Breaking News: California to Pay State Employees with Bottle Caps and Compacted Pencil Shavings

In what economists call the "Come On, Baby, You Know Papa's Good For It" approach to fiscal policy, the state of California is looking to pay its end of the month financial obligations to various state workers, pensioners, financial-aid recipients, and destitute grandmothers with IOUs.

Presumably, these IOUs will not be scrawled on cocktail napkins and stained with tears.

The deciding factor could be California's banks. If they're willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They'll be able to cash the IOUs.

But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession...So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang. (source: Sac. Bee)

Apparently, this particular method of addressing a budgetary clusterfuck has a tried-and-true history. In 1992 the Golden State temporary suspended its policy of actually paying people real money in favor of promissory notes. And back then, the banks were a tad more willing to play along on account of them being a tad more solvent.

On the other hand, given the state of California's real estate and financial markets, I'm sure the FDIC is running half of the banks in California already (not really, but humor the notion). And if the Federal Government is willing to throw a life-line to the likes of such a travesty of managerial judgement and civic responsibillity as AIG on the grounds that its failure would pose a systematic risk, I don't see how the same rationale wouldn't justify keeping what is effectively the world's 10th largest economy from sinking into the sea for at least another month.