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 on The Daily Reckoning site � it's an essay you don't want
to miss.

Did you take an extended
holiday this week and miss and issue of the DR? Don't fret, all is not lost. We
have all of this week's essays for you, below. Of course, we have the usual
suspects, like the Mogambo Guru and our fearless leader, Bill Bonner, and we
have some added variety. On Tuesday, Breakthrough Technology Alert's
Patrick Cox joined us to share some unprecedented opportunities for patient
farsighted investors. We also threw Puru Saxena into the mix, with his look at
whether we face hyperinflation or deflation. And finally, Barry Ritholtz rounded
out our guest contributors this week with a look at where the blame for the
credit crisis should land. You'll find them all, below…
 

Money Tsunami Capsizes the Global Economy
by The Mogambo Guru
Tampa Bay, Florida
 
"Even the World Bank has revised its estimates, and now says the global
economy will contract by 2.9% this year instead of their previous forecast of
1.7%, which is an error of 41%."
 
Don't Let a Good Crisis Go To Waste
by Patrick Cox
Marco Island, Florida
 
"Economics is called the 'dismal science' for a reason. And it often falls to
rational economists to play the role of parent, explaining that we just can't
afford all those cool toys people want right now."
 
Hyperinflation or Deflation?
by Puru Saxena
Hong Kong, China
 
"In the business of investing, the tape never lies and it is worth remembering
that Wall Street is littered with the graves of those who got married to one
particular outcome and then held on to their ill-conceived notions."
 
Casting Blame, Part I
by Barry Ritholtz
New York, NY
 
"The Fed not only failed to supervise lending institutions, but it also ignored the
most significant shift in lending standards in the history of human finance. The
results were disastrous."
 
Bubble Deniers
by Bill Bonner
London, England
 
"Do these setbacks cause economists to stop and wonder if their theories are
bogus and their numbers are nonsense? Nope, they do what McNamara did.
They turn up the heat. They propose to spend more money they don't have on
more programs that don't work."
 
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.'"
 
You can catch Dennis Gartman (along with Agora Financial's best and
brightest) at this year's Agora Financial Investment Symposium in Vancouver,
B.C. The symposium promises to be the event of the year � so don't miss out!
Secure your ticket now � before the event sells out!

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