Illinois and California - next in line for a FED Bailout ???

[Reality Check]

The states of California and Illinois have been using accounting tricks to appear to balance their state budgets each year, for several years now.

Debts have also been pushed down to cities and counties, and also stimulus funds from the Federal Government, which have now run out, have been used for the same purpose.

The impact on the U.S. economy if these huge states actually balanced their budgets, which, unlike the federal government, they are required to do each year by law, would be devastating.

Is it reasonable to assume the the U.S. Federal Reserve board will use it's "independent powers" to print money and buy the bonds of California and Illinois in the same way it has done with United States government Bonds since 2009, and in the Same way the European Central Bank has done in the past to buy Italian and Spanish bonds?

The goal would be the same as the goals have been purchasing U.S., Italian and Spanish debt: Buy "old" bonds of CA and IL on the secondary bond market thus forcing down the interest rate on new bond issues ( and refinancing bond issues ) by CA and IL.

One more way to kick the can down the road and it does not require a vote by the Congress to print Trillions of Dollars and buy bonds. The federal reserve board is independent and one of it's missions is to "save the economy".

Obama's re-election in November is looking more and more likely after the Supreme Court ruling on Obama-care. CA and IL are Democratic states and such bond purchases would be a way of rewarding President's Obama's supporters and avoiding a vote in Congress on it as well.

[Marc]

Makes sense to me, Reality Check, in regards to a Fed-led backdoor state-bond bailout. Fed Chair Bernanke has publicly stated in the past that the US states should not expect loans from the Fed. However, buying the bonds of states on the secondary market, paid for by simply creating more Fed debit entries, would indeed be the backdoor way to kick the can down the road a little more — as well as find a politically-doable way to help troubled US states such as California and Illinois. I can also see "the powers that be" favoring this action as a quiet way to help Obama out a little bit, too, during this crucial election time. Thanks for sharing. —Best regards, Marc

[Reality Check]

... I can also see "the powers that be" favoring this action as a quiet way to help Obama out a little bit, too, during this crucial election time. ...

I do not see this happening before the election, because the need to do it would be seen as more bad economic news on Obama's watch.

But after the election, it is another way to kick the can down the road for a few more weeks, months or years.

[Marc]

... I can also see "the powers that be" favoring this action as a quiet way to help Obama out a little bit, too, during this crucial election time. ...

I do not see this happening before the election, because the need to do it would be seen as more bad economic news on Obama's watch.

But after the election, it is another way to kick the can down the road for a few more weeks, months or years.

Good call; you are quite possibly right about that. I do wonder, however, if an obfuscated way might still be found to do it soon if there is no other good way to save the day, such as by encouraging, say, Goldman Sachs to buy up a lot of these troubled state bonds, and allowing pre-existing backstop arrangements to protect the purchases. With today's drawn-out crisis environment, it is, of course, hard to predict what can happen day-to-day, although political realities are certainly weighed into the big public financial decisions that are made. Thanks again for the intelligent comments. —Best regards, Marc

[Trevor]

I happen to live in California and I can tell you, the state's holding itself together by its fingernails. We've got the second-third lowest bond rating in the country and we've still got an outlook of negative. Only 80,000 jobs were created in the whole country last month, and the amount of people giving up was greater than that.

Stockton's just went bankrupt and places like San Diego aren't far behind.

[Marc]

I happen to live in California and I can tell you, the state's holding itself together by its fingernails. We've got the second-third lowest bond rating in the country and we've still got an outlook of negative. Only 80,000 jobs were created in the whole country last month, and the amount of people giving up was greater than that.

Stockton's just went bankrupt and places like San Diego aren't far behind.

California is certainly hurting. I also know that there's been a goodly amount of student activism in California in regards to massively-hiked tuition fees; however, incessant cries of "Education for People, Not for Profit" and such '60s rhetoric probably isn't going to accomplish the protesters much: the state is simply near-bankrupt. It wouldn't surprise me to see, say, the University of California system almost become private in nature, and/or for it to begin establishing quasi-private "boutique units" which provide "value-added" degrees/programs and which can suck up a lot of that Federal student financial aid. Just my guess here.... Thanks for the cogent anecdote. —Best regards, Marc

[Trevor]

I've run into that myself. I can't go to college because it's just too damn expensive; tuition doubled in just five years, which is rather astonishing. I've heard the administration described as a giant welfare system. There's certainly some truth in that and I'd like to know just where all that money is going.

California's just as bitter and paralyzed as everyone else. I wouldn't say we're Greece, but we certainly resemble Italy.

[Higgenbotham]

Is it reasonable to assume the the U.S. Federal Reserve board will use it's "independent powers" to print money and buy the bonds of California and Illinois in the same way it has done with United States government Bonds since 2009, and in the Same way the European Central Bank has done in the past to buy Italian and Spanish bonds?

I'm 99.8% sure the Federal Reserve Act doesn't give the Fed legal authority to do this. The next question is would legality of the issue stop Bernanke from pursuing it anyway. In general, the answer to that would in my opinion clearly be no. The next question is whether there might be any practical reasons that would stop Bernanke from doing this. That's where the answer could be yes, as buying US bonds is quite different from buying the debt of a state. States can go bankrupt independent of the US and if the pubs or some other party or maybe even a different democrat were to gain control of any state they could take any of those states through bankruptcy and the Fed along with it, as the bonds would become worthless. The time horizon for that possibility is too short and the probability too high for Bernanke to risk it in my opinion.

So why isn’t the Fed open to advancing this cheap credit to the states? According to Mr. Bernanke, its hands are tied. He says the Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market. Congress imposed that restriction, and only Congress can change it.

That may sound like he is passing the buck, but he is probably right. Bailing out state and local governments IS outside the Fed’s mandate. The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests. No others need apply. The Federal Reserve is the bankers’ own private club, and its legal structure keeps all non-members out.

http://www.webofdebt.com/articles/nobai ... street.php

Just my opinion again, but Bernanke could and would do this whether it's legal or not (breaking laws wouldn't bother him), but he doesn't want to do it and is hiding behind the law as an excuse.

[Reality Check]

I'm 99.8% sure the Federal Reserve Act doesn't give the Fed legal authority to do this. The next question is would legality of the issue stop Bernanke from pursuing it anyway. In general, the answer to that would in my opinion clearly be no. The next question is whether there might be any practical reasons that would stop Bernanke from doing this. That's where the answer could be yes, as buying US bonds is quite different from buying the debt of a state. States can go bankrupt independent of the US and if the pubs or some other party or maybe even a different democrat were to gain control of any state they could take any of those states through bankruptcy and the Fed along with it, as the bonds would become worthless. The time horizon for that possibility is too short and the probability too high for Bernanke to risk it in my opinion.

According to Mr. Bernanke, its hands are tied. He says the Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market. Congress imposed that restriction, and only Congress can change it.

That may sound like he is passing the buck, but he is probably right. Bailing out state and local governments IS outside the Fed’s mandate. The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests.

Certainly a superior analysis of what the relationship between the FED and the Banks was before 2008.

But a number of things have changed. The largest banks, the investment banks, are now insured by the FDIC and are subject to Dodd-Frank. Federal law allows the banks to continue to carry near worthless assets on their balance sheets at 100% of face value. The FED has loaned the largest banks Trillions using those assets as collateral at 100% of face value. The interdependence of risk, and the interdependence of implied control, between the largest banks, the executive branch of the U.S. government, and the FED has grown geometrically since 2008.

How that implied control could be exercised by the executive branch of the Federal government was described by the former bank regulator in this video.
http://www.youtube.com/watch?v=J8CqaHTy ... creen&NR=1

What the FED and the Federal executive branch can NOT legally do directly, the FED and the executive branch could do indirectly through the Banks.

The only question is what is the scenario that would motivate at least two, out of three, of the Troika of the Largest Banks, The FED and the Executive branch of the U.S. Government to believe it is in their interest to delay California and Illinois from both balancing their budgets and from going bankrupt?

What would motivate them enough to make them want to kick the can down the road a few more weeks, months or years?

[Reality Check]

What is the scenario that would motivate at least two, out of three, of the Troika of the Largest Banks, The FED and the Executive branch of the U.S. Government to believe it is in their interest to delay California and Illinois from both balancing their budgets and from going bankrupt?

What would motivate them enough to make them want to kick the can down the road a few more weeks, months or years?

I would answer my own question like this:

It is the same thing that is motivating the German banks to support kicking the can down the road on default by the Italian and the Spanish banks.

The same thing that is motivating the transfer of the risk of default on debt by individual EU Country governments and the related control of individual European Union countries' budgets, from the electorate of the individual countries to the EU wide government controlled by the EU elites.

The elites believe by doing so they can avoid, or at least delay, the uncontrolled chaos that will occur when the debt bubbles collapse.

They profit by what they can control, but they are put at risk by events not under their control.