California and New York both have massive fiscal problems. They both elected progressives to run their states, people who won't want to slash state employee union pensions or eliminate entitlement programs. California in particular is quickly running out of ways to raise taxes. It looks like they've painted themselves into a very tight corner. But have they?
Fed Chairman Ben Bernanke recently announced a plan to buy $600B of US Treasury bonds, essentially funding about 1/2 of the deficit with paper money. His rationale was that unemployment was still too high and the dangers of deflation were too great. Well, California's unemployment rate of 12.3% is just about the highest in the nation. Why doesn't his rationale work at the state level, too?
Before Tuesday's donkey slaughter, California and New York could at least hope to convince Congress to bail them out with another stimulus bill. That's impossible now. It seems to me that their only remaining option for rescue rests with Ben Bernanke.
4 comments:
The feds are escaping the same way those poor souls in the upper floors of the World Trade Towers escaped.
KT,
Please elaborate. Are you suggesting that California will hold cost of living adjustments, both for taxation and salary increases below the future rate of inflation?
California needs money. It can sell bonds if it has a buyer. The Fed can just as easily buy California bonds as anything else and come up with a flimsy rationale for it. Even proponents of the current $600B blast admit it's not going to do much. Given that not having much of an effect is a fine reason for printing $600, how much of an excuse do you need to pring $60B more?
KT,
It's already started, but in a manner slightly different than you predicted. See my post.
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