California to pay vendors with IOUs
Posted
Dec 05 2008, 06:42 AM
by
Douglas McIntyre
Rating:
People still keep Confederate Dollars. They have not been worth anything since 1864, but they are a nice collectors item and evoke memories of brother killing brother.
Now, the State of California is collecting that old paper and moving it into its treasury. It has run out of U.S. dollars and hopes that its vendors won't notice. It looks like real money, so who will know?
According to Bloomberg, "California, the world’s eighth largest economy, may pay vendors with IOUs for only the second time since the Great Depression, State Finance Director Mike Genest said."
It is a fine example of how a deep recession is the parent of its own awful offspring. When the nation's most populous state cannot pay people, it means that many of its suppliers will either lay-off workers or go out of business altogether. That puts a greater strain on social services and cuts the tax base.
The news begs the question of the extent to which the federal government bailout could have to move to some major states and cities. First on that list has to be Michigan. If Congress does not save the car companies, a state which already has an 11% unemployment rates and massive deficit could face dealing with another 200,000 people out of work. That will spread to car companies' suppliers and the number will go up.
One state becoming insolvent and reaching for government aid could cause others to follow. Bailout money works that way. When it helps the troubled, it becomes a magnet for the nearly troubled. Why fall into the abyss when you can be saved at the last moment?
The borders of the bailout are about to move beyond private enterprise.
Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.
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