This recession is raising all sorts of interesting sideshows. The most recent being the California IOU issuance. There are some that see this as no less than a threat to the Union.
First consider that the state is working through a bill to make the IOU’s legal tender for the payment of all fees, taxes and other payments owed to the state. Currently, the SEC has decreed that they are securities which means that theoretically, at least, they can only be traded by registered broker-dealers. Now if the state declares them to be legal tender does that trump the SEC or do we end up with some sort of stand-off that the courts have to adjudicate.
But it gets to be a deeper pit. Article 1 Section 10 of the Constitution says in part:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
In other words you can’t print your own fiat money and this is where some people are getting really upset. Marshall Auerback has this to say about the situation:
Most significantly, the Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. It certainly means considerably less muni bond issuance in the first instance, if the proposal passes constitutional muster.
It will be interesting to see what the exchange rate is between California IOU and US currency – the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.
This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasising “fiscal sustainability” and destroying aggregate demand in the process.
In fairness, his essay is fairly lengthy and contains some good observations, so reading it in it’s entirety is worth your time.
So where are we headed? The Obama administration seems to have little interest in bailing out California, seeing I suppose all sorts of downside and little political gain. Any federal assistance would require some sort of tough restrictions on California’s budgeting and taxation policy which would not only leave a lingering bad taste in that state’s collective mouth but would raise all sorts of constitutional issues itself.
If he lets them work it out on their own and the IOU’s do start to resemble a real alternative currency there is going to be a point at which the federal government does need to assert its control over this issue. It might be somewhat comical now but that could change in an instant. Consider that other states are no doubt watching this closely. The IOU ruse provides an escape hatch to constitutionally required balanced budgets and many are looking desperately for any sort of get out of jail free card, rather than facing up to the hard task of cutting spending and increasing taxes.
The really discouraging piece of this entire episode is that once again we’re confronting a crisis by resorting to the issuance of more debt rather than tackling the fundamental problems the state faces.