If you wonder why many businesses feel abused and taken for granted by California, you don’t have to look any further than the IOUs that the state sent out this month.
Without so much as a thank you, California pushed its funding problem off on its creditors and the state’s banks by issuing the IOUs. The people and businesses that were paid with the IOUs but couldn’t find a bank to convert them into cash had been forced, in effect, to carry a piece of the state’s debt on their backs. And the banks that cashed the scrip for their customers ended up recording a part of the state’s debt on their balance sheets.
What’s more, banks that accepted the IOUs were engaging in unsound practices. A bank that cashes too many of those kinds of IOUs under normal circumstances could get rung up by regulators, including state regulators, because the bank was draining its liquidity. You can bet that little irony was lost on California legislators.
The message the state sent to banks: “Don’t do anything stupid or dangerous. Unless I make you.”
As reported last week in the LA Business Journal, many community banks were in a tight spot. They sure didn’t want to accept the state’s scrip but they felt obliged to do so in order to help out and keep their customers.
I liked the way one small California banker, quoted in a Bloomberg story, phrased it: “I don’t like the fact that this is getting jammed down our throats and we’re financing the incompetence” of the government.
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Speaking of the state’s money troubles, I’ll bet a budget agreement would have been reached in Sacramento long ago if, instead of constantly calling it a “$26 billion budget shortfall,” everyone had called it “$26 billion in overspending.”