JP Morgan Bails Out California

BusinessInsider ^ | 8/19/09 | John Carney

[Sammy67]

Remember when the US government had to bail out investment banks? Now a bank is bailing out the state of California.

California had been covering its budget shortfalls by issuing IOUs to pay for services, making it the first state to issue its own fiat currency since the Civil War. The program ran into trouble when banks announced they wouldn't keep cashing the IOUs.

Eventually California reached a budget deal and kicked the can down the road, but there's still the issue of the outstanding IOUs.

Yesterday JP Morgan agreed to lend California $1.5 billion to

[FlingWingFlyer]

Like the liberals say, “As California goes, so goes the nation.”

[Parley Baer]

The question is where does JP Morgan get the 1.5 billion to bail out California? Maybe the court order for the Feds to release their documents will provide the answer.

[4rcane]

i think its more likely that its the FED using JP Morgan as the proxy to bail out California

[MontaniSemperLiberi]

Agree. I think this has been the plan all along. When California threatens to default, it will be considered a threat to the financial system and we will bail them out.

[Fingolfin]

The question is where does JP Morgan get the 1.5 billion to bail out California?

Banks don't actually lend existing money, they create the money they lend by typing the amount of the loan into the borrower's (in this case California) account. This is brand new money added to the nation's money supply. When (if) California pays the loan back the money is destroyed.

[Moonman62]

i think its more likely that its the FED using JP Morgan as the proxy to bail out California

That's funny. It was JP Morgan, the person, whose bailout of the federal government in the early 1900's, which led to the creation of the Federal Reserve.

[Orange1998]

yeah right. sarc

[Moonman62]

Banks don't actually lend existing money, they create the money they lend by typing the amount of the loan into the borrower's (in this case California) account.

That's not how it works.

[eyedigress]

True. They bought my mortgage last year. I don’t plan on any default anytime soon.

[Toddsterpatriot]

Banks don't actually lend existing money,

The ones that stay in business do.

they create the money they lend by typing the amount of the loan into the borrower's (in this case California) account.

When California spends the loan, the bank better have some existing money, in the form of deposits, or the checks will bounce.

[Ruy Dias de Bivar]

***The question is where does JP Morgan get the 1.5 billion to bail out California?***

From the 401-Ks that people I used to work with have, or what is left of the 401-ks.

[Fingolfin]

When California spends the loan, the bank better have some existing money, in the form of deposits, or the checks will bounce.

JP Morgan is simply crediting California's bank account with brand new money it created with a few keystrokes on a computer. Checks drawn against that account won't bounce because California really does have 1.5 billion dollars, albeit it is just digital checkbook money created from the initial debt.

[Desron13]

"vThe question is where does JP Morgan get the 1.5 billion to bail out California?

Exactly! JPMChase doesn't have any more "money" than the government does. In plain terms, they're both broke.

[Toddsterpatriot]

Checks drawn against that account won't bounce because California really does have 1.5 billion dollars, albeit it is just digital checkbook money created from the initial debt.

When the check goes thru the clearing process, imaginary dollars won't make it clear. JP Morgan needs real dollars from real deposits or those checks will bounce.

[Fingolfin]

When the check goes thru the clearing process, imaginary dollars won't make it clear. JP Morgan needs real dollars from real deposits or those checks will bounce.

No. This 1.5 billion did not exist prior to JP Morgan making the loan, and it certainly wasn't taken from "reserves". It may have been based on reserves, but they are still there at JP Morgan. This isn't a unique situation - it is how all loans originate and how 95% of our money supply is created.

[Toddsterpatriot]

This 1.5 billion did not exist prior to JP Morgan making the loan, and it certainly wasn't taken from "reserves". It may have been based on reserves

A deposit of $1.5 billion (plus reserve) is needed to make a loan of $1.5 billion.

[Fingolfin]

A deposit of $1.5 billion (plus reserve) is needed to make a loan of $1.5 billion.

Correct, but none of that is actually lent out. The 1.5 billion loan is on top of the reserve and is brand new money.

In other words, if JP Morgan has 1.65 billion dollars, at a 10% reserve ratio, it holds 150 million as "reserves" and 1.5 billion is considered "excess" and can be lent out. However, the excess is not lent out, it is used as the amount of new money to bank is legally allowed to create and credit to the borrower's (California) account. The original 1.65 billion is still safe at JP Morgan as bits on a hard drive.

[Toddsterpatriot]

Correct,

Excellent!

but none of that is actually lent out

Bzzzzt, wrong.

The 1.5 billion loan is on top of the reserve and is brand new money.

The loan creates new money, but the $1.5 billion actually leaves the bank when those checks get cashed.

In other words, if JP Morgan has 1.65 billion dollars, at a 10% reserve ratio, it holds 150 million as "reserves" and 1.5 billion is considered "excess" and can be lent out.

Yes!

However, the excess is not lent out

NO!

The original 1.65 billion is still safe at JP Morgan as bits on a hard drive.

The $150 million reserve is held at the Fed (or as vault cash). The $1.5 billion in deposits now exists on paper and the $1.5 billion in cash (that was deposited) is gone once the checks are cashed.

[PGalt]

Thanks for posting. They’re living it up at the Hotel California...and sending us, our kids and our grandkids the bill.