Friday, October 03, 2008

California Needs A Bailout Too

Of course, it's not the decades of wasteful deficit spending that's to blame for California's fiscal crisis, it's a "lack of liquidity" in the credit markets. Lest you think there's no money available for borrowing anywhere, he's the "money quote" from the LA Times:

State officials now fear they face a potential cash crisis worse than California confronted in 2003, in the final days of Schwarzenegger's predecessor, Gov. Gray Davis.

At that time, the precipitous decline of state revenue in the middle of a budget year forced officials to pay a syndicate of banks a premium of hundreds of millions of dollars for what amounted to an expensive "payday loan."

Even that option, administration officials say, would not be available during the current credit drought. They say if Congress does not approve a bailout plan -- and maybe even if it does -- there will be no lenders available to provide the state with the money it needs, regardless of the premium the state is willing to pay.

"We need to go as wide as possible to try to find buyers at reasonable rates," said Robert Fayer, an attorney advising the state on its planned $7-billion bond sale.

"Whether it could ultimately be the federal government, I have no idea. It is a fairly radical concept."
I'll go out on a limb: The only way California will get its spending under control is through bankrupcty. It might happen sooner than we think.
GOVERNOR ARNOLD SCHWARZENEGGER
October 2,2008
The Honorable Henry M. Paulson, Jr.
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Mr. Secretary,

First of all, let me commend you for your leadership to enact emergency economic stabilization legislation. This credit crisis has the power to grind the U.S. economy to a halt if swift and decisive action is not taken immediately. The federal rescue package is not a bailout of Wall Street tycoons -it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake. I have communicated this message to the entire California Congressional delegation and will continue to press for passage of an emergency rescue plan.

Like many other states, California is feeling the enormous effects of this crisis on our economy. California’s economy is dynamic and resilient, but also uniquely sensitive to national and international economic conditions and fluctuations in the financial markets. The credit crisis has frozen investment and commerce, forcing businesses and families to stop purchasing goods and services. This has resulted in tens of thousands of lost jobs and billions of dollars in lost tax revenue to the state.

Most immediately, California and a number of other state and local governments are experiencing the lack of liquidity in the credit markets firsthand. Many states and local governments have been unable to secure financing for bond offerings and for routine cash flow used to make critical payments to schools, local governments and law enforcement. While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash flow needs exceed the entire budget of some states. We expect to issue $7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days.

Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing.

The economic fallout from this national credit crisis continues to drain state tax coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time. I will continue to do all I can to encourage passage of the emergency rescue plan.

Sincerely,

Arnold Schwarzenegger

4 comments :

Patient Renter said...

The Governor's letter is nice and all, but:

The federal rescue package is not a bailout of Wall Street tycoons

Come again? Many independant economists were under the impression that it was. Maybe you know something they don't?

The credit crisis has frozen investment and commerce...This has resulted...in lost tax revenue to the state.

So it was the credit crisis that somehow caused declining tax revenue? This is a revelation!

The credit crisis has frozen investment and commerce, forcing businesses and families to stop purchasing goods and services.

It's a wonder that any of us still have jobs being that commerce is frozen and businesses can't purchase services. But on the bright side, since families are being "forced" to stop purchasing goods, at least the lines at the grocery store will be shorter.

smf said...

Califonia had two bubbles that bumped up (temporarily) tax revenues, The dot.com and housing bubbles.

They increased their spending by like amounts, and now we see were the State is.

1998 budget - $70 billion
2008 budget - $145 billion

The answer of what has to happen is pretty clear now.

As to the credit market:

Would you lend California any money right now in their condition?

Patient Renter said...

The NYT today is finally pointing that the SEC granted a debt limit exemption to the big 5 investment banks, and that the exemption was supported by none other than.... Henry Paulson. I'd love it if this makes Congress think twice before handing near unilateral authority to the same man.

Would you lend California any money right now in their condition?

That's exactly it. As Max has pointed out, you can throw money at banks, but you can't force them to lend to an entity they don't trust. Why oh why has the media STILL not pointed this out!?

Anonymous said...

Simply sell oil leases off the coast.

What happens when your family needs cash? Hold a garage sale, that's what.

Sell assets like oil leases. End fishing restrictions off the coast. Resume logging. Resume mining in the deserts for rare/precious minerals.

Cannot believe that people haven't thought of this yet. Would you rather starve?

Environmentalism is for the rich.