California May Need an Emergency Federal Loan

[cute fuzzy bunny]

Yeah, it was interesting when everyone thought those 5%+ MM yields were a free lunch.

 

[FIREd]

So let me understand this (I don't quite understand how state finances work):

California borrows money on a short term basis, to pay state employees salaries and other state expenditures. They keep rolling over the debt until, supposedly, tax revenues come in, at which time California uses the money to repay its short term loans. Then they have to borrow money again to tie them over until the next revenue cycle... It sounds backwards to me. The finances charges on those short term loans must be a big waste of taxpayer money! It's kinda like living on credit cards for 3 to 6 months, and then you have a big lump sum coming in, you repay your CC debt and you start digging the hole all over again until another lump sum comes in...

So, if I understand this, now that these loans are coming due, California must borrow more money to repay these loans duh but they can't find anyone willing to lend them money at a reasonable rate? Is that correct? It sounds crazy.

 

[samclem]

This isn't about taxes or spending. It is about short-term liquidity.​

It's exactly about taxes and spending. When some bub hits me up for 40 bucks because he doesn't have enough money to make it to payday, it's not a "liquidity crisis"--it's an earnings/spending issue. Maybe he's gotten accustomed to squeaking by in this way--that doesn't make it responsible behavior.

Remember all the discussion about commercial paper (CP) and how companies may not be able to meet payroll, etc. etc. because of the credit crunch? Remember how some folks were opining that we should just let everyone default? Well the crisis is spreading and now entire states are at risk, with CA looking to be the first victim.​

Yep. Are there lessons CA should now learn about how to manage resources?

You may have noticed how tax exempt mutual funds are paying really, really, high yields? Do you think they are just being generous? Sorry, but no. They are struggling to raise short-term liquidity like everyone else.
But don't worry, the market will sort it all out.

You've identified the precise mechanism by which the market is working it out. Higher interest rates will bring more money to be loaned. CA will pay more money for this short-term loan--which brings us back to taxes, spending, and the need for fiscal responsibility on a personal, state, and national level.

​

 

[Gone4Good]

The finances charges on those short term loans must be a big waste of taxpayer money! It's kinda like living on credit cards for 3 to 6 months, and then you have a big lump sum coming in, you repay your CC debt and you start digging the hole all over again until another lump sum comes in...

Money isn't free. If the state sits on piles of cash to manage its day to day expenses someone is paying for that cash. That person is you.

So what is your cost of funds? 18% on a credit card? 9%+ on a home equity loan? Meanwhile the state typically borrows at 2%. So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?

 

[samclem]

So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?

Well, there's "efficient" and then there's "effective" and then there's "prudent." In the present situation, it looks like California's "live on credit" policy is none of these, wouldn't we have to say? Maybe in the past it was "efficient", but, based on what we now see, it was never prudent.

 

[Gone4Good]

You've identified the precise mechanism by which the market is working it out. Higher interest rates will bring more money to be loaned. CA will pay more money for this short-term loan--which brings us back to taxes, spending, and the need for fiscal responsibility on a personal, state, and national level.​

But CA is saying that it needs an emergency loan because it doesn't think it can raise the money it needs, at any price. It is not asking the Federal government to intervene because it wants a lower rate. The money is simply not available. Meanwhile CA is a viable long-term credit. It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people. Now that CA has said it needs help you can almost hear the sound of money being drained out of tax free money market funds around the country.

You need to accept the fact that the market is breaking down . . . and market solutions alone will not fix it.
​

 

[Notmuchlonger]

They should just raise my taxes and get it over with.

 

[Gone4Good]

Well, there's "efficient" and then there's "effective" and then there's "prudent." In the present situation, it looks like California's "live on credit" policy is none of these, wouldn't we have to say? Maybe in the past it was "efficient", but, based on what we now see, it was never prudent.

This may well be true.

But let me ask you . . . how many weeks of food do you have in your house? If the trucks stopped replenishing your local grocer, would your pantry look "prudent"?

 

[FIREd]

Money isn't free. If the state sits on piles of cash to manage its day to day expenses someone is paying for that cash. That person is you.

So what is your cost of funds? 18% on a credit card? 9%+ on a home equity loan? Meanwhile the state typically borrows at 2%. So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?

I may very well be naive about all this. But I guess I don't understand when it became acceptable practice for states and companies to borrow money to cover operating expenses, that's all. Borrowing money through bonds to finance large projects, I understand, but borrowing money for routine outlays, I don't understand.

Even if you can get access to cheap money, isn't it still more expensive than sitting on piles of money (that could earn interests until they are needed and therefore reduce the amount of taxes to be collected) and pay your bills from that pile of money? I guess I don't understand how it costs more money to sit on piles of money than to live on credit.

 

[samclem]

. . . it doesn't think it can raise the money it needs, at any price.

Do you honestly believe this? That there is no rate at which California could borrow funds?

It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people.

California bet that interest rates would stay low, and that's the assumption upon which their state budget is built. They bet wrong, and foolishly. Just like a homeowner betting that his ARM wouldn't go up. It's not that California can't get the money--it's that they can't get the money at the interest rate they want to pay. Too bad. I'll bet a lot of states have similar struggles, and would love to go to Uncle Sam for a temporary loans ("just this once!!" )

If California's wants favorable bond ratings (and interest rates), the state will need to live within its means. Lots of far poorer states do just fine. I have no tear for the Golden State.

 

[Gone4Good]

I guess I don't understand how it costs more money to sit on piles of money than to live on credit.

You're right that it doesn't cost the government anything to sit on a surplus. In the same way it doesn't cost a company anything to sit on a hoard of cash. It does, however, cost the taxpayer (or shareholder). Typically, the return on cash balances to the government (or corporation) is lower than the cost of funds for the taxpayer (or shareholder).

 

[Gone4Good]

Do you honestly believe this? That there is no rate at which California could borrow funds?

Yes I do. Because I've seen the commercial paper market close to credit worthy borrowers. If an entity (state, municipality, corporation, etc) needs to borrow $10 today, and only $5 of interest shows up, no yield is going to bring that extra $5 into the market TODAY. In the short run, supply is very inelastic. And you have to get through the short-run if you want to avoid bankruptcy.

And also in today's environment high yields actually scare people off. Do you think investors are running to get those 5% tax free money market yields? Or do you think they are saying to themselves, "why are those yields so high? There must be something wrong. I'm going to stick my money in treasuries at 0% where at least I know it's safe."

In that case do you really think a 10% yield will help?

 

[Gardnr]

Im still wondering where that huge surplus that California had went... The mysteries of the universe. Good news though they finished working on I 5! Hot damn! By the way I cant stand Arnold either.. Bring back Petey boy.

I'm a long way from being expert on CA budget issues, but wasn't that surplus built on the housing bubble just like our (U.S.) late '90s surplus was largely built on the tech stock market bubble?

When the bubble pops, the money goes poof!

I've heard some stats about the CA economy being something like 25% based on the housing industry (builders, realtors, mortgage financing, etc.). I don't know if that number is accurate but it was certainly high from what I understand. Something about too many eggs in one basket comes to mind. Am I right about that?

 

[Gardnr]

I may very well be naive about all this. But I guess I don't understand when it became acceptable practice for states and companies to borrow money to cover operating expenses, that's all. Borrowing money through bonds to finance large projects, I understand, but borrowing money for routine outlays, I don't understand.

Even if you can get access to cheap money, isn't it still more expensive than sitting on piles of money (that could earn interests until they are needed and therefore reduce the amount of taxes to be collected) and pay your bills from that pile of money? I guess I don't understand how it costs more money to sit on piles of money than to live on credit.

Yeah that's one thing that I've been learning in this whole credit crisis situation that's got me scratching my head too. I'm no business major but I really have a hard time understanding why so much of business' ongoing day-to-day operations is funded with short term credit vs. a larger cash position. It seems as if this may just be one more evolution that's occurred in this era of easy money/credit that is now showing it's downside. Operating on debt is riskier than a cash operation.

I wonder how Buffett operates??

samclem has some very good points in this thread that speaks to this as well.

 

[Hamlet]

I'm not entirely sure that the market is being irrational in being slow to lend California money. The state manages it's finances like a train wreck. They have been having trouble making ends meet in fairly good times with one of the highest tax rates in the country.

There is likely to be a fairly severe recession. California is ground zero for the housing crisis, so I would imagine that any recession we have will be even more severe there. They will likely have a massive budget shortfall, with very little room to raise taxes any further. The people of California have shown absolutely no willingness to cut spending in the past, so I don't think the possibility of California going completely off the rails is too small to ignore.

I personally wouldn't loan them money.

But CA is saying that it needs an emergency loan because it doesn't think it can raise the money it needs, at any price. It is not asking the Federal government to intervene because it wants a lower rate. The money is simply not available. Meanwhile CA is a viable long-term credit. It is completely irrational that the market would not give CA money for 30 or 90 days, but fear is overwhelming people. Now that CA has said it needs help you can almost hear the sound of money being drained out of tax free money market funds around the country.

You need to accept the fact that the market is breaking down . . . and market solutions alone will not fix it.
[/left]

 

[ST in London]

I'm in SF nearly weekly for negotiations (Barclays Capital associate) with Wells Fargo and my American counterparts are very clear that California represents the very best of America. Very "tall poppy" attitude.

It has come up many times that they feel like it would be in their best interest to secede from the US and become a separate country.

So maybe toss in an extra billion for the cost of secession and a few rashers of bacon and be rid of them.

 

[Hamlet]

California represents both the very best and the very worst of America.

I'm in SF nearly weekly for negotiations (Barclays Capital associate) with Wells Fargo and my American counterparts are very clear that California represents the very best of America. Very "tall poppy" attitude.

It has come up many times that they feel like it would be in their best interest to secede from the US and become a separate country.

So maybe toss in an extra billion for the cost of secession and a few rashers of bacon and be rid of them.

 

[ST in London]

California represents both the very best and the very worst of America.

Let me guess. Best coastline and weather? Worst people?

I always laugh at my own jokes and humor. Just so someone gets a laugh out of it.

 

[Independent]

Money isn't free. If the state sits on piles of cash to manage its day to day expenses someone is paying for that cash. That person is you.

So what is your cost of funds? 18% on a credit card? 9%+ on a home equity loan? Meanwhile the state typically borrows at 2%. So do you think it is more efficient for the state to borrow from the capital markets at 2% or from its tax payers at 9%+?

I won't repeat everything that Firedreamer and SamClem have said. I'll just say that they make a lot of sense to me.

On this 18% and 9% vs. 2% point, you are assuming that all taxpayers are net debtors. That's not true. Plenty of people have more money invested than borrowed. If I'm in the second group, it's more efficient for me to pay the taxes in advance of the spending, rather than in arrears. Why should the gov't run its operations to favor taxpayers who are net debtors instead of taxpayers who are net lenders?

 

[Razor]

I won't repeat everything that Firedreamer and SamClem have said. I'll just say that they make a lot of sense to me.

On this 18% and 9% vs. 2% point, you are assuming that all taxpayers are net debtors. That's not true. Plenty of people have more money invested than borrowed. If I'm in the second group, it's more efficient for me to pay the taxes in advance of the spending, rather than in arrears. Why should the gov't run its operations to favor taxpayers who are net debtors instead of taxpayers who are net lenders?

Exellent point. This country has become a debtor nation. From the little guy making the minimum payment on his maxed out credit card to big government that continues to spend and borrow more than it takes in. This country can not last for long at this pace.

 

[Caroline]

I take an annual road trip through Nevada and Utah every year. I am often amazed at the unsolicited things people decide to share with me, a perfect stranger.

A fellow customer in a buffet line: "Hi, where you from?
Me: "San Francisco Bay Area."
Him: "Humph. California, land of fruits and nuts."
Me: "I do hope the weather holds up until we get to Reno."

Waiter in Nevada town: "Where you-all from?"
Me: "Northern California"
Him: "I hate California -- too many damned (insert homosexual slur here)."
Me: "You don't say. When's the last time you visited our fair state?"
Him: "Hell, I've never been there, and I never plan to go."
Me: "I'll have the eggs over medium, please."

Me: "Hi, would you fill her up, please?"
Oregon gas station attendant: "You've got California plates there, I see"
Me: "Why yes. I live near San Francisco."
Attendant: "Hope you're not planning on staying. We've got too much of you Californicators up here already."
Me: "Would you do me a favor and check the oil while you're at it?"

Person A on this board: "Lots of far poorer states do just fine. I have no tear for the Golden State."
Person B: "California is the best and worst of America."
Person B: "Let me guess. Best weather, worst people."

Why thank you all, so very, very much.

As it happens, I'll be in London later this month on business. I hope the good manners my parents taught me stand me in good stead if I'm tempted to verbally molest innocent natives going about their daily business.

Before I go, a shout-out to you, ...Yrs to Go. I thought you summed up the state's loan issue very well, and I thank you. But I suspect that the desire to see us "Californicators" get our comuppance (something we also saw expressed during the energy crisis a few years back), works against your getting the message through to a lot of folks.

 

[ST in London]

I take an annual road trip through Nevada and Utah every year. I am often amazed at the unsolicited things people decide to share with me, a perfect stranger.

A fellow customer in a buffet line: "Hi, where you from?
Me: "San Francisco Bay Area."
Him: "Humph. California, land of fruits and nuts."
Me: "I do hope the weather holds up until we get to Reno."

Waiter in Nevada town: "Where you-all from?"
Me: "Northern California"
Him: "I hate California -- too many damned (insert homosexual slur here)."
Me: "You don't say. When's the last time you visited our fair state?"
Him: "Hell, I've never been there, and I never plan to go."
Me: "I'll have the eggs over medium, please."

Me: "Hi, would you fill her up, please?"
Oregon gas station attendant: "You've got California plates there, I see"
Me: "Why yes. I live near San Francisco."
Attendant: "Hope you're not planning on staying. We've got too much of you Californicators up here already."
Me: "Would you do me a favor and check the oil while you're at it?"

Person A on this board: "Lots of far poorer states do just fine. I have no tear for the Golden State."
Person B: "California is the best and worst of America."
Person B: "Let me guess. Best weather, worst people."

Why thank you all, so very, very much.

As it happens, I'll be in London later this month on business. I hope the good manners my parents taught me stand me in good stead if I'm tempted to verbally molest innocent natives going about their daily business.

Before I go, a shout-out to you, ...Yrs to Go. I thought you summed up the state's loan issue very well, and I thank you. But I suspect that the desire to see us "Californicators" get our comuppance (something we also saw expressed during the energy crisis a few years back), works against your getting the message through to a lot of folks.

Wow, that was quite a painting of the people of Utah and Nevada. How rough you must feel having to travel there. I've heard those same sentiments many times during social hours after meetings in SF. Seems Californians have little use for those states.

But London will be fine whether you come or not. Just remember not to mention our drafty old hotels, the small lifts and other ancient things that don't meet California standards (anymore than your neighboring states don't have the same intelligentsia as your state). Something my Californian colleagues have only recently learned. Or next thing you know, we'll have the heathens from Nevada and Utah descending upon us looking for kindred spirits, one notch down.

 

[FIREd]

A fellow customer in a buffet line: "Hi, where you from?
Me: "San Francisco Bay Area."
Him: "Humph. California, land of fruits and nuts."
Me: "I do hope the weather holds up until we get to Reno."

Waiter in Nevada town: "Where you-all from?"
Me: "Northern California"
Him: "I hate California -- too many damned (insert homosexual slur here)."
Me: "You don't say. When's the last time you visited our fair state?"
Him: "Hell, I've never been there, and I never plan to go."
Me: "I'll have the eggs over medium, please."

Me: "Hi, would you fill her up, please?"
Oregon gas station attendant: "You've got California plates there, I see"
Me: "Why yes. I live near San Francisco."
Attendant: "Hope you're not planning on staying. We've got too much of you Californicators up here already."
Me: "Would you do me a favor and check the oil while you're at it?"

Unfortunately Caroline, I get in the same kind of situations when, as a resident of Alabama, I travel to CA. A few years ago we were invited to a wannabe-posh wedding in San Diego and somewhere along the line somebody thought that it would be great fun for everybody to introduce themselves (name and where they came from) during the rehearsal dinner. Hi I am Cindy from San Fran, clap clap, hi I am Steve from Orange county, clap clap, hi I am Wendy from Santa Barbara, clap clap, hi I am FIREdreamer from Alabama, chuckle chuckle... I was pretty much ignored for the rest of the evening. Never mind the fact I was the only one in the room with a Ph.D., never mind the fact that I was probably one of the wealthiest guests there, never mind the fact that I grew up in one of the most cosmopolitan cities in the world, I was instantly reduced to an unworthy red neck because I have Alabama license plates on my car.

As a European, I have only been insulted twice in the US for being a foreigner. I have lived in the South for 12 years and believe it or not, it took traveling to liberal temples like San Francisco and New York to hear myself being called names because of the color of my passport.

 

[cute fuzzy bunny]

It may be worthwhile to point out that once you get outside the metropolitan areas of SF, LA and SD, most californians are fairly conservative, lower to middle class, and in many instances very red neckish.

 

[ST in London]

It may be worthwhile to point out that once you get outside the metropolitan areas of SF, LA and SD, most californians are fairly conservative, lower to middle class, and in many instances very red neckish.

I would go one step further. Even in those large cities, the red neck shines brightly. Most Californians in, even, the Tinsel towns trace to farm belt America and Mexico. Not exactly Harvard or Yale, let alone Eton or Oxford. Just seems that once you settle in SF, LA and SD, you hide the former identity and become posh. Ultra, whatever. See it here in London as well.

I do sense affectation and smugness when chatting with colleagues in SF, not nearly as much in NYC and really just nice charm when in Charlotte.

It does play a part in why we here in London are going, oh my, the cur's fleas are showing.

Firedreamer, that is par for my conversations in SF. Mention the South and it's a good old besmirching party on.