As clear evidence as one could wish for that the credit crisis is entering a new, frightening stage. The Los Angeles Times is reporting that Governor Arnold Schwarzenegger has written a letter to Treasury Secretary Henry Paulson warning that California may soon need an emergency $7 billion loan from the federal government because its normal access to short term credit has dried up. (Thanks to Josh Marshall at Talking Points Memo for the tip.)

The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.

This is what Paulson and Bernanke meant when they warned Congressional leaders two weeks ago that "the economy could stop" if action wasn't taken quickly to restore liquidity to credit markets. States, large corporations and small businesses, and individual Americans are all encountering serious trouble borrowing money.

Paul Krugman, noting in his blog that the newest data on tightness in the credit markets are especially grim, reaches new levels of bleakness in his column. And even as he trashes the bailout, which the House of Representatives is debating again as I write these words, he gives possibly the most lukewarm endorsement of a government proposal I've ever seen.

I hope that it passes, simply because we're in the middle of a financial panic, and another no vote would make the panic even worse. But that's just another way of saying that the economy is now hostage to the Treasury Department's blunders....

One thing's for sure: The next administration's economic team had better be ready to hit the ground running, because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression.