Free Markets, Free People

So Will The Federal Government Bail Out California?

Is it too big to fail? Megan McArdle believes the possibility certainly exists (I mean was Arnie really in DC yesterday just to see the sights). Says McArdle:

If the government does bail out the muni bond market, how should it go about things? The initial assumption is that they’ll only guarantee existing debt. Otherwise, it would be like handing the keys to the treasury to every mayor, county board, and state legislature, and telling them to go to town.

But once the treasury has bailed out a single state, there will be a strongly implied guarantee on all such debt. So you don’t give them the keys to the vaults, but you do leave a window open, point out where the money’s kept, and casually mention that you’ve given the armed guards the week off.

Of course the right answer is not to bail out either. Failure is a great teacher. And then there’s the moral hazzard angle.

But in this day and age, that’s approach is almost unthinkable apparently. Government, as we’re being told, is the answer to everything.

My fear, based on what the federal government has done to this point, is they’ll “hand the keys to the treasury” on both the muni bond market and the states (with bailouts). They have no business doing anything in either place, but we’ve already seen that the arbitrary assessment that some entity is too big to fail apparently takes priority over economic law.

Once a single state is bailed out, there is nothing to stop other states from making a similar claim on the treasury.

Should such a thing happen in either case (or both), Federalism, which is on its last legs anyway, will be officially dead.


15 Responses to So Will The Federal Government Bail Out California?

  • I say NO or at least not enough ..  unless there is another “stimulus” bill of $300 billion or more.

    California needs something like $26 billion.  The only way you can get $26 billion for CA is to spend $300 billion nation-wide, as the one truism of DC is that when the “piggies” line up the the feeding trough, there has to be enough for all.

  • Failure is a great teacher

    Right. That’s why the public and the political class want so badly to ban it. 

  • The Argentian method?

  • MCQ-  Should such a thing happen in either case (or both), Federalism, which is on its last legs anyway, will be officially dead.

    If  CA thinks the feds making demands to get the stimulus money was bad wait till the find out the price of a bailout. Every piece of legislation, from CA,  would have to be pre-approved  by the feds.

  • If Obama is feeling generous, he might give holders of CA muni bonds 20% of their value.  The rest of the state will go to the public employee’s unions and the federal government.

  • Could it be? Could it really be that The Clown™ wanted this to happen? That he wanted those ballot measures to fail?

    Could it be…gulp…that The Clown™ wants to OWN California? To be his own personal state? After all, he now has his own personal auto maker (Chrysler), his own banks (Bank of America, etc.), and his own Insurance company (AIG), not to mention that he believes that since he was born under a good sign, he can part the waters and make countries do certain things, and have the US Congress bow to every wish (or nearly every wish).

    Why shouldn’t The Clown™ want to have his own state? After all, in 2012, people are going to be so fed up with his shenanigans, his spending, and his ruination of the entire American economy that when he is literally thrown out of office by his bare arse he is going to need a place to call his very own, outside of his stolen mansion in Chicago…so why not OWN California, where he can do anything he wants? He can vacation anywhere because he will own it; he can do what he wants with any portion of the state because he will own it; and, because he now has Ahhhnold (and the doofus’ successor) by the balls, he can make the Governor of the state do what he wants.

    I hate to say it, but The Clown™ is turning America into a joke. If I had said a year ago that the President of the United States would be spending trillions on massive spending and try to take over large segments of our economy, I would have been laughed at. But no one is laughing now.

  • I think it only happens if the feds get more control of state spending… what’s scary is CA is the one state that could be reigned in by going under Federal control.

    Politicians are still getting mixed messages – CA is a blue state – those propositions only existed as a compromise because a Republican senator would sign off on the original budget with them as propositions instead of spending laws in the budget.  It was pretty much DOA especially given this report: “The state Democratic Party has refused to endorse Proposition 1A, the statewide measure that is the linchpin of California’s budget deal. According to the Chron, Prop. 1A failed to get the necessary 60 percent of the vote at the Democratic state party convention yesterday, meaning the party will remain neutral on the issue. The state Republican Party opposes Prop. 1A. ” – think about it 4 of the 5 props (moving the 6th pay raise limits prop to another category) didn’t manage to pass a single county…. only Prop 1B even managed to carry a single county (it carried 3 all around SF Bay) that was the closest of the 3 failing with only 62+% of the population against…

    But the necessary feedback loop is missing – you see in a proper feedback loop the same people who across the state voted against these propositions to continue the Democrats preference for spending would have also voted against those same politicians – right…wrong – in CA’s two leadership elections, the 26th State Senate district voted by 70% in favor of the Democrat candidate.  Similarlly the 32nd congressional district voted 55% cumulative for two Democrat candidates ensuring the runoff would be (D) vs. (D) for that senate seat.

    Insanity is doing the same thing over and over and expecting different results…

  • Great.  My state is also in financial trouble.  We also have a dem (spit) governor.  Wonder if we’ll be second or third in line for a bailout after CA?

    And for all of you who live in states that HAVEN’T been fiscally mismanaged into the ground, how do you like the idea that you’ll get to pay more taxes to support those of us who were too stupid to elect people who could balance our states’ checkbooks?

    • Ask the blue staters who think they’ve been supporting the Red states (as if).

  • Maybe they can get Baba abd her buddies to have a bailout-a-thon

  • And what about the papers in CA, chiding the people for voting?  Do they not know Democracy is the rule of the people (or mob rule as Jefferson put it)?  CA asked the people and they answered; and the DYING newspapers criticize their hopeful customer base.

    Is everything that messed up in CA?