Another No to Federal Propping of California

Discussion in 'Wall St. News' started by S2007S, Jun 18, 2009.

  1. S2007S


    Actually surprised to see them turn away from propping up California, you would think another $24 billion would be a drop in the bucket, I mean they bailed out how many failing companies, lets start bailing out every state in the US running a deficit, Right??? Nah didn't think so, lets see how california does without the help of taxpayers money.

    Another No to Federal Propping of California

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    Published: June 16, 2009

    WASHINGTON — The Obama administration has gone on the record again that it will not use federal stimulus money to prop up California as it wrestles with its fiscal problems.

    “It’s obviously not an easy time for the State of California,” the White House spokesman, Robert Gibbs, said Tuesday at a briefing after The Washington Post reported that top state officials had requested aid. “We’ll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they’re going to have to solve.”

    But a spokesman for Gov. Arnold Schwarzenegger took issue with The Post’s article, which said officials had gone to the administration “hat in hand.”

    Mr. Schwarzenegger’s communications director, Matt David, said: “We are in complete agreement with the White House that California should be solving its budgetary problems on its own without a bailout from the federal government. Governor Schwarzenegger has stressed time and again that we need to get our own fiscal house in order, and that’s exactly what he has proposed to do. The governor has not asked for federal assistance to address California’s fiscal crisis.”

    Mr. David’s statement said the governor was working with the Legislature to find a solution to a $24.3 billion deficit. State officials have said California will run out of cash in less than 50 days. Last month, Mr. Schwarzenegger did ask for a $6 billion loan guarantee to back the state’s debt. But Treasury Secretary Timothy F. Geithner, speaking to Congress, said he was skeptical that he had the authority to provide aid to the state without new legislation, a view that Mr. Gibbs echoed.

    After a series of meetings in the past few days between Mr. Geithner and White House officials, the administration concluded that the state could hold out for a while longer.

    “The administration will continue to monitor all aspects of the economic and fiscal challenges in California and elsewhere,” said Jennifer Psaki, a White House spokeswoman. “But the focus now should be on California and the tough choices that the elected officials must make to address their fiscal problems.”
  2. Two years from now, the following conversation will take place:
    "Barack, California needs 24-billion-dollars. Please help us" said Arnold Schwarzenegger.
    "No" said Barack Obama.
    "You will not be re-elected" said Arnold Schwarzenegger.
    "Well, in that case, here's the money Arnold" said Barack Obama.
    "Thank you" said Arnold Schwarzenegger.
    "No problem and you're welcome" said Barack Obama. :cool:
  3. TGregg


    It's only a matter of time.
  4. Unfortunately, the "propping up" need of California (and other states) is not temporary... but rather perpetual.

    Where will the "line" be drawn, if any?
  5. 377OHMS


    Yeah and we really need the money so we can keep paying out welfare to illegal aliens and the entire city of Oakland.

    Somebody has to pay for the bullet-train from Disneyland to Las Vegas. It is vital for our, well, junkets lol.

    Red folks won't allow the property taxes to be increased. Blue folks won't stop the entitlement spending. California is going to be purposefully driven off a cliff.

    Bottom line, the equation will be fire cops or raise property taxs. Its probably the reason you can't find any ammunition at the Walmart in this state. People realize that there could be some diminishment of law enforcement in their area.
  6. TGregg


    When US debt becomes so massive that it causes problems from being too expensive to for the feds to continue to borrow or when capital becomes too expensive for most private enterprise.

    Or both. But it doesn't end well. :(
  7. Obama Should Tell California to Drop Dead

    During the height of New York City’s financial crisis in the 1970’s, President Gerald Ford had the good sense to turn down Mayor Abe Beame’s request for a federal bailout. The refusal prompted the famous New York Post headline, “Ford to City: Drop Dead.” More than 30 years later, as California Governor Arnold Schwarzenegger makes a similar plea to Washington, I hope President Obama will show similar restraint. Unfortunately, given Obama’s recent string of unwise economic decisions, it’s hard to imagine that his judgment will suddenly improve.

    A federal bailout would spare California from having to make spending cuts needed to bring its budget into balance. The matter has become urgent since California voters rejected several tax-hiking ballot initiatives. Rather than taking the vote as a signal to dramatically curtail spending, the state turned to the feds. If they get a free pass, the politicians can avoid fixing any of their past mistakes or preparing California for the future.

    California, like many states, expended its bureaucracy as the nation’s bubble economy inflated. When condos flipped like hamburgers and homeowners flush with equity spent like lottery winners, extra tax revenue flooded into Sacramento. However, instead of saving the money for a rainy day or paying off prior debts, the state government simply ballooned its spending. Now that the bubble has burst, and revenues are severely depleted, it is time for California to reconsider its excesses.

    Governor Schwarzenegger’s claim that a federal guarantee is not a bailout is ludicrous. No one in the private sector will lend California any money because the state can’t pay it back. Just like AIG and GM, it needs federal help to stay solvent. And although the Federal balance sheet is in far worse shape than California’s, there is one crucial difference: Washington has a printing press, and Sacramento does not. With the ability to pay off debts with newly created funds, a federal default is not a concern.

    However, if Obama comes to the rescue, none of the needed cuts will be made. Instead, California will continue to operate its bloated bureaucracy and will be in constant need of more bailouts. In other words, if Schwarzenegger gets his bailout, look for him to utter his famous line – “I’ll be back.”

    But it’s not just Schwarzenegger who will be back, but governors from all the other states as well. After all, if the Federal government bails out California, by what right can they deny similar aid to other states? The bailout will send a clear message that states do not need to cut spending.

    Similar to the reckless behavior that resulted from federally guaranteed mortgages, federal guarantees on state debt will counteract the market’s attempt to force states to act responsibly. As the market accurately prices-in the heightened risk of default, California faces staggering increases in its borrowing cost. Under normal circumstances, this pressure would force the state to act prudently now to diminish the risk of a future default. However, by allowing California to evade the “bond market vigilantes,” the stage will be set for much bigger losses.

    The moral hazards created by state bailouts are tremendous. With federal guarantees given to profligate states, those states that had shown greater fiscal responsibility will face higher interest rates –as their bonds lack a federal guarantee. This creates the perverse incentive for all states to act irresponsibly.

    Just as government-guaranteed mortgages lead the market to make overly risky home loans, federally guaranteed state obligations will set the stage for yet another crisis.

    Federal backing of California bonds would effectively turn them into Treasury bonds, with the added appeal of being exempt from California state income tax. Therefore, the Treasury will be at a competitive disadvantage when it looks to issue its own debt to Californians. If it then has to guarantee the bonds of all the other 50 states, why would any Americans buy Treasuries when they can get identical credit quality on better terms from the states? The only real buyers left would be foreigners, who are already queasy about the Treasuries they own.

    The need to make good on state and federal obligations will further depress the appeal of all U.S. dollar-denominated debt. As a result, as real buyers flee the market, the Fed will have to run its printing presses even faster to pick up the slack. This will set into motion a self-perpetuating spiral of money printing and Treasury sales with a predictable result: hyperinflation.

    In the meantime, by redirecting credit to California that otherwise would have gone to more credit-worthy borrowers, the government will worsen the credit crunch for the rest of the country. Since there is only a finite supply of credit, money borrowed by California will no longer be available to other borrowers. The effect is a less efficient allocation of capital that further undermines national productivity.

    The only rational policy choice for Obama is to send Schwarzenegger packing. If he does, California will have no choice but to cut spending or default on its bonds. My guess is that, with their backs to the wall, the California legislature will choose the former. However, even if they default, at least the losses will be borne by those who freely assumed the risks. With a bailout, the losses will be shouldered by those who were not even parties to the transactions. If we go this route, we can all say “hasta la vista, baby” to our prosperity.

    Peter Schiff
  8. An entire article by Peter Schiff, yet he fails to address the 2/3'rds "super-majority" vote needed in the State Legislature to get anything done.