Published on The Huffington Post, by Ellen Brown, June 30, 2009.
“Our wallet is empty, our bank is closed and our credit is dried up.” – Governor Arnold Schwarzenegger, June 2, 2009.
California State Controller John Chiang has warned that without a balanced budget in place by July 1, he will begin using IOUs to pay most of the state’s bills. On June 25, California Governor Arnold Schwarzenegger rejected a plan that would save the state $3 billion by cutting school spending, saying he would rather see the state issue IOUs than delay the funding problem with a piecemeal approach. The state’s total budget deficit is $24.3 billion.
Meanwhile, other funding doors are slamming closed. The Obama administration has said it will not use federal stimulus money to prop up California; and Fitch Ratings, a bond rating agency, announced that it was downgrading the credit rating of the state, which already has the lowest in the nation. Once downgraded, California’s rating is likely to fall below the minimum level legally required for most money market funds, forcing the funds to sell their California bonds. The result could be a cost of millions of additional dollars in higher interest rates for the state.
What to do? Perhaps California could take a lesson from the island state of Guernsey, located in the English Channel off the French Coast, which faced similar funding problems in the 19th century. Toby Birch, an asset manager who hails from there, tells the story in Gold News: …
… The bank operates as a bankers’ bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It makes 1% loans to startup farms, has a thriving student loan business, and purchases municipal bonds from public institutions.
Looking at California’s budget figures, projected state revenues for 2009 are $128 billion. At a reserve requirement of 10%, if California deposited all $128 billion in its own state-owned bank, it could issue $1.28 trillion in loans, far more than it would need to cover its $23 billion budget shortfall. To lend itself the money to cover the shortfall, it would need only $2.3 billion in deposits and about $2 billion in capital (assuming an 8% capital requirement). What Sheldon Emry wrote of nations is equally true of states:
It is as ridiculous for a nation to say to its citizens, “You must consume less because we are short of money,” as it would be for an airline to say, “Our planes are flying, but we cannot take you because we are short of tickets.”
As a card-carrying member of the banking elite, California could create all the credit it needs to fund its operations, with money to spare.
Link – same in german: Kaliforniens leerer Geldbeutel: Krise in Chance verwandeln, by Ellen Brown.