A bailout for California?

Forget about Citigroup, AIG, or General Motors. A Golden State bankruptcy would make them all look like small fry.

Topics: California, U.S. Economy, How the World Works, Taxes, Budget Showdown,

As went Chrysler and will go General Motors, et tu, California?

Stephen Lubben, the bankruptcy expert who has been documenting every twist and turn of the Chrysler and General Motors sagas at Credit Slips, notes today that “several people have asked me whether California might not follow GM into bankruptcy court.”

The easy answer to that is “no,” since states, unlike cities and counties, can’t file under the federal Bankruptcy Code.

But the financial press has also picked up on the issue and noted that California might be forced to default at some point this year if it becomes impossible to continually refinance its outstanding debt.

That would be bad. Very, very bad. True, there is historical precedent for states defaulting on their debts, mostly in the pre-Civil War era. California itself failed to pay the interest on its debt in 1854, but it claimed that the bonds in question had been illegally issued and later refunded them by issuing new bonds.

If California defaulted on its debt today, it would have an enormously difficult time regaining access to debt markets afterward, and, writes Lubben, because of the size of its economy, “it would be very difficult for it continue to fund its daily operations without some access to finance.”

So where does that leave us? Megan McArdle declares that “California is completely, totally, irreparably hosed.” The editorialists at BreakingViews declaim that the state will have “to cut its spending to what is absolutely necessary” and that “this will remove some of the Hollywood glitz from Californian life for years to come.” And Thomas Donlan at Barron’s wonders whether California “will throw itself on the mercy of the federal government.”

You Might Also Like

The average Californian is richer than the average American and California has more than its fair share of rich people (who pay the bulk of state and federal taxes). But Schwarzenegger and the dysfunctional legislature are hoping Washington will provide the same kind of deus ex machina rescue that it is providing to big banks. Naturally, they want a better deal than the feds are giving to General Motors and Chrysler, because states don’t go bankrupt.

A bailout for California? If the rationale for a GM bailout or a Citigroup bailout is that the company’s failure would be too devastating a blow for the larger economy to handle, then doesn’t the same reasoning hold true for a possible collapse of California? But how could even the mighty U.S. government afford to prop up an economy as large as California’s?

The parameters of this debacle become more mind-boggling the longer you contemplate them. The speed at which the U.S. economy is contracting might be slowing, but just as a bottom comes into sight, California is about to start laying off thousands of state workers and has already put a halt on millions of dollars of state contracts. Talk about your anti-stimulus!

Apologies to readers if How the World Works seems a little obsessed with the California nightmare. But I’ve got a ringside seat at this evolving train wreck, and as Lubben writes, “It is a situation that bears watching, because if you thought AIG’s default would have had serious economic repercussions, California would bring a whole new level of systemic risk.”

Andrew Leonard
Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 13
  • Close
  • Fullscreen
  • Thumbnails

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    DAYA  
    Young Daya has yet to become entirely jaded, but she has the character's trademark skeptical pout down pat. And with a piece-of-work mother like Aleida -- who oscillates between jealousy and scorn for her creatively gifted daughter, chucking out the artwork she brings home from summer camp -- who can blame her?

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    MORELLO   
    With her marriage to prison penpal Vince Muccio, Lorna finally got to wear the white veil she has fantasized about since childhood (even if it was made of toilet paper).

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CINDY   
    Cindy's embrace of Judaism makes sense when we see her childhood, lived under the fist of a terrifying father who preached a fire-and-brimstone version of Christianity. As she put it: "I was raised in a church where I was told to believe and pray. And if I was bad, I’d go to hell."

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CAPUTO   
    Joey Caputo has always tried to be a good guy, whether it's offering to fight a disabled wrestler at a high school wrestling event or giving up his musical ambitions to raise another man's child. But trying to be a nice guy never exactly worked out for him -- which might explain why he decides to take the selfish route in the Season 3 finale.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    BOO   
    In one of the season's more moving flashbacks, we see a young Boo -- who rejected the traditional trappings of femininity from a young age -- clashing with her mother over what to wear. Later, she makes the decision not to visit her mother on her deathbed if it means pretending to be something she's not. As she puts it, "I refuse to be invisible, Daddy. Not for you, not for Mom, not for anybody.”

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    SOSO
    We still don't know what landed Brooke Soso in the slammer, but a late-season flashback suggests that some seriously overbearing parenting may have been the impetus for her downward spiral.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    POUSSEY
    We already know a little about Poussey's relationship with her military father, but this season we saw a softer side of the spunky fan-favorite, who still pines for the loving mom that she lost too young.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    PENNSATUCKY
    Pennsatucky had something of a redemption arc this season, and glimpses of her childhood only serve to increase viewer sympathy for the character, whose mother forced her to chug Mountain Dew outside the Social Security Administration office and stripped her of her sexual agency before she was even old enough to comprehend it.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    CHANG
    This season, we got an intense look at the teenage life of one of Litchfield's most isolated and underexplored inmates. Rebuffed and scorned by her suitor at an arranged marriage, the young Chinese immigrant stored up a grudge, and ultimately exacted a merciless revenge.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    HEALY
    It's difficult to sympathize with the racist, misogynist CO Sam Healy, but the snippets we get of his childhood -- raised by a mentally ill mother, vomited on by a homeless man he mistakes for Jesus when he runs to the church for help -- certainly help us understand him better.

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    NORMA
    This season, we learned a lot about one of Litchfield's biggest enigmas, as we saw the roots of Norma's silence (a childhood stutter) and the reason for her incarceration (killing the oppressive cult leader she followed for decades).

    The 12 most incredible pint-size look-alikes in "Orange Is the New Black" season 3

    NICKI
    While Nicki's mother certainly isn't entirely to blame for her daughter's struggles with addiction, an early childhood flashback -- of an adorable young Nicki being rebuffed on Mother's Day -- certainly helps us understand the roots of Nicki's scarred psyche.

  • Recent Slide Shows

Comments

0 Comments

Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>