There are Hollywood idiots willing to pay $30,000. to dine with Obama. Let them bail out California.
On May 31, 7:33�am, bruce majors <[email protected]> wrote: > �Obama (Should Say) to California: Drop Dead � by: Peter Schiff May 30, 2009 > > � � [image: Peter Schiff > picture]<http://seekingalpha.com/author/peter-schiff> Peter > Schiff <http://seekingalpha.com/author/peter-schiff> > > During the height of New York City's financial crisis in the 1970s, > President Gerald Ford had the good sense to turn down Mayor Abe Beame's > request for a federal bailout. The refusal prompted the famous New York Post > headline, "Ford to City: Drop Dead." More than 30 years later, as California > Governor Arnold Schwarzenegger makes a similar plea to Washington, I hope > President Obama will show similar restraint. Unfortunately, given Obama's > recent string of unwise economic decisions, it's hard to imagine that his > judgment will suddenly improve. > > A federal bailout would spare California from having to make spending cuts > needed to bring its budget into balance. The matter has become urgent since > California voters rejected several tax-hiking ballot initiatives. Rather > than taking the vote as a signal to dramatically curtail spending, the state > turned to the feds. If they get a free pass, the politicians can avoid > fixing any of their past mistakes or preparing California for the future. > > California, like many states, expended its bureaucracy as the nation's > bubble economy inflated. When condos flipped like hamburgers and homeowners > flush with equity spent like lottery winners, extra tax revenue flooded into > Sacramento. However, instead of saving the money for a rainy day or paying > off prior debts, the state government simply ballooned its spending. Now > that the bubble has burst, and revenues are severely depleted, it is time > for California to reconsider its excesses. > > Governor Schwarzenegger's claim that a federal guarantee is not a bailout is > ludicrous. No one in the private sector will lend California any money > because the state can't pay it back. Just like AIG and GM, it needs federal > help to stay solvent. And although the Federal balance sheet is in far worse > shape than California's, there is one crucial difference: Washington has a > printing press, and Sacramento does not. With the ability to pay off debts > with newly created funds, a federal default is not a concern. > > However, if Obama comes to the rescue, none of the needed cuts will be made. > Instead, California will continue to operate its bloated bureaucracy and > will be in constant need of more bailouts. In other words, if Schwarzenegger > gets his bailout, look for him to utter his famous line - "I'll be back." > > But it's not just Schwarzenegger who will be back, but governors from all > the other states as well. After all, if the Federal government bails out > California, by what right can they deny similar aid to other states? The > bailout will send a clear message that states do not need to cut spending. > > Similar to the reckless behavior that resulted from federally guaranteed > mortgages, federal guarantees on state debt will counteract the market's > attempt to force states to act responsibly. As the market accurately > prices-in the heightened risk of default, California faces staggering > increases in its borrowing cost. Under normal circumstances, this pressure > would force the state to act prudently now to diminish the risk of a future > default. However, by allowing California to evade the "bond market > vigilantes," the stage will be set for much bigger losses. > > The moral hazards created by state bailouts are tremendous. With federal > guarantees given to profligate states, those states that had shown greater > fiscal responsibility will face higher interest rates - as their bonds lack > a federal guarantee. This creates the perverse incentive for all states to > act irresponsibly. > > Just as government-guaranteed mortgages lead the market to make overly risky > home loans, federally guaranteed state obligations will set the stage for > yet another crisis. > > Federal backing of California bonds would effectively turn them into > Treasury bonds, with the added appeal of being exempt from California state > income tax. Therefore, the Treasury will be at a competitive disadvantage > when it looks to issue its own debt to Californians. If it then has to > guarantee the bonds of all the other 50 states, why would any Americans buy > Treasuries when they can get identical credit quality on better terms from > the states? The only real buyers left would be foreigners, who are already > queasy about the Treasuries they own. > > The need to make good on state and federal obligations will further depress > the appeal of all U.S. dollar-denominated debt. As a result, as real buyers > flee the market, the Fed will have to run its printing presses even faster > to pick up the slack. This will set into motion a self-perpetuating spiral > of money printing and Treasury sales with a predictable result: > hyperinflation. > > In the meantime, by redirecting credit to California that otherwise would > have gone to more credit-worthy borrowers, the government will worsen the > credit crunch for the rest of the country. Since there is only a finite > supply of credit, money borrowed by California will no longer be available > to other borrowers. The effect is a less efficient allocation of capital > that further undermines national productivity. > > The only rational policy choice for Obama is to send Schwarzenegger packing. > If he does, California will have no choice but to cut spending or default on > its bonds. My guess is that, with their backs to the wall, the California > legislature will choose the former. However, even if they default, at least > the losses will be borne by those who freely assumed the risks. With a > bailout, the losses will be shouldered by those who were not even parties to > the transactions. 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