Los Angeles County’s Metropolitan Transportation Agency decided to hand out $44 million from the federal stimulus package in the form of $500,000 transportation grants to each of the county’s 88 cities. But some cities didn’t have any shovel-ready transportation projects and couldn’t do anything with those grants.

So cities started to buy and sell federal stimulus funds from each other at discounted prices. Ironically, local officials actually created a short-lived regional derivatives market, as they traded future credits (basically a promise of federal money) for present money.

La Habra Heights, a city of 6,000, has sold its $500,000 in federal funds to the city of Westlake Village for $310,000 cash. Irwindale, population 1,500, also sold its $500,000 to Westlake Village, for $325,000 cash.

Spontaneous re-allocation of resources towards Pareto efficiency. Capitalism found a way.

Later the MTA axed the deals, but it is interesting to see the natural process taking place when you least expect it.