Semi-Daily Journal

Elections in general are sources of risk. So we should ban elections so that bond traders are happy?

Andrew's right.

And, while I hate the idea of recalls for anything other than criminal malfeasance, they're a part of the California Constitution. The recall organizers managed to get the requisite signatures and, if the polls are to believed, the vast majority of Californians disapprove of Davis.

bond traders have no problem with elections - every four years. they do have a problem with elections forced on a state with a huge budget gap that is guaranteed NOT to be fixed by a lame duck governor.

bond traders have no problem with elections - every four years. they do have a problem with elections forced on a state with a huge budget gap that is guaranteed NOT to be fixed by a lame duck governor.

The primary source of extra risk this guy is talking about is the budget, the election is just a throw-in. It may be costing a few basis points. The reason Moody's et al are talking about downgrading the bonds is the budget situation. That would be the really expensive thing, because it incurs some extra payments to issuers if it happens, for some recent bonds. (Not to say the Republicans are exactly blameless there, either, but I'd say Davis and both parties in the legislature share the blame on that one.)

This only hurts for bonds California is issuing NOW, as far as taxpayers are concerned.

http://www.bizjournals.com/sacramento/stories/2003/06/30/daily28.html

http://online.wsj.com/article_email/0,,SB105917423628868300,00.html

ironically it could prove a goldmine :D "On Friday, 20-year California general obligation bonds yielded 5.35%. To an investor in the 28% federal tax bracket, that's equivalent to a taxable yield of 7.43%." for investors and asset managers needing income for retirement accounts and the like and who haven't been or aren't able to go out and take on a lot of credit risk on the one hand and think the low yields in treasuries have been too meager on the other with attendant interest rate risk, which we've seen some of, i think heading to california might seem awfully tempting!

http://www.nytimes.com/2003/07/28/business/28ECON.html?ex=1059969600&en=e9f857294586fd22&ei=5062&partner=GOOGLE

and, in light of state budget crises, one of the more interesting ideas i've seen floated:

http://online.wsj.com/article_email/0,,SB105131224015163100,00.html

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Stephanie proposes that the Federal Reserve purchase municipal bonds. That approach would combine the best, she maintains, of monetary and fiscal policy, while nicely avoiding the risk of offending foreign investors, since munis, whose big attraction is their tax benefits, appeal almost exclusively to domestic investors.

By monetizing munis, Stephanie argues, the Fed could thus achieve its goal of reflating without scaring muni buyers away.

If anything, it might be a draw for the muni crowd, making the Fed's job all that easier. The beauty of her proposal is that it would help both the states and Uncle Sam without giving the public more of the hair of the dog that bit it.

Or, to use her more elegant locution, without invoking the "standard formula of plying consumers with credit as a means of achieving our economic ends," which inevitably "creates further imbalances while encouraging reckless financial behavior."

Sure, she concedes, monetizing municipal debt carries its own moral hazards. But such hazards are limited by the fact that states must balance their budgets, effectively putting a ceiling on their borrowing.

And Stephanie also is aware that "in an ideal world, the economy and the markets would be allowed to sort out these imbalances without the interference of meddling policy makers."

But an ideal world this isn't, and given that Washington "has every intention of rolling up its sleeves and making a good mess of things," her alternative strikes us as more than a little intriguing.

The bond markets are likley reacting to the prospect (or lack thereof) of resolving the state's fiscalissues. The recall supporters have no fiscal plan. While the GOP legislators had refused to endorse any new taxes - they were suggesting draconian spending cuts. The GOP recall supporters, however, were criticizing Davis for proposing even modest cuts. But the good news today is that a compromise budget did pass which should give markets a little more confidence that CAL's fiasco house is less risky. It might even reduce the chances that this recall effort will fail. That would delight me - not because I'm a fan of Davis, I'm not. But this recall effort has less basis than that Impeachment Fraud Henry Hyde & Co. tried to pull.

"And, while I hate the idea of recalls for anything other than criminal malfeasance, they're a part of the California Constitution. The recall organizers managed to get the requisite signatures and, if the polls are to believed, the vast majority of Californians disapprove of Davis."

While that may be true, there was just a general election last November which Davis won by a large margin. California voters have already chosen, and elected him twice. Now they should live with him.

It is well known that getting signatures for any kind of a measure is just a matter of money. If you pay enough volunteers, people will sign ANYTHING. This is a fundamentally antidemocratic ploy by the very wealthy Issa to make a coup d'etat of the state government.

non-econ,

I said pretty much the same thing, minus the Issa slam, way back in February (http://www.outsidethebeltway.com/archives/000794.html)and have reiterated my distate several times since. But it's nonetheless part of the system.

And, in all honestly, the voters weren't thrilled with Davis even in November. They just liked him better than a horrendous Republican alternative. And Davis used his own campaign funds to defeat Riordan, who would almost have certainly beaten him in November, in the Republican primary. That's pretty low too, although, again, within the rules of the game.

Perhaps you could blame the voters of the California Republican Party for choosing Simon rather than Riordan as their candidate? I think Davis's pouring money into anti-Riordan ads before the Republican primary was doubleplusungood. But Davis did not vote in the California Republican primary.

Since this thread is in part about the California structural deficit, let me ask Brad a question I have long wanted to ask. There are a couple issues which suggest a possible reform to California finances.

The first issue with the State budget is that, due to the requirement for an annually balanced budget, the State budget becomes pro-cyclic. It booms during boom times, and cuts back during slumps, magnifying the booms and busts. The simplest fix would be to remove the requirement that the State budget balance, but I don't trust the State politicians (of either party) use that power responsibly.

The second issue is that it seems likely that there will be a campaign for further structural changes in California finances to avoid problems like the current deficit. One obvious solution is a constitutional amendment saying that spending may increase only in proportion to increases in the population and for inflation. IIRC, that has been passed in other States already. An issue with that approach is that it prejudges that over the long term State spending may not increase as a fraction of state GDP, and over the really long term (assuming per-capita economic growth) the fraction will decrease. My sense is that a big part of the real problem was that the dot-com boom gave the state a large one-time infusion of revenue, which was treated by the budget process as a permanent increase in revenue. So I would prefer a change that is more narrowly targeted at limiting the damage from this sort of error.

Thus, my idea is a different California State Constitutional amendment. This amendment would state that the State budget could run an annual deficit, but in nominal dollars the total spending could increase by only one-third of the state surplus in hand at the start of the budget. This means that the state does not have to cut the nominal budget during a recession, but it then cannot raise the nominal budget until it starts building up a "rainy day" fund. The correct account(s), timing of measurements, and fraction could be quibbled, and it would have to be written in proper "Constitutionalese," but that is the general idea.

So Brad, what do you think about this approach to reforming California State financial rules?

Thanks

Brad,

Doesn't California have open primaries? I know the old blanket primary was thrown out by the courts, but thought it was replaced with an open primary system. If so, there were undoubtedly a large number of Democrats voting. Presumably, they voted for Simon if the Democratic Party and/or Davis were de facto in his camp.

Plus, the power of negative advertising is certainly impressive. Lots of money attacking Riordan is a huge advantage for Simon.

This sounds like "blame the victim" talk to me. The citizens who signed the recall are the victims, Gray and the legislature are the victimizers. They created the worst mess in the nation. The worst mess by several miles.

"I wonder how much Mr. Issa and the other sponsors of the recall election have just cost me? "

Do you think they've cost the state more than Davis's disastrous mishandling of the energy crisis?