Should We Bail Out California?

California is now in the market for a government guarantee. The state needs to sell $13 billion of short-term notes and no bank will touch them. 

Before the credit crisis banks would routinely provide credit support for states and municipalities that needed to raise short-term credit. As you know, banks have rediscovered the concept of risk and now underwrite loans which puts California in a pickle. The Golden State now is the proud owner of the lowest credit rating of the 50 states. So, banks to California — “Drop Dead.”

Of course, it hasn’t been lost on California’s politicians that other borrowers have found themselves in this situation recently and found a solution in the halls of Congress. So like any other insolvent bank or bankrupt auto company they’re getting in line at the bailout window. They’ve also learned their lines well as their pitch is that coming to their assistance is the best thing for the economy right now. It wouldn’t do to be cutting services at a time like this is how it goes.

To be fair, they probably deserve a handout as much as any of the other recipients and the state is arguably a better risk than GM. Here is how they make their case:

The California officials say they would be willing to pay the federal government for the guarantees, just as they do banks. They say the arrangement places the U.S. at little risk given a low probability of default. Municipal bonds secured by a pledge of taxes, such as city and state debt, had a cumulative default rate of 0.03 percent from 1986 to 2007, according to a March 2008 Standard & Poor’s review of the bonds it rates.

“It would be a moneymaker for the federal government because we’re not going to default,” Dresslar said. “We’re a lot better risk than the folks who wrecked our economy and are getting billions of dollars in federal assistance.”

OK, it makes sense even if the dig about the “folks who wrecked our economy” is a cheap shot at the banks. But then again they probably have the right to be a bit miffed.

So, should California get some help. I’m inclined to say yes but with a provision or two.

Let’s do this like the GM deal or the bank stress test. They have to come up with a plan to dig themselves out of this hole. Show Barney Frank and Chris Dodd how they intend to rationalize their operation and achieve long-term viability. The taxpayers need to see how California is going to increase taxes and reduce expenses and stick to it so we don’t find them back at the doorstep anytime soon.

Yes indeed, let’s hold their feet to the fire just like we have with every other basket case. They need to understand that the federal government is not afraid to let anybody fail.

more: here 

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