By Mickey Walker-July 12, 2009
What happens when you run out of money? Worse, what do you do when a whole
state runs out of money? And that
one state happens to be the richest state in America in terms of GDP? There was an article recently that scorched
the cyberspace financial newsletters: California is crashing. California is out of money and about to default. Yes, many human and public services
will be lost. Many thousands of
government jobs will have to be cut. Thousands of welfare recipients will be forced to live with relatives
with resources, jobs and income or face living out on the street. Oakland, they say, is likely to default
on its municipal bonds. But they
did happen to file a lawsuit on some of the companies that insured their bonds
so all asses are properly covered when bonds default and the insurers welsh on
paying off.
http://www.oaklandcityattorney.org/PDFS/News
Release/Bond insurance lawsuit 8.28.08.pdf
You see, the bond insurance companies, AMBAC and MBIA went
bankrupt from greedily playing the demon derivatives shell games on the sideline,
and when the derivatives hit the wall, Ambac and MBIA went up in flames. Everybody was eat up with greed back in
those regrettable days of deregulation, I guess. California is a mess. Oakland is but a pimple on California’s butt, and most all urban cities
in the state many of which are on life support as we speak. California’s GDP is larger than Brazil,
Russia, India, or China. We cannot
allow it to go down the tubes. But
saving California will make saving AIG look like buying a dozen Stealth Bombers
to buying a box of Girl Scout cookies.
In February, Fitch Rating Service lowered California’s
rating to where the Golden State’s very own General Obligation bonds are now
the riskiest of any state in the union. Kinda leaves you all slack-jawed, I know, I know. Governor Swartzenegger has furloughed
over 5,000 state employees with indications that over 65,000 additional
furloughs will be forthcoming, and sadly, that action, too little, too late, is
only a Band Aid remedy at best. Such
massive time out non-paid leave for state employees has caused much unrest and
threats of massive tax revolts in the counties and cities affected. Such a wave of rebellion, if it grows,
would prove disastrous in more ways than just in the pocketbooks of bondholders
and investors and lenders to California. There would be rioting in the streets. And if the eighth largest country in the world in terms of
GDP (California) goes down the toilet think of the troubles the loss of tax
revenue and jobs would create for the United States as a whole when we are
already broke and the biggest debtor nation in the history of the world. It’s unthinkable.
In late June, 2009, there is a state shortfall of 24.5
billion dollars, and the governor has vowed not to raise taxes (which incidentally
would be too little, too late if he could pull it off). He has pleaded with Barack Obama to
help California out of the ditch, and word is, the president has told him
no. California, like all the other
states, must do their best with the Obama stimulus package or cut bait. Some say Obama has finally learned how
to say, ‘No.’ But it’s more of a
no-brainer because Obama is broke by trillions of dollars as he tries to shore
up what is left of our battered and blown-up financial system here in the United
States. Rumor is that commercial
real estate defaults are knocking on the president’s door with terminal growths
of cancerous derivatives in what’s left of what used to be the organs of viable
mortgage holders and banks. So
Governor Arnold will have to go elsewhere to get the money. The Feds got their own financial
monsters to deal with, and they’re endless in number and too scary to think
about.
It looks like California is going down. Some say that if it does and its cities
and municipal bonds default on their services there will be blood in the
streets. Others say that
California will lead the rest of the country into the abyss of bond defaults
worldwide. Translation: if you own municipal bonds from
Tallahassee, Oakland, Chicago, or Kansas City, or any other city in the U.S., get
out now. The ripple effect will
cause all bonds everywhere to become questionable as debt instruments that will
hold up under fire. So they say.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=ayC51TwbH6_8
I cannot agree with the likelihood of a national bond tax revolt,
but then again, once the ball starts rolling, who can say? If a mob of angry citizens who played
the game fair and paid their taxes, feel the real loss of services as well as
their jobs and homes, then a tax revolt is not out of the question. That would be unthinkable. Could it affect the debt obligations of
other cities in other states in America? I doubt it. But things are
out of sorts these days. These are
different times in many ways. Never has the country had to bear up under such crushing debt. It would be a simple matter if the
nation and other states had more money to help shore up California.
California, some say, is the canary in the coal mine, and we
Americans should watch the events there closely to help get perspective on how
to save our own financial skins no matter where we live in the United States. California’s economy is much greater
than most nations of the world, and many suggest that if it goes down, so might
the United States, and that we should turn off the ball game and American Idol
and pay attention this time around.
The same old chicken keeps coming back to roost. There ain’t no more money. We ran out long ago and then kept
borrowing, knowing it was wrong. When other states borrowed millions, California borrowed billions. The logic behind it was that California
needed more capital because California’s roaring economy demanded more money
infusions than many of the other states put together. I hope California can learn to do without services that tax
dollars pay for. Years ago when
the voters put a lid on taxes with the passage of Proposition 13, California
did not break off and sink into the ocean. Hopefully it won’t this time, either. We could all take a lesson in how to
economize and do with less. We
need to get used to it. But times
are harder now or so many believe. We can’t start from zero and regroup because we owe our souls for all
the trillions in debt we have already taken on as Americans. But it sure it looks like California
is, indeed, the canary in the coal mine. And will be the first shoe to drop. I hope we can prevent it somehow for our own sakes as
Americans. If California goes
down, I would hate to witness the financial tidal wave that would be coming our
way behind California’s fall... 