California Will Collapse. Buy California Bonds.

You might have heard that California passed a budget lately.

Actually, it passed a budget revision because the budget passed in February was already in a $26b deficit. And the revision didn’t close the $26b hole, either. Now, Moody’s, one of the three credit-rating agencies used by the bond market, says California faces an addition $15b deficit for the next year. Republicans will demand cuts and probably not agree to any taxes. Democrats may agree to some cuts, but they won’t be able to close this. I am pretty sure the Democrats won’t do a cuts-only budget again, even if that were somehow possible. Not in an election year. IOUs will run out or stop being accepted. California will have to stop paying something.

And, as I mentioned before it passed, the latest budget revision trades sovereign default for a wave of municipal Chapter 9 bankruptcies. Moody’s agrees.

Moody’s also criticized California’s plan to take more than $1 billion from counties’ redevelopment agencies this year to help close its $24 billion deficit, saying that could jeopardize those agencies’ credit ratings.

But apparently, sovereign default is quite likely, or at least increasingly likely. The $1.9b in borrowing called for in the latest budget comes at a huge 8% interest rate. If the bond market takes Moody’s report to heart, those 8% bonds will go down in price and increase yield. Oh, by the way, state bonds are tax free for state residents (and fed tax free). Very easily people with money in this economy could achieve a 10% tax free yield out of California tax payers. Inflation is low, so the deal is even better for the rentiers. If you can afford to do so, I would recommend buying these bonds. (Can readers tell me if these bonds can be called?)

Why? Because the market will treat them like the risk is real, but it’s not. Name one bailout of late where the bondholders took a serious haircut, let alone were wiped out. Even in recent sovereign defaults in emerging markets, such as Ecuador, the bondholders ended up getting paid back significant amounts. Privatize profit, socialize risk.

So who will bailout California? Probably the Federal Reserve and the U.S. Treasury. As opposed to an IMF bailout where a bunch of pointy heads come in and tell the inferior intellects (snark) in the government to cut and cut some more and then restructure the debt, Californians have representation in the federal government. There probably will be no bailout for local government, who will simply enter Chapter 9.

Unless something changes—and today’s GDP report still shows contraction—like, right now, this will be real.

Dept. of Just Not Getting It


Organic food has no nutritional or health benefits over ordinary food, according to a major study published Wednesday.

Raise your hand if you eat organic food just for its health benefits. At least as far as I understand it, the numerous pesticide scares of the last several decades had a lot to do with the growth of organic foods, but, more importantly, its the environtmental benefits that we care about.

Plus, there is a much lower risk of, well, those pesticides showing up even if the end product contains the same amount of Vitamin C. Did the study address that?

Organic food’s cost to “regular” food can only be compared when you include the externalities that we all pay as a kind of tax when the production methods pollute the commons. It just doesn’t show up on the grocery bill, today.

Though organic production doesn’t guarantee sustainable production, nor does it guarantee that you’ll comport with everyone’s ethical standards, it is an important first step and shouldn’t be dismissed as a mere fad among the bourgeoisie.

Solving the mortgage crisis for the historically ignorant

Dean Baker in the Guardian:

Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).

So, what we should do is make people the latter-day equivalent of tenant farmers? As awful as the relationship can be between mortgagor and lender, it is not a  zero-sum relationship. Landlord-tenant, on the other hand? Especially with a rent cap like this, the landlord will just do whatever needs be to kick the tenant out if a higher rent can be got from a new one.

Anyone familiar with economic history—or even just American history—might recognize this as the phenomenon that gave rise to the populist movement in the late 19th century. Farmers were getting screwed by bankers and losing their land. So, now instead of farmers, we have the post-ww2 middle class homeowner.

The easy solutions to this problem disappeared in 2007 when we could have bailed out the homeowners instead of the banks by preventing the defaults that setup this domino effect. That time has passed. Now, to me, the best solution is to allow residential property to be “crammed down” in bankruptcy.

Yeah, I know the counterarguments about a runaway effect on the market. But isn’t that what already happened? The simple solution is to make the bankruptcy painful enough so that it’s only done as a last resort. As it stands right now, it’s not far from that.

Too bad the banks run Washington.

P.S. Oh, and then there’s the various blame the victim arguments that go together with saying that the burden will be passed on to other ‘responsible’ homeowners. Well, just work out a way to keep that from happening. Other homeowners might suffer a slight diminution in value, temporarily, but is it worse than a bunch of empty houses, or, worse, according to property value mavens, a bunch of rented homes where the tenant has no stake in it? And about the interest rates? Well, ‘responsible’ homeowners would have a fixed rate or a loan already. Future buyers, duh, will like the lower values and interest rates are low. What’s the problem?


India now has a bona fide second strike capability, but Pakistan does not. This shifts the balance of power in the region towards a stronger MAD equilibrium between China and India, but it also shifts it decidedly in favor of India in Indo-Pakistani relations.

Back in November, I wrote that without these, they had no second strike capability. Though there were rumors then of this submarine.

When you game this out, it actually stabilizes the situation quite a bit. The previous recipe: poor early warning, short decision times due to proximity, and no second strike capability, launching a nuclear attack could become a dominant strategy as tensions rise. Now, Pakistan does not have a dominant strategy to launch because a second strike would destroy them. Knowing that to be the case, India doesn’t get locked in to their first strike dominant strategy either. So, we don’t have a recipe for an accidental nuclear war anymore.

This doesn’t, however, change the fact that an otherwise non-nuclear conflict could go nuclear under the wrong circumstances. Having said that, this is actually a big improvement in strategic stability for the subcontinent assuming we have a generally non-belligerent India.

Given the United States’ military interests in Afghanistan and its economic ties to India, I think this is preferable to a Pakistani boomer sub.


Is saying all the right things and seems committed. This will be the test of his Presidency. If he can deliver, I think he’ll be unstoppable. If not, he’s Clinton II.


Frank Ricci charges in the lawsuit that the city violated the Americans with Disabilities Act, which prohibits discrimination against people with disabilities.

So, as TPM puts it “If you were Frank Ricci, you might say that Frank Ricci got a job and somebody who wasn’t dyslexic didn’t. After all, this is the same Frank Ricci who took hisreverse discrimination suit all the way to the Supreme Court, which overturned the holding of the lower courts–including Sotomayor’s–that had ruled against him.”

This is fairly typical of the mentality of GOP voters. As long as something is working for them, it’s their property. When it’s not, it’s government disruption.

A Dead Fish Bounce

Presumably, being an outdoors-oriented Alaskan, Mrs. Nilap, you were speaking about salmon when you said that, to paraphrase, only dead fish go with the flow. Actually, it is the living salmon smolts that go with the flow. Any cursory knowledge of salmonid outmigration (you were speaking about salmon, Mrs. Nilap, right?) reveals that they respond to a flow cue to outmigrate as smolts. The dead ones may float about with the freshet for awhile, but eventually they will either be gobbled up by a carrion eater or else will wind up on a side channel, or at the bottom of the river etc.

Similarly, as adults, it is the live salmon that go against the flow. They use cues from the water running towards the ocean to  navigate their way upstream. Should they make it back to their natal steams they will spawn and die. Thes dead adult salmon also do not go with the flow. Rather, they rot on the banks of the steam and transfer the nutrients they consumed in ocean back to the forest stream bed of their birth.

Not sure if there is any symbolism in this brief salmon life cycle lesson befitting Sarah Nilap’s goof city, farewell verbal lobotomy. Never mention marine nutrient transfer to a gobbeldy-gooker, I guess.