California Bailout: Tough Talk Before Capitulation

CaliforniaThe buzz around the blogosphere today is being caused by the WaPo article about the federal government bailing out California. The article implies that there will be no aid forthcoming and then suggests that, well maybe there will be.

The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state’s recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

I think that you can pretty much put this one in the done deal category. We’ll see the usual back and forth and a bit of brinkmanship and then something, probably in the form of a guarantee, will be spewed out of the jaws of Congress in an emergency, non-thinking sort of way. California will float bonds with a U.S. government imprimatur and the can will have been effectively kicked down the road. The state will retreat into its usual dysfunctional business as usual mode hoping that the good times return and cash once again rolls in.

The more interesting question to me is what conditions the government can impose that are going to deter others for lining up for their share. I suppose that certain mandates regarding the development of new revenue sources and spending restraints could be offered but I’m not sure they could be imposed. I’m no constitutional lawyer but one would think that the political class in Sacramento would still be bound by the state constitution. It doesn’t seem logical to assume that the federal government could confer dictatorial powers on the California officials and therefore any substantive changes would require the assent of the legislature and, when required by law, the citizens of the state.

So, if I’m right, then it would seem that any agreement for funds or guarantees from the federal government, though it might contain tough words, is likely to be mostly a paper tiger. I’d tend to think that any other state that was thinking of tapping Uncle Sugar would see through the subterfuge and be deterred not at all.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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