Thursday, November 18, 2010

Fed Indirectly Subsidizing California Debt

Newest BFFs.

In a recent post, KT opined that the Fed's Quantitative Easing would result in California "skipping out on our test" because the Fed could buy up California bonds as easily as U.S. Treasuries. (Go to the comments to see the full discussion.) However, the Fed's purchase of U.S. Treasury bonds is already having an indirect subsidy effect on California bonds. From the WSJ's Meredith Whitney:
Over 20% of California's debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. . .
Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.
The Fed is printing money to temporarily keep interests rate down and buying the U.S. debt, this money is then transferred into the Treasury which a. subsidizes California debt and b. pays for direct subsidies from the federal government to the states.

We have slowly dismantled the federal system, to our detriment. The bad acting by New York and California is being paid for by all of the states. Hopefully the new Republican majority in the House of Representatives, with scant members from CA or NY will put the brakes on these subsidies as part of the effort to clean the federal deficit. Maybe those of you reading this column from outside my state could put some pressure on your Congressman to end the transfers. After all, our bad behavior is just contaminating the nation.

1 comment:

  1. Thanks for the link! The Build America Bonds are still debt, debt that has a payment structure attached. California is still insolvent and only continued, large-scale lending will allow it to escape truly Draconian cuts.

    I don't see that lending as a part of QE2 nor likey from the new Congress. Please buckle your seatbelts and prepare for severe turbulence.