Federal Reserve Bank Warns Against Competing Currency!

[pwcmba]

http://tinyurl.com/mobwsp

They list why CA issued currency is not as good as the FRNs in your pocket (Federal Reserve Notes) - The FRB HATES competition:

US Federal Reserve Cautions California IOU Recipients

By Sarah N. Lynch and Meena Thiruvengadam

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The Federal Reserve warned state contractors, local governments and other potential recipients on Thursday to consult with their banks before depositing warrants issued by California.

The Fed's warning came in reaction to an earlier announcement by California's top accountant, who said the state would start issuing the warrants, or IOUs, to thousands of creditors as early as Thursday.

The $3.4 billion in IOUs are being sent out after state lawmakers failed to come to an agreement on a way to close the massive budget deficit. Issuing IOUs will pose major costs to the state, which will then have to repay those them with millions of dollars in interest.

But the Fed said customers need to consult with their banks before depositing any registered warrants and ask a few important questions first.

"Will the bank accept the registered warrants for deposit?" the Fed asked. " When will funds be made available for withdrawal?"

The Fed said that some banks could have arrangements in place to advance funds to depositors prior to the warrants' pay date and that warrants will not likely be subject to the normal federal check-hold limits.

In addition, the Fed warned there could be a potential for customers to incur certain fees.

California "will likely return unpaid any registered warrants that it receives before the payment date," the Fed said. "Depositors of these warrants may be subject to returned-deposit fees if their banks attempt to collect these warrants before they are payable."

The Wall Street Journal reported earlier Thursday that some banks have committed to accepting the IOUS. Most banks also accepted them back in 1992 when Sacramento had to issue them during a budget problem.

Without these IOUs, the state's top accountant has said California would run out of cash by the end of July.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@ dowjones.com

-By Meena Thiruvengadam, Dow Jones Newswires; 202-862-6629; meena.thiruvengadam@dowjones.com

(Wall Street Journal reporters Stu Woo and Sabrina Shankman contributed to this article.)

(END) Dow Jones Newswires
07-02-091801ET
Copyright (c) 2009 Dow Jones & Company, Inc.

[pwcmba]

Re: Federal Reserve Bank Warns Against Competing Currency!

http://www.federalreserve.gov/newsev.../20090702b.htm

above is the actual release. They demand monopoly over money printing and setting short term interest rates!:mad:

[GRG55]

Re: Federal Reserve Bank Warns Against Competing Currency!

http://www.federalreserve.gov/newsev.../20090702b.htm

above is the actual release. They demand monopoly over money printing and setting short term interest rates!:mad:

The release seems to offer up some sound advice imo. Unless I am reading the wrong release, I missed the part where the Fed "demands monopoly over money printing and setting short term interest rates"...

[Slimprofits]

Re: Federal Reserve Bank Warns Against Competing Currency!

The release seems to offer up some sound advice imo. Unless I am reading the wrong release, I missed the part where the Fed "demands monopoly over money printing and setting short term interest rates"...

As much as I love to tear down the Fed, you're exactly right.

I think the subject was discussed here. In the past, banks have refused to honor these IOUs.

Also, how does an IOU for Federal Reserve notes serve as a competing currency with FRNs?

Common sense, hello?

[Southernguy]

Re: Federal Reserve Bank Warns Against Competing Currency!

Well, California warrants ARE money. As soon as a contractor receive them and pay his workers or fuel or any other product he may need, and then those do the same with their respective creditors these papers become to circulate just like money.
Maybe if their denomination are too big this process shall be slowed, buy their destiny if theyīre not redeemed shortly is to act just like currency.
Of course, if banks take them the process is accelerated. And my opinion is that banks are going to take them.
This process was very extended in Argentina in 2001 and 2002, when the crisis was most severe.
As with California states began to emit IOUīs which became widely used as currency.
It took several years for the situation to stabilize and those currencies, the best known of which were "PATACONES", an old denomination for Argentinaīs currency to be redeemed and taken off circulation.
So, the FEDīs monopoly is effectively in jeopardy.
Because itīs not easy for a national institution to cut such situation. Their only real solution is to finance California further so as it does not need to emit IOUīs.
Remember that money, as Steeve Keene pointed out is created by the banks in the first place, and after that by the Central Bank, aka FED.

[GRG55]

Re: Federal Reserve Bank Warns Against Competing Currency!

Well, California warrants ARE money. As soon as a contractor receive them and pay his workers or fuel or any other product he may need, and then those do the same with their respective creditors these papers become to circulate just like money.
Maybe if their denomination are too big this process shall be slowed, buy their destiny if theyīre not redeemed shortly is to act just like currency.
Of course, if banks take them the process is accelerated. And my opinion is that banks are going to take them.
This process was very extended in Argentina in 2001 and 2002, when the crisis was most severe.
As with California states began to emit IOUīs which became widely used as currency.
It took several years for the situation to stabilize and those currencies, the best known of which were "PATACONES", an old denomination for Argentinaīs currency to be redeemed and taken off circulation.
So, the FEDīs monopoly is effectively in jeopardy.
Because itīs not easy for a national institution to cut such situation. Their only real solution is to finance California further so as it does not need to emit IOUīs.
Remember that money, as Steeve Keene pointed out is created by the banks in the first place, and after that by the Central Bank, aka FED.

All these IOUs represent are a new form of [presumably short term!] borrowing by the California government. Essentially it is just tapping into a new group of somewhat "involuntary" lenders, who just happen to be "willing" to lend at cheaper rates than California can secure from other, more traditional sources. :rolleyes:

For the IOUs to be exchanged for, or replace, the "old" currency, Federal Reserve Notes, there has to be sufficient confidence in the issuer of the IOUs. Despite Washington's track record I doubt anyone has yet come to the conclusion that the government of the State of California warrants more confidence for its creditworthiness than the US Federal Government. I suspect that the only reason California has any creditworthiness at all, and the only reason the IOUs will be accepted by anyone else, is that everyone knows that if it comes right down to it Washington will bail California out.

Nobody could seriously believe that anyone at the Federal Reserve is feeling the least bit threatened by these IOUs becoming a substitute currency to FRNs.

When I hear reports that California public employees are demanding to be paid in Sacramento IOUs instead of good ol' American Dollars then I might start taking some of the stuff being posted here more seriously...

[Southernguy]

Re: Federal Reserve Bank Warns Against Competing Currency!

Dear GRG55: The necessity and posibility of some piece of paper to become currency arises from the inevitability of a lot of people to accept it. Rather than expecting an impredictable amount of time to be payed in FEDīs dollars, a contractor-emloyee of California accepts the bonds. Then someone else is put under the same option, and so on. If the process goes on and on, you shall see Californiasīs PATACONES circulating in Washington, and may be even outside the US. After all, what is "the full credit of the United States" worth these days anyway?
If California goes too far down the way or paying with patacones, then, their purchasing power shall go dramatically down.
And this process may be very beneficial to de California economy in the medium term.

All these IOUs represent are a new form of [presumably short term!] borrowing by the California government. Essentially it is just tapping into a new group of somewhat "involuntary" lenders.

For the IOUs to be exchanged for, or replace, the "old" currency, Federal Reserve Notes, there has to be sufficient confidence in the issuer of the IOUs. Despite Washington's track record I doubt anyone has yet come to the conclusion that the government of the State of California warrants more confidence for its creditworthiness than the US Federal Government. I suspect that the only reason California has any creditworthiness at all is that everyone knows that if it comes right down to it Washington will bail it out.

Nobody could seriously believe that anyone at the Federal Reserve is feeling the least bit threatened by these IOUs becoming a substitute currency to FRNs

[GRG55]

Re: Federal Reserve Bank Warns Against Competing Currency!

Dear GRG55: The necessity and posibility of some piece of paper to become currency arises from the inevitability of a lot of people to accept it. Rather than expecting an impredictable amount of time to be payed in FEDīs dollars, a contractor-emloyee of California accepts the bonds. Then someone else is put under the same option, and so on. If the process goes on and on, you shall see Californiasīs PATACONES circulating in Washington, and may be even outside the US. After all, what is "the full credit of the United States" worth these days anyway?
If California goes too far down the way or paying with patacones, then, their purchasing power shall go dramatically down.
And this process may be very beneficial to de California economy in the medium term.

When I hear reports that California public employees are demanding to be paid in Sacramento IOUs instead of good ol' American Dollars then I might start taking some of the stuff being posted here more seriously...

[Southernguy]

Re: Federal Reserve Bank Warns Against Competing Currency!

Well, they seem to have no choice.
Perhaps many people in the US and elsewhere prefer to be paid in gold, or silver.
But they simply have no choice, so they accept dollars or some other fiat.
And thatīs the origin of fiat currencies.
If I were a FED governor i would be worried.
If the process goes on in time and extension we shall see a broad discusion and political and economical pressures over Arnold.

[big67]

Re: Federal Reserve Bank Warns Against Competing Currency!

A Patacones-like situation took place in Italy too, in the 80s for some reason there was shortage of coins, so various banks started emitting very small amount of cash in the form of printed checks payable to the bearer, the so called "miniassegni" (minichecks). I believe they circulated in lieu of coins for a couple of years before being withdrawn. They are still a collectible item.

[Jim Nickerson]

Re: Federal Reserve Bank Warns Against Competing Currency!

http://www.ft.com/cms/s/0/9b61b710-6...44feabdc0.html

• Absurd though they might seem, redolent of a serial fiscal delinquent such as Argentina rather than a US state, IOUs are not new to California. They were also used in 1992 during the last big US recession. But their repeated use continues to eat away at California’s credibility, and the way they have been implemented is grotesquely unfair. Welfare payments to the poor will be made in IOUs redeemable by October – assuming the state can afford it. Meanwhile, the legislators who have proved themselves unwilling to sort out this mess will still be paid in cash. Emphasis JN

To me this is typical behavior of most who are elected by the people to serve the people. First, pols look after themselves, and secondly, pols look after themselves.

[Fiat Currency]

Re: Federal Reserve Bank Warns Against Competing Currency!

Well, they seem to have no choice.
Perhaps many people in the US and elsewhere prefer to be paid in gold, or silver.
But they simply have no choice, so they accept dollars or some other fiat.
And thatīs the origin of fiat currencies.
If I were a FED governor i would be worried.
If the process goes on in time and extension we shall see a broad discusion and political and economical pressures over Arnold.

Bingo. I have studied fiat currencies for quite a while (I have weird hobbies )

One could argue that California - with the 8th largest GDP - actually has a lower debt-to-GDP ratio than the USA. It's currency could therefore be viewed as stronger than a FRN ...

... in a "best-looking-horse-in-the-glue-factory" kind of way. :eek:

[GRG55]

Re: Federal Reserve Bank Warns Against Competing Currency!

Bingo. I have studied fiat currencies for quite a while (I have weird hobbies )

One could argue that California - with the 8th largest GDP - actually has a lower debt-to-GDP ratio than the USA. It's currency could therefore be viewed as stronger than a FRN ...

... in a "best-looking-horse-in-the-glue-factory" kind of way. :eek:

I think it is misleading to suggest that debt-to-GDP is the sole, or even the most important, factor in determining a currency's relative value.

A fiat currency is essentially a zero-duration bond. Anybody that believes that a California issued "currency" would be viewed more favourably than US Dollars need take one look at how the market is currently pricing another of California's debt instruments - general obligation bonds. Compare them to how the market is pricing the bonds of other States in the Union, and against the pricing of comparable duration US Treasuries. That data is indicating that California is one of the worst-looking-horses-in-the-glue-factory"...;)


Here's the latest from the taxpayer-supported "private" US banking sector.

This system is setting up for speculators with money, and willing to bet that California will eventually make good on the IOU notes [perhaps with the generous assistance of taxpayers across the Union via a Washington bail-out], to accumulate the notes at a discount to face value from people desperate for cash to fund their daily needs. These things are going to behave like a high-yield mini-California State bond, not an alternative fiat currency to FRNs. The only reason for Bernanke [and Geithner] to be worried is over the amount of issuance, because that will determine the size of the ultimate bail out needed from D.C. Looks like another perfect opportunity for Goldman to use its considerable influence in Washington to make some risk-free jingle...

Bank of America sets cutoff for redeeming California IOUs

The bank warns it will halt the transactions after July 10. Some other big financial institutions follow suit.

By Tom Petruno, Los Angeles Times
July 3, 2009

Bank of America Corp. set the tone for the banking industry's response to California's decision to issue IOUs.

That message, essentially, is this: "We'll help you for a week. If you can't get your act together and nail down a budget by then, you're on your own."

Bank of America announced late Wednesday that it would redeem in full the state's IOUs (formally, "registered warrants") from current BofA customers who want to cash them in. But the bank set a cutoff date of July 10.

On Thursday, other big banks including Chase, Wells Fargo & Co. and Union Bank followed BofA's lead, saying they'll cash the IOUs from customers only through July 10.

Some banks, including City National, didn't set a cutoff date, but they didn't preclude doing so at some point. Many credit unions also have agreed to accept the IOUs from customers without setting a time limit, the California Credit Union League said.


The big banks' hardball strategy will create hardships for their customers if no budget deal is struck soon and the state continues to issue IOUs instead of checks. The state set a redemption date of Oct. 2 for the IOUs, although it said it might redeem them before then if it has the cash. Other lenders may step up to buy the IOUs in the interim, but probably at a discount to face value, unlike the big banks' redemption programs.

When asked why it set such a narrow window for customers to cash IOUs, BofA cited the "operational and financial" challenge of accepting them.

In an e-mailed statement, the bank referred to "the last time the state issued registered warrants in 1992, where the longer the registered warrants were accepted, the longer it took the Legislature to resolve the matter. So, we don't want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible."

Asked whether it might extend the July 10 deadline, the bank all but ruled out doing so, saying, "This is a firm date for us."

Note that banks will earn something for their troubles: The state will pay an annualized 3.75% tax-free rate of interest on the IOUs until it redeems them.

If recipients of the IOUs don't need the cash right away -- which might be hard to imagine in this economy -- they can hold on to them until the state finally pays up. They'd collect whatever interest has accrued to that point.

At 3.75% -- and tax-free -- the interest is far better than what you'd earn on short-term savings in a money market mutual fund . . . or at a bank.

[radon]

Re: Federal Reserve Bank Warns Against Competing Currency!

I think it is misleading to suggest that debt-to-GDP is the sole, or even the most important, factor in determining a currency's relative value.

A fiat currency is essentially a zero-duration bond. Anybody that believes that a California issued "currency" would be viewed more favourably than US Dollars need take one look at how the market is currently pricing another of California's debt instruments - general obligation bonds. Compare them to how the market is pricing the bonds of other States in the Union, and against the pricing of comparable duration US Treasuries. That data is indicating that California is one of the worst-looking-horses-in-the-glue-factory"...;)

That seems to be the heart of the matter. Without speculation nobody would want these things at all. Really, without fiat to force settlements of debts these IOUs have a better chance at becoming wallpaper than a competing currency. Then again we shouldn't give the legislature any ideas.....

[Southernguy]

Re: Federal Reserve Bank Warns Against Competing Currency!

Arenīt BOFA, Morgan, Wells Fargo, etc owners of the FED?
If that is so, then the FED, for now "indirectly" is becoming to pressure the State of Californai on the issue.
And that was a predictable thing to happen.
California warrants are money, and their rate of exchange against the dolar is the same thing as the ER of any other currency. The difference is that in this case tha face value of the currency is one to one with the greenback. As time goes on, if the currency is not cancelled, ERates shall oscillate, as they do with any other currency.
Something which aroused my surprise is the arrogance with which a private entity, BOFA, refers to a democraticaly elected constituency, the legislature of California.
Quite shocking, and a sign of the times.
Isnīt there any Californian to protest?
That does not mean any judgement respect the acts of such body, which Iīm in no situation to do.