Comments on: A California default A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Taeyoung Tue, 19 May 2009 22:21:10 +0000 “And indeed the really nasty unintended consequences of a Californian default might well be felt outside the state, with the closing down of the municipal bond market nationally. Once California defaults, it’s hard to see any other state raising private general-obligation funds at any kind of interest rate it would consider acceptable.”

Is this necessarily the case? I would have thought that the bond markets can look at state’s budgets and financial situation and reach educated judgments differentiating most states from California. I.e. states that aren’t running comparably huge deficits, or whose revenues are not so sensitive to fluctuations at the top of the income scale (or in real estate valuation) would not suffer as badly as states like, say, New York. Or are these bonds priced on the assumption that the federal government will step in and print money whenever state governments screw up as badly as California has done?

By: justwondering Sat, 09 May 2009 12:42:52 +0000 If it is illegal for California to default on its bonds, as you claim, then why would the state waste money paying insurance premiums against a default?

You simply MUST follow the money, sir. Some insurance companies are being paid to insure California against something that BOTH California state officials AND the insurance company know will never occur. That enriches, unjustly, the insurance companies at taxpayer expense.

Imagine for a moment that I’m an insurance broker, and I sell you insurance against the Sun going Supernova in your lifetime.

Would you buy that insurance? No? Let me sweeten the deal:

What if it was really cheap? Would you buy it now? No? Let me sweeten the deal:

What if you could purchase it with someone else’s money? Now you’re a little more interested. Yes? But maybe still not enough? OK then, let me sweeten the deal just a little bit more:

What if I could arrange for you, personally, to get a “rebate” on the premium.

I bet you’d buy that insurance now.

And that’s exactly what state officials in Sacremento are doing. They’re buying insurance with tax dollars and getting under-the-table kickbacks from insurers who know they’ll never have to pay a claim.

Everyone profits.

Except of course – us.

By: Mike Wed, 29 Apr 2009 20:52:27 +0000 You say “But it’s hard to see where they would get the money, or how Congress would ever approve such an appropriation”.

You must be joking! This gov’t will simply print more green fiat paper money. 13 trillion so far and lots more to come.

By: Adam Wed, 29 Apr 2009 02:49:58 +0000 The only relevant information I can find to answer the question of attaching California’s assets is from a World Bank report titled “Subnational Insolvency,” but the article primarily addresses municipalities below the state level. It reads, in part:
“In the Unites States, a prominent judicial doctrine holds that only proprietary property is attachable. ‘Proprietary property’, subject to debt foreclosure, was defined by the U.S. Supreme Court as ‘held in (the municipality’s) own right for profit or as a source of revenue not charged with any public trust or use.’ Property dedicated to ‘public use’ such as streets, hospitals or courthouses is exempt even in the absence of specific statutory protection, as are funds held in the local treasury for general use. As a result, the backstop of private creditors’ rights – the right to seize the property of the debtor – is often unavailable to subnational creditors.” (p. 15)

fascinating throughout: BTDEPT/Resources/468980-1207588563500/48 64698-1207775351512/PRWP4496.pdf

Now I’m curious how it will actually work when/if (i.e. when) California defaults…

By: Chris G Fri, 24 Apr 2009 15:54:28 +0000 Felix, when it comes to the California legislature, I’m afraid this time around you are uncharacteristic optimistic (or even – dare I say – irrationally exuberant).

The state’s political system is dysfunctional for bigger reasons than that attitudes of the legislator. We have these propositions that funny the vast majority of the state’s revenues into pet projects before any elected official gets a say in where it goes. I doubt they will ever get serious about the budget without deep, fundamental changes to not only the state’s fiscal situation, but also to its political system.

By: Jonken Fri, 24 Apr 2009 13:08:05 +0000 Sorry, Mr. Salmon. It is to YOU that I should have posted my thanksgiving.

By: Jonken Fri, 24 Apr 2009 13:04:43 +0000 Thanks you for your article Mr. Pindelski, I was beginning to think that no one outside Calif. was aware of, much less willing to print, such an apt description of our legislature. I particularly appreciate your reference to their dysfunction. The majority has for too many years created programs to serve their personal contributors’ desires e.g. unions. It is no longer enticing to start a business and create jobs as I have done several times in my 70 years. The taxes and fees would preclude profit so I would be stuck with a business that no one in their right mind would buy.

By: Thomas Pindelski Fri, 24 Apr 2009 05:05:16 +0000 Thank you.

Sharpening the focus on the political aspects, let’s not forget that the President is beholden to Illinois, Louisiana and California. Home town, empathy and campaign funds, respectively. All high default risks on paper.

So I wonder if that slants the argument in favor of TBTF?

I enjoyed your response. I think you are about 4-4 on ‘for’ and ‘against’ arguments!