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Should California Get a Bailout?


As a Californian, I find this argument comforting. But as a Californian, I find the need for this argument extremely troubling.

California Really Is Too Big to Fail. Ask yourself this question: If AIG and other Wall Street firms are considered by policymakers to be too big to fail, what does that say about California?

California, which like many other state and local governments is still experiencing extreme budget problems, has an economy larger than all but about 10 countries. Even without the actions that the federal government has already taken to provide corporate bailouts, there is little likelihood that Washington, D.C., could or will allow a default in the municipal bond market to occur in the current economic and financial environment. In fact, through the stimulus bill and other actions, the federal government has already taken a number of steps to make that less likely.

That’s why the rumor about a plan being prepared in Washington to deal with the financing needs of state and local governments should be taken seriously even though it could have a significant effect on the federal budget. Especially with California’s large economy (and 55 electoral votes), there really isn’t much of a choice.

That said, a lot of companies that proved too big to fail weren't too big to change. Wall Street was given compensation caps. GM had to renegotiate its labor contracts. If Washington is going to bail out the Golden State, it should make the money contingent on structural reforms that leave the state better able to balance budgets in the future. This should be like an IMF intervention (maybe Simon Johnson has some thoughts?).

California's legislature is in a strange position: It needs a two-thirds vote to raise taxes but also has to fund ballot propositions that require a simple majority of an uninterested public. The majority party in the legislature, in other words, can neither control how much money it raises nor how much money it spends. That's not a sustainable state of affairs.

(Photo credit: AP Photo/Rich Pedroncelli)

By Ezra Klein  |  May 19, 2009; 4:00 PM ET
Categories:  Solutions  
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dont forget to vote in our special statewide election now.

Posted by: jkaren | May 19, 2009 4:48 PM | Report abuse

I guess this is a precedent-set-aside time, but I can't see the US Senate agreeing to something for CA that doesn't also apply to AL, MS, GA, and TX ( Let's not forget that the IMF is hated by all that came in contact with - to the extent that the Asian countries changed their policies to favor building Forex surpluses so they'd never have to go to IMF again. Their really isn't an easy way for Geithner and Bernanke to tell CA how to structure its constitution, and there shouldn't be. Let CA fix that themselves, or else. Perhaps some general guarantees for state bonds across the board would pass muster, but the Feds don't have much more credibility-room on the Fed. deficit plus guarantees to keep the confidence of foreign investors (central banks, especially).

Let's call the reality here: the same extremist right of the GOP that controls the national party now has been controlling the CA GOP for years. They are not reasonable people looking for a solution that a majority of CA citizens will support - but they can prevent action, just as they now do in the US Senate with the 60 vote requirement for anything.

So that means Geithner/Beranke/Obama must conjure-weave a cloth fix for CA out of thread from the Fed and Treasury. And, if they do, I'd expect major blowback from Congress.

Obama must appear to do something if CA is on the brink of default on their bonds, but it may be just a small hairpiece on a very bald head. Congresss won't listen to a sky is falling cry on this issue because their is no will to get to 60 votes in the Senate. How many US House Republicans from CA would be willing to vote with Obama? Did I hear someone whisper 'none'?

Posted by: JimPortlandOR | May 19, 2009 4:54 PM | Report abuse

One of the specific bailouts that the Schwarzenegger Administration is currently asking for, it might be noted, is the ability to get a waiver from the stimulus requirement that federal matching funds are conditioned on maintenance of effort within state Medicaid programs. The Governor wants to cut dental and other services from the program, "saving" the state $750 million but can't currently do so without losing the federal match.

I agree with the commenter who said that the relief couldn't (and probably shouldn't) be targeted exclusively at California. If there were to be a next bailout package, it should probably be targeted directly to the states which is arguably what the first bailout package should have done.

It is true that CA needs constitutional reform, but could and should this be imposed from above? I'd like to see us recognize and then get our way out of our own mess.

Posted by: micahdw | May 19, 2009 5:58 PM | Report abuse

Meantime, with millions of Americans without jobs, the invasion continues, no Liberal Democrat will address the 500 pound gorilla in the room, and millions of invading, plundering, welfare loving, Illegal Aliens taking millions of jobs that should be American jobs and 100,s billions of dollars in social services that should be for American citizens!

One cannot be political correct and admit that Illegal Aliens are an large part of the problems in this Nation.

Their negative impact extends to every area from Sub-par loans & defaults, Underground economy, Massive document fraud, Lower standard of living, Crime, Overflowing prisons , Bankrupted hospitals, Failing schools, Property Taxes, Insurance costs, Environment, Culture, Welfare costs, Welfare fraud, SS fraud, Voter fraud, Disrespect for our laws & country, our Constitution against invasion and even Balance of payments occurring from oil and other imports to support the 20 to 30 million illegal aliens in this country!

One has to only look at Calif. which is basically mostly an Spanish speaking, Bankrupt state that cannot afford to provide Welfare, Schooling, Medical, Prison cells etc. for millions of MS-13 Gang bangers, Drug dealers, Rapist and other assorted Criminals and uneducated, fast breeding, third world rejects from Mexico!

In a very few years it will be impossible to see where Mexico ends and Calif. begins as both will be an third world cesspool!

Failure to secure our borders and reward the Invading horde for their invasion and their relatives in an never ending chain with American Citizenship is nothing less than committing National Suicide & will assure our future is an over populated Spanish speaking third world Nation that is an Cesspool of Corruption, Crime, Poverty and Misery modeled on Mexico!

Posted by: american1 | May 19, 2009 7:13 PM | Report abuse

I know that the cliche is that Californians are a little nutty, but you can possibly be so nutty as to believe there is going to be some sort of federal bailout, right?

Especially if you all vote down the meager revenue propositions today.

Why in the world do you think people in Michigan and South Carolina, states hurting just as bad, would go along with that?

You people need to get out of the sun...

Posted by: Bob_in_MA | May 19, 2009 7:51 PM | Report abuse

If California goes bankrupt, maybe that will be the final shock to their system that convinces them to scrap their proposition-ridden constitution and start all over again from scratch. If they *do* get a bailout, then odds are that they will be convinced they can just keep doing what they're doing.

Posted by: tyromania | May 19, 2009 9:54 PM | Report abuse

It is insane that we are even discussing a federal bailout of a state. If anything, it affirms the notion that the federal government should have just let the market take its course with AIG, GM, Chrysler, and any other company - bankruptcy. Then we would not have to argue whether or not those CEO's got bonuses or what kind of car GM should make - these are not issues that can be properly decided by government (short of a dictatorship).

The federal government is not much better off than California, anyhow. It would probably be just postponing the failure of California and making it more likely the federal government would fail as well.

Let California fail. Make them rewrite their constitution if they have to. Maybe the state should be broken in two. Maybe they shouldn't be in the union. Maybe the federal union should be broken up.

I would take any of these outcomes over a federal bailout of a state.

Posted by: rwyoung | May 20, 2009 12:27 PM | Report abuse

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