Topic: Economics
Let California Fail
It is ironic that the federal government is substantially meddling in the financial affairs of other entities given the dilapidated state of Washington’s own finances.
by Kenn Jacobine
(libertarian)
Sunday, May 24, 2009

First, there were the banks, investment houses and insurance companies – the most notorious being AIG.  Then the auto companies weighed in getting their piece of bailout funds from Uncle Sam.  Now, it seems the states will be next to tap the national treasury for funds that do not exist. 

There is a saying, "As California goes, so goes the rest of the nation."  How true these words have become since both are completely bankrupt.  With the defeat this week by voters in the Golden State of ballot initiatives that would have drastically raised taxes to close a $24 billion budget gap, the state is on course for a complete financial collapse by July.  Unlike the national government, California can't print money to buy more time either – no pun intended.  It must find a way to raise the funds otherwise millions of Californians will not receive checks.

But, not to worry, Governor Schwarzenegger, Senator Boxer and other Golden Staters are putting the squeeze on Treasury Secretary Tim Geithner to guarantee emergency loans that California needs to meet its obligations.  With the state's credit rating in the toilet, some analysts believe federal backing is California's only hope to secure the loans it needs to pay its bills.   The proposal would collateralize U.S. taxpayer funds to guarantee private lenders that they would be repaid if California defaulted.  The concept is to take the risk out of lending to California for banks and place it squarely, again, on the shoulders of American taxpayers.

Of course the leverage state officials are using on Geithner is that California is "too big to fail."  They claim if the state were to go belly up it would send ripples through the rest of the country and even the world.  Further, if Washington allowed the collapse to take place imagine what that would do to the confidence the rest of the world has in us to lead economically.

Clearly the feds are in a totally unenviable position.  If they don't bail Sacramento out they will look really bad given their enormous generosity towards unscrupulous bankers, and inept carmakers.  Since most of the money California needs to borrow will go to ordinary folks, teachers, cops, government workers, Washington can't be seen again to favor the interests of Wall Street over Main Street.  Thus, I believe there is no question that the Obama Administration will bailout California.  Naturally, this is a big mistake.

In the first place, if Washington succumbs to the "too big to fail" ploy with California, then what happens if say Wyoming asks for bailout funds.  Can it be denied because its economy is not nearly as important as California's to America's health?  Is it proper to favor one group of Americans over another simply by virtue of where they live?  I realize we do that now with things like highway funds, but saving one state and letting another go is a horse of a different color.  What about Wyoming's portion of the federal bailout funds for California?  If Washington submits to Schwarzenegger's request it will open up an array of ethical and legal questions pitting states against each other.

Then there is the "moral hazard" that would result with a California bailout.  Given that politicians are not very courageous when it comes to making touch choices, state bailouts by the feds would allow state officials to manage state funds even more irresponsibly.  California is a perfect example.  The statist politicians there have overpaid public employees, spent generously on social services, and overregulated business and the environment.  Bankruptcy is the perfect solution to their reckless spending.  It is what ended socialism in Eastern Europe; it should be used to end socialism in California.  Without it, politicians of all stripes will believe that Uncle Sam will catch them when they fall.  This will impede economic recovery and perpetrate the myth that Washington has a bottomless bank account or a bank account at all.

Which brings us to the question of where does California think the feds are going to get this money anyway?  Our leaders have become oblivious to our financial condition.  When you can't pay your bills you are bankrupt.  Washington has been bankrupt for a long time, but again has had the means (printing press) to put it off.  And put it off the politicians have.  That is why we now face the economic situation before us – a lower standard of living, mountains of debt both personal and national, and a gigantic task of rebuilding our industrial base so that we can compete again.  You see the politicians since at least 1971 have mortgaged our future; those bills have come due; and we don't have the money to pay them.

So, California is not alone.  "As California goes, so goes the rest of the nation."  Both entities are broke.  Perhaps instead of groveling to Washington to bail them out with funds Washington doesn't have, the politicians in Sacramento can set an example for Washington to follow – deregulate, end the welfare state, disband public unions, and live within your means as a society.  Wouldn't it be nice if California led the nation in a positive way for a change?    

Kenn Jacobine teaches internationally and maintains a summer residence in Haywood County, North Carolina.  Visit his blog site online at:  The View from Abroad.


©2009 Kenn Jacobine, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, May 24, 2009
Last modified: Sunday, May 24, 2009

The views expressed in this article are those of Kenn Jacobine only and do not represent the views of Nolan Chart, LLC or its affiliates. Kenn Jacobine is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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Reader Comments:

Posted By: Walt Thiessen
Date: 2009-05-24 11:51:20

Of course, it could also go the other way. California could get its bailout, and the rest of the states could then start lining up.

It reminds me of the old Monty Python skit about the Piranha Brothers, in which one of the Pythons dressed in drag as an old woman says, "Oh yes, they were in and out of each other's houses with each other's property all day long. Ha ha! Oh yes, they were a cheery lot...cheery, and violent."

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Posted By: David S
Date: 2009-05-24 13:05:44

Right now the federal government is like a chicken with it's head cut off... technically dead but still able to run around for a while.

 BTW as long as we're into the bailout business I propose a law that's too good to pass up; the Buy Dave a Boat Act. What's so good about that you ask? Well the big selling point is that its incredibly cheap compared to the others, only $30,000. Compared to $700 billion for TARP or even the tens of billions for the auto companies, my bill is a barely a drop in the bucket. It's just too good a deal to pass up.

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Posted By: Brittanicus
Date: 2009-05-24 14:58:22

Not a word about the true nature of the massive problems in the Sanctuary State--California.  Illegal Immigration and the pandering by the Sacramento legislators, who have placed the inhabitants in this all encompassing crisis.

Illegal immigration is once again on the front burner of issues. We cannot hide from the fact that once Proposition 187 was snuffed by a liberal judge and manipulated not to reach reaching the highest court, Now California budget started to suppurate.  The cost is almost unmentionable if you ask City Manager Andronovich as they have reached pandemic proportions and must be neutralized or the budget meltdown will keep mounting.

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Posted By: Jahfre Fire Eater
Date: 2009-05-25 06:22:04

Hi Kenn,

Good article. 

I have a different take on this.  California will not "fail".  It will seek a sustainable economic state.

This will involve a mass exodus into the pacific northwest in seek of government succor.  Those states too will be sucked dry and abandoned.  By that time the rest of the country will have begun to take actions to avoid the west coast collapse.  I have no idea how that will go...but a long list of possibilities.

If John Steinbeck were here today I'd love to read his account of the return of Californians to the dirt farms of Oklahoma.  I wonder if the ghost of Tom Joad would welcome them to their roots?

Who will leave first?  Middle class with family elsewhere, small business owners who need local customers, young people who are not afraid of hard work.

Who will stay as long as possible?  The extremely wealthy, those who qualify for direct federal hand-outs that bypass the bankrupt state and those who are already slaves to the state and have no notion of ever improving their lot.  And of course, those who have sustainable businesses and employment.  There will be lots of these and lots of jobs but at far less than the federal minimum wage.

I believe the decline of California will be the straw that broke the camel's back for the horribly destructive federal minimum wage laws.  That one issue will be an important marker of Obama's legacy.  

We do live in interesting times.

-Jahfre Fire Eater

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Posted By: Adrian Scott
Date: 2009-05-26 02:30:22

As a Californian myself, I was happy to vote down 5 of those 6 props that Sacramento put before us- not for a lack of trying, but because overnight, the concept of a state constitutional convention became a mandatory part of every discussion. That's politicking to your advantange.

 Don't get me wrong. The Legislature is still more than capable of fixing this mess, but they won't do it. The whole government is like a dain-bramaged child, raised by dysfunctional parents- the voting populace. And now the chickens have come to roost.

 That is perhaps the greatest achievement to come out of this- an opportunity to start anew and reassert state sovereignty. My only fear is that Obama will attempt to co-opt this effort for his own political gain. And by any other means, he'd have to be blind not to.

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Posted By: Jake, the Champion of the Constitution
Date: 2009-05-26 10:44:05

I thought the phrase was ""As General Motors goes, so goes the rest of the nation."   oh well.

The State of California's people can figure out what to do - they don't need to suckle at the government's teat - but that doesn't mean that their elected representatives are up to the task.

"Necessity is the plea for every infringement of human freedom.  It is the argument of tyrants.  It is the creed of slaves." - William Pitt

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Posted By: Chuck B
Date: 2009-05-26 10:48:41

I suggest that if a federal bailout is needed that it be done the same as an IMF bailout. Send Simon Johnson (ex chief economist of the IMF) or a similar expert to restructure California's finances and budget as a condition of a federal loan and then submit his plan to the legislature for an up or down vote. If they agree to a viable plan they can borrow the funds. If not then they remain uncredit worthy should not be approved for a loan.

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Posted By: Ed
Date: 2009-05-26 11:14:27

California must fix itself, and it must start with changing the state constitution to be rid of the ridiculous gridlock-feeding supermajority requirement to pass a budget, and also the similarly ridiculous simple majority required to pass unfunded ballot mandates that have crippled the state economy.

 If California voters want services, they must pay for them. Period. Forcing them to choose what they are (and are not) willing to pay for is stunningly obvious yet voters have been allowed to hogtie the state government for decades with unfunded mandates and restrictions of fund distribution. This is the drawback of California's style of direct democracy, and it is unsustainable.

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Posted By: michael
Date: 2009-05-26 13:45:10

I recently visited California and found much of the state to be beautiful, it will make a wonderful Federal Park.  Why not we will be paying for it anyway.

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Posted By: Thomas Locke
Date: 2009-08-04 09:36:17

I've had a feeling we'd bail out states next. No surprise Calfornia's the first in line for it.

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