Banks Just Say "No" to California IOUs

Things are not looking so great in California, which just a couple years ago was partying harder and louder in the face of the housing boom than pretty much any other part of the country.

The world’s eighth largest economy is strapped for cash – in a big way. So much so, that they have issued 900,000 IOUs worth nearly $355 million.

On Friday, came news that at least two major banks, Wells Fargo and Bank of America, will stop accepting IOUs from California residents – many of whom received these IOUs from income tax returns.

Beth Mills, spokeswoman for the California Bankers Association, said, “What’s ultimately in the best interest of everyone will be for the state to act quickly and resolve the budget impasse.”

Unfortunately, with a $26 billion budget gap – this impasse may take a bit longer to resolve.

Will more ‘stimulus’ solve this problem? Bill Bonner wonders that in The Daily Reckoning’s Highlight of the Week, below…

Naturally, the calls for more stimulus spending are becoming louder. People are wondering how come Washington bails out Wall Street but not California.

Wouldn’t that stimulate the economy? The Golden State is issuing IOUs to paper over the holes in its budget. Wall Street has announced that it has found a way to make a buck on California’s troubles; it will trade the IOUs just like bonds. But major creditors – fearing the paper could decline in value – may not take it…forcing California into a more immediate crisis.

This will make people wonder something else: how come creditors take U.S. IOUs, but not California’s? The feds’ deficit is 70 times greater than California’s. Yet, lend money to the federal government for 10 years and you get just 3.5%.

Meanwhile, in the business sector, Bloomberg continues its reports on the progress of the depression: “Earnings Drop Worldwide,” says the headline.

In the United States, dividends are going down faster than at any time in the last 50 years. Businesses are earning less and paying less in dividends because shoppers have stopped buying.

Maybe it’s just mid-summer. But despite the darkening clouds, there’s an air of eternity…like the stillness before a thunder storm…as if time were stuck in a drop of amber…and lightning would never strike.

“The worst is behind us,” says a report from the British Chamber of Commerce. Of course, those words could have come from any one of dozens of sources. Economists believe it. Businessmen. Investors. The recovery may be “long” and “fragile.” Maybe “L” shaped…rather than the V we were hoping for.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

A slower than anticipated economic recovery has been dragging on the commodities marketplace. This marketplace, which Reuters refers to as “one of Wall Street’s favorite playgrounds” isn’t seeing any new product rollouts lately.

“I believe there were many products that were supposed to come out and I don’t think there was a desire for them at the end of the commodities boom-bust cycle,” Michael Pento, chief economist for Delta Global Advisors in New Jersey, said. “They are probably being held in abeyance, awaiting the right time.”

Not only that, but as Dennis Gartman, over at The Gartman Letter points out, “Commodity prices are weak, as the markets weigh the economic problems attendant to rising unemployment in the US. It is really quite that simple and one wastes one’s time trying to analyze things any more deeply than that. If the US consumer, who’s driven the global economy for decades, is retrenching and going on the unemployment lines, then who or what shall replace him or her? It is a reasonable question, and the answer, for the moment, is ‘No one and nothing.'”

That does it for us today. Enjoy the rest of your weekend!

Kate Incontrera
The Daily Reckoning

The Daily Reckoning