Real Estate Developers Bracing For Bankruptcy

Bad for the Goose, Worse for the Gander

Last week, major banks announced they would no longer offer cash for the IOU's written by the state of California. At the same time, China proposed that the U.S. dollar be replaced as the world's official reserve currency. Although seemingly unrelated, these two developments have at their root the same issue: uneasy creditors. Inspired by Washington's profligacy, California's Democratic majority long pursued a policy of populist politics, supercharged by referendums, which called for increasingly massive expenditures. Exploding deficits were the natural result. Now, it has reached the point where holders and potential buyers of California debt have lost confidence in the state's ability to ever repay. Ever since President Nixon severed the dollar's link to gold in August 1971, the U.S. has embarked on a monetary policy that has been both a blessing and a curse. The blessing was found in the dollar's reserve status, which allowed for monetary flexibility that no other country could attempt. But therein lay the curse, as gross economic imbalances were allowed to grow unaddressed. Our currency's exportability obscured the fact that our government spending was financed largely by inflation and debt. It appears that California politicians assumed that they could follow the same model. They began to authorize massive expenditures on freeways, schools, universities, and parks. In their thirst for votes, they introduced a vast array of referendums on entitlement issues. This is quite unlike Switzerland's successful forays into direct democracy, which restricted referendums to election laws and constitutional matters. Absent limits to their purview, California voters inevitably granted themselves new benefits from the public purse, financed by increased taxation and debt. This led to ever higher voter demands and a dramatic rise in real estate values. In imitating the example of Congress, California's politicians made one crucial error. Like the Administration, they could tax and borrow. But unlike Washington, California could not print money.

The G-8 Is Dead

Democracy no longer counts for much. Neither does freedom. And human rights have lost their claim to universal validity. That, in a nutshell, is one result of the G-8 summit in the Italian city of L'Aquila last week. It was a funeral ceremony: The G-8 is dead, at least as a global leadership forum. It has now been reduced to a mere talking shop for certain heads of state and government. The important decisions are made elsewhere.