As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Thursday, May 21, 2009

The Backstop Is Not A Bailout

I heard a bunch of California Republicans yesterday talking about the effort to get the US Treasury to backstop state borrowing as a "bailout," and the media has fallen for it, using phrases like "California is too big to fail" and other snickering.

This is ridiculous.

Let me explain this fairly clearly. California will need to borrow billions of dollars to cover their cash flow issues, the same way they do every year. Traditionally, the money comes in at different times then the money goes out, necessitating short-term borrowing. Because of the state's miserable credit rating, the interest rates that investors charge for this borrowing are ridiculously high. Usually, banks guarantee those loans, but this year they are balking because of the severity of the state's fiscal picture. So the state has asked the Treasury to step in and guarantee the loans instead.

This would cost the Treasury Department approximately $0.00 dollars to perform. Providing loan guarantees simply means that you are insuring against default, which has never happened in the history of California. Not through the Depression or at any other time. What this would do is stop Wall Street from gouging the state with abnormally high interest rates, pure and simple.

Here are the words of an idiot:

Rep. Jerry Lewis (R-Redlands) predicted little sympathy for the Golden State on Capitol Hill. "I have the feeling that it's going to be a long time before Washington decides that they're going to ask Kansas or Wisconsin to help with California's funding problem," he said.

Nobody would be helping anybody. The federal government would guarantee loans that California would pay back. This is about lowering interest rates to make the price of short-term borrowing lower.

I understand that President Ford rejected these types of loan guarantees for New York City in the 1970s. But later he approved them. By the way, after that so-called "bailout," every single dollar was repaid by the city of New York. How on earth could this be characterized as a bailout?

The Ford Administration, under the direction of Treasury Secretary William Simon, imposed certain conditions on the loan guarantees (which will actually delivered directly by Treasury, so this is somewhat different). That could also happen here, and the Shock Doctrine possibilities are not pleasing. Still and all, this savings (which would only represent about $1 billion dollars in all, 1/20 of the current deficit) would not cost the federal government one red cent and thus shouldn't be used to cram down California in a punitive way. The possibility exists, but it's worth the risk.

Labels: , , , , , ,