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The California State flag.
California just kicked off a $2 billion municipal bond offering that will run through tomorrow. So far, it's looking pretty solid, according to the Wall Street Journal/Dow Jones Newswires, with $550 million sold so far to retail investors. Institutional investors will get their shot later this week.
The bond sale highlights the paradox of the Golden State:
California's bond offering comes after Standard & Poor's sweetened its outlook on the state to positive from stable earlier this month. At the time, the ratings agency said it could upgrade the Golden State, depending on its ability to better align its cash performance and budget assumptions.
California is "the most heavily indebted state, but it also has the biggest economy," said Paul Montaquila, vice president of fixed-income trading at San Francisco-based Bank of the West, whose capital markets group has $10 billion of total assets under management. "For as bad as things may seem to be, the state always figures something out."
Montaquila said his firm's clients, which range from ultra high-net-worth individuals to mid-tier corporations, placed an order for California bonds. He added that the state's debt offered better yields than other similarly maturing fixed-income assets, like Treasurys.
The above chart is from the U.S Treasury's Treasury Notes blog (Cute, right?). It was written by Jan Eberly, who argues that this is not a good time to be pulling back on support for the economy, even though we're running up some significant deficits in the aftermath of the financial crisis.
What it all boils down to is a question about what we should do in the short term:
While there is a nearly complete consensus among economists and budget analysts that deficit reduction sufficient to stabilize our debt would have significant long-run economic benefits, the literature also cautions that fiscal consolidation is contractionary in the short run. Though under certain conditions the withdrawal of fiscal support can be partially offset by economic and policy changes, those conditions do not prevail in the United States today. Interest rates are currently at historic lows, leaving little room for them to go lower, and though exports have grown at a healthy pace recently, they cannot be counted on to grow enough to offset substantial near-term cuts.
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File: A Bank of America branch is seen in Times Square October 19, 2010 in New York City.
Financial regulation of Wall Street matters in Washington. The U.S. Treasury thinks so and has begun to blog about why. Yes, blog. In its most recent post, the Treasury debunks the idea that bank reform is somehow bad for small banks:
Myth #1: Wall Street Reform Hurts Small Banks
This claim is particularly dubious given strong support for enactment of the Dodd-Frank Act by the Independent Community Bankers of America. Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk.
The operative concept here is risk. It isn't small banks that pose systemic risk to the banking system — it's the too-big-to-fail banks that ignored prudent risk models in the lead-up to the financial crisis. Robert G. Wilmers — a banking executive who runs M&T Bank, one of the few large banks that more or less sailed throught the financial crisis — provides a very succinct take on the problem at Bloomberg: