, and will have to “delay” paying what’s owed to “school districts, counties, social service providers, vendors,” and other State-dependent agencies. Lockyer predicts this will force some school districts into bankruptcy. So, like any financially struggling institution that is too big to fail, they have turned to the federal government.
Lockyer’s request is particularly clever, almost Citibank-like. He proposes the following: California needs to borrow in order to make up for the shortfall. It wants to borrow by issuing Tax and Revenue Anticipation Notes (TRANS), which are what they sound like: they sell $X billion in these notes, saying, hey, look, we’re anticipting tax revenue down the road, and we’ll pay you back when this hits. So investors (banks) buy the notes, expecting that they’ll get paid back what they put in plus interest. But, as with any investment, there’s a risk involved. If California defaults, then the banks that they issue the bonds through are left holding the $X billion bag. They would still be required to pay the bonds off — California isn’t going to file for bankruptcy protection, after all — but no bank wants to take the chance that it will be left holding a multi-billion dollar outstanding debt. California’s credit rating is the lowest of all 50 states.
So Lockyer has asked Treasury to guarantee California’s borrowing. If California defaults, he wants Treasury to say, we will step in and buy their debt from you, the banks. This way, the banks feel confident that they’re going to get paid no matter what, and California will be able to borrow more easily because Treasury has just made them a sure-fire investment.
If this sounds familiar, it’s because it is very, very close to what the intention of the TARP is: Treasury guarantees bad assets, so that banks are more willing to loan money. Lockyer — and California — are right to say that this is the point of TARP.
Lockyer also argues — again, correctly — that the overall goal of TARP and all its acronymish brethren is to improve financial security and stability in the market overall. A default by California, or even a major stall in its payments to state agencies, wouldn’t exactly help the nation’s economy. Please imagine the unequaled BAD of schools staying closed, fire stations shutting down during fire season, mental health centers shuttering, and everyone who works in those places sitting at home, not spending any money.
Now, I’d expect yelling from the right about this. The governors who have declined (or tried to decline) stimulus spending have all done so standing on the soap box of States’ Rights, which would seem to imply that they believe each state should have to stand on its own. If California should default, here, then residents of faraway states would end up paying for their debt, at least immediately. California would still eventually have to pay the government back, but the big outlay necessary to pay off its bank debts would be more money coming out of Treasury and less money that could go toward… well, toward the original goal of the TARP, shoring up banks.
Yet this seems to me a better way to spend that money, or at least a more urgent need. If California, which is something like the world’s sixth largest economy, has to undertake IMF-levels of austerity in its budget, the impact on the national economy would be dramatic. This wouldn’t be wilting green shoots: this would be like setting the green shoots on fire and then putting them out by pouring concrete on top. Hate on Cali all you want, but as it goes, so goes 13 percent of national GDP.
I suddenly feel a need to buy an avocado. Short of a similar massive national sentiment, the TARP bailout sounds reasonable. I hope Geithner writes a positive reply to the letter — and soon.
SATURN SMITH 