Thursday, May 21, 2009

Is California Too Big To Fail?

Who is up next for bailouts? How about California?

Preliminary returns on Tuesday night show that voters soundly rejected ballot measures calling for higher taxes, meaning that the not-so-Golden State's politicians are likely to take hat in hand and head to Washington begging for a bailout.

Republican Gov. Arnold Schwarzenegger floated that idea months ago, as did Assembly Speaker Karen Bass, a Democrat. Schwarzenegger's visit to the White House on Tuesday surely didn't harm its prospects.

California does have enough cash to survive through June 30, but the state controller estimated in March that another $10.6 billion would be necessary to last the summer.
Where does this stop? How many other states have budget troubles? If you want to have government spending, you must have sufficient tax receipts to pay for it. The moral hazard of a federal bailout of individual states is staggering. Why would any state balance its budget?

An article in Tuesday's Bond Buyer newspaper reported, citing congressional sources, that the U.S. Treasury and Federal Reserve are considering loan guarantees and "other assistance" to state governments. A House of Representatives committee is holding a hearing Thursday on a bill to provide federal guarantees; House Speaker Nancy Pelosi, a San Francisco Democrat, is in a position to make that happen.

Now, it's true that California's fiscal woes are serious, but they're the result of politicians' poor decisions over many years. No matter how it's concealed, a bailout could jeopardize the nation's AAA credit rating - and invite 49 other governors to queue up outside the Treasury building. (The incentive is perverse: The worse shape your state is in, the more cash you get from the Feds.)
This is just a symptom of our greater national problems. We are spending more money than we make on nearly every personal and governmental level. This cannot continue.

1 comment:

mus302 said...

Is California Too Big To Fail?

The better question would be is the California vote too important to the democratic party for them not to do something during California's time of need?