2009 May 19 Tuesday
Megan McArdle Sees California Doomed To Bankruptcy

Can California avoid bankruptcy?

So what about California?  A reader asks.  Ummm, that's a tough one.  No, wait, it's not:  California is completely, totally, irreparably hosed.  And not a little garden hose.  More like this.  Their outflow is bigger than their inflow.  You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money that comes in during the booms, borrow some more, and then act all surprised when revenues, in a totally unprecedented, inexplicable, and unforeseaable chain of events, fall during a recession.  You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets.  Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice.  But actually, we do have a choice:  we could let them go bankrupt.  And we probably should.

Okay, but when California goes into bankruptcy court can it basically lay off and yank the citizenship of its dumbest citizens? Can it order all its illegal aliens to leave? Bankruptcy court is supposed to allow more powerful remedies to be applied to problems. Well, okay, I'm down with that. So how about solutions that address the root causes of the problem?

Defeat of ballot propositions aimed at balancing the budget has put California back into a budget crisis.

Voters decisively rejected five ballot propositions that were sold as reforming a dysfunctional state budgeting process and sealing the February agreement to wipe out a $42 billion deficit.

But the deficit quickly reopened, pushed by the struggling economy and now the defeat of the budget package to $21.3 billion.

California used to be a dream of a place. Now it has become a nightmare. Still has nice weather near the coast though.

Update: Megan also wonders whether the bursting financial bubble will end the resurgence of New York City.

There's a lot of angst out there over whether products like Starbucks that seem somehow emblematic of an era of wasteful spending will outlast the current downturn.  The other day it occurred to me to wonder if the same isn't true of US cities.  The first model for an urban renaissance was, after all, New York.  But while New York's renaissance was certainly a product of a lot of factors, all of the institutional improvements were funded by the post-1982 financial services boom.  New York City is projecting its 2010 revenue will be down 30% from FY2008.  That's three years after the recession started.

I do not expect financial services to come back as strongly because some of the ways financial services companies made money are not coming back. Plus, they are going to try harder to cut costs and the costs of operating in NYC are avoidable by shifting more operations out of the city.

Megan has moved on to worrying about the moral hazard of a state bail out by the US federal government. Think her fears are premature? Municipal born insurance might serve as one way for the Feds to bail out states, cities, and counties.

May 18 (Bloomberg) -- The National League of Cities says it will ask the U.S. Treasury today for a $5 billion interest-free loan to capitalize a new municipal bond insurer it plans to create.

Share |      By Randall Parker at 2009 May 19 11:43 PM  Politics Money

Ned said at May 20, 2009 7:41 AM:

It's funny that the states with the highest taxes (New York, California, etc.) have the worst budget problems. I think there's a lesson there.

kurt9 said at May 20, 2009 8:35 AM:

The way forward is to start auctioning off state assets. The highways are sold off to private investors and become toll roads. The state parks can be sold to private investors. State land, in general, can be sold. And, finally, the UC and Cal State systems could also be privatized. Perhaps University of Phoenix or some other private entity will buy them.

Keep Dreaming said at May 20, 2009 9:28 AM:

Obama (that really means you and me and Ned) is gonna bail California out on a regular basis. We'll call it the California Solvency Tax. And illegals won't be going anywhere except to the voting booth.

James Bowery said at May 20, 2009 11:30 AM:

RP writes: California used to be a dream of a place. Now it has become a nightmare.

The time is coming for action. Legitimate government is nonexistent anywhere in the Eurosphere for the simple reason that men would not agree to sign a social contract that entailed a “peace” consisting of the invasion of their territory by an overpopulated world. The fact that invasion is enforced on unwilling locales through “integration” laws is also, by itself, sufficient to remove legitimacy. This lack of legitimacy is increasingly obvious as the pathologies, caused by enforced invasion, erupt in symptoms that threaten subsistence due to economic “crises”.

To create property rights beyond those that would exist in the state of nature and to ensure the social stability of said property rights, the following actuarial militia is proposed to operate in locales occupied by no more than a few thousand people:

To minimize tactical voting and the resulting political parties, all votes are under the approval voting system (you can “approve” of more than one candidate). To minimize campaigning all voting is continuous—a running tally of approval is maintained at all times. The militia members accept new members at the 2/3 approval threshold and reject existing members at the 2/3 disapproval threshold. Militia members invite someone to be their leader with a 2/3 approval, ties are broken by degree of approval. Leaders are rejected at 2/3 disapproval of militia members.

By mutual consent with customers, renewed annually, the militia accepts insurance premiums in an amount set by actuarial calculations based on any information deemed appropriate by the militia, and paid in militia-issued scrip, for protection of property rights, and for their indemnification in the event of loss due to criminal act, including impositions by illegitimate governments.

Militia members are:

1) not charged for coverage of their homestead property rights (home and means of supporting their family),

2) paid dividends as equal holders of voting shares, and

3) expected to self-equip under principles similar to those intended in the 2nd Amendment to the United States Constitution.

Militia scrip enters circulation via dividends to the members and is removed from circulation by withholding militia dividends.

Lovelle Mixon said at May 20, 2009 3:37 PM:

---Still has nice weather near the coast though.---

Sho' fine weather fo' crime.

averros said at May 21, 2009 4:23 AM:

Oh, the sky is falling.

In fact, I (a Californian) is cheered by the looming bankruptcy of the native Californian class of parasites. Fewer cops? Right-o... we have too many of these blue-shirted highway robbers on the highways. (I'm still waiting to hear a story of a cop actually saving someboby from criminals). Fewer regulatiry-office inspectors? Good. More freedom for local businesses to do what they need to do without fearing extortion, ahem, inspection from agency-for-regulating-TP or something like that. Less funding for state schools? Cool. They go further down the drain, and more parents educate their kids themselves or at private schools. Less socialist brainwashing overall. No money for the "free" emergency rooms? Less waiting in queues for us, paying customers. No money for pensions of uninionized thugs? Well, they, for once, have a chance to do something good for other people - something other people want to buy. Must be good for their karma. No money for "social programs" - finally, the illegals will go home, with the lure of state freebies no longer attracting them like flies to the piece of crap.

Now, if only all of the government parasites packed and went away to greener pastures... but, alas, that is not going to happen. Too many people who cannot conceive life without being watched over and disciplined. Must be masochism, or something.

miles said at May 21, 2009 7:08 AM:


There is little that is less American than toll roads. Thats the elite's dream come true. You should not want that.

On the "resurgance of large cities",

Folks, Section 8 housing and HUD are one big gimmick the elite have created that moves the underclass "out to you" from the inner city ring areas so that they can go back in there and gentrify the area. They are pawing off the underclass on the working and middle classes via these programs. I deeply suspect all the banks that have taken TARP money are going to be finding out that they will be forced to "get with the program" to help keep this happening. Dont be enthused when you hear of yet another demolishment of a former housing project, what it probably means is that all the scum that used to live therein have been sifted out to the county line so they can live on the same street as plumbers, car maintenance guys, factory workers, electricians, lower management, nurses and the like. Manhattan's resurgence coincided with Guiliani steroiding-up police prescence so that the scum was too harried to ply themselves much in Manhattan, and simply stayed in the outer boroughs and north of Harlen while on the little island.

Trent Telenko said at May 21, 2009 7:41 AM:

California will not go bankrupt so much as it will default on its bonds. This will cause a huge injection of uncertainty into the financial markets.

Unknown unknowns like which American state or city bond will go into technical default for the Feds to cover up.



This is another way that we've broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.

This has a huge price. A commentor over at Richard Fernandez -- Wretchard at Pajama's media -- blog identified where this process breaks down here:


""So what’s coming? A showdown between Congress and the Fed.

The Fed is an independent entity. It is a network of 12 Regional Federal Reserve banks. The Presidents of these Regional Fed banks are chosen by an independent board of directors. Each Regional Fed bank is owned by member banks, but the board is controlled by non-bankers (6 non-bankers, 3 bankers).

This means that the control of the Fed banks is in the hands of private citizens, and not Congress. Each President works for their respective board, which hires and fires them.

Some folks complain about this arrangement, but it has saved our bacon, IMHO. This independence has allowed the Fed to act without having to go to Congress or the White House for permission. This keeps its OODA loop tight, and helps shelter it from partisan political fights. Its independence has also allowed the US dollar to be the world’s reserve currency.

But here’s things get sticky. The Obama Administration is proposing the most dramatic expansion of Federal spending in history. Trillions of dollars will be added to the Federal Debt during the next 3-4 years, and if they pass healthcare reform, it will get even worse.

In addition, by increasing marginal tax rates, economic growth will slow, and growth is the only way we can eventually pay off the debt we have accumulated.

So here’s the scenario. In the next 12 months we will see all of these factors come together:

1. Dramatic expansion of government spending.
2. Falling tax receipts due to recession and increased marginal tax rates.
3. A projected $10T increase in Federal Debt.
4. Continued unsustainable structural deficit from entitlement programs.
5. Stabilized of financial markets.
6. More “green shoots” of growth creating early signs of inflation.

All of these factors will lead the Fed to conclude that interest rates must be increased, to drain excess liquidity out of the financial system. Unless rates get raised, there will be huge inflationary pressure. The party will be starting, and it will be time to take away the punchbowl.

However, there is one more fact that will come into play:

7. Unemployment will still be high.

This means that Congress and the President will NOT want interest rates to increase, lest the young “recovery” be hurt.

The result will be a showdown, and it will determine whether the dollar will continue to be the world’s reserve currency, and the US the largest financial services provider in the world.

In the coming weeks, you will start to see calls for Congressional influence or approval of the Fed Presidents. To set this up, there will be an increasing drumbeat from folks like Frank and Dodd as well as the Obama Administration (yes, Insty, the country’s in the best of hands) railing against the Fed, and blaming them for every little hiccup or setback, while taking credit for anything good. This will all be part of an effort to undermine the Fed, and position it for a Congressional takeover.

And when the takeover attempt is made, that will be the moment of truth, the time at which we will determine whether the housing bubble bursting will trigger just a really nasty recession, or the next Great Depression.

If Congress gets control of the Fed, the game will be over. Everyone in the world will know that the US is going to inflate its way out of its problems so that it doesn’t have to confront its lack of fiscal discipline. Bond prices will plummet, the dollar will collapse, and the economy will go back into the ICU. Inflation will punish the working man, while the investor class will be fine (inflation can be a good thing for equities and real estate).

If the Fed maintains its independence, interest rates will rise and Democrats will have to face the music and give up on most of their expansionist dreams. If they continue to spend, rates will continue to rise and we’ll get stagflation just in time for the 2010 elections. And they’ll get hammered, just like in 1980.

So Congress can tax and spend responsibly, or they can take over the Fed. Guess which they’d prefer.

From such a crisis of a nation comes the test of a generation.""

IOW, We are headed for a hyperinflation.

California has already gotten to where the rest of us are going, minus the inflation.

Trent Telenko said at May 21, 2009 7:50 AM:

This was over at Instapundit:

A “SERIOUS CASE OF DOLLAR DAMAGE?” “Concern has been mounting that the increasing U.S. debt load, as well as a potential inflation time bomb in the form of the quantitative easing, could drag down the greenback. Garnering attention is the risk the United States could lose its triple-A sovereign credit rating, which reflects the chance of the borrower defaulting on its debt.” Given the disrespect shown to the rights of Chrysler and GM bondholders, it’s easy to see why people are worried, entirely aside from the reckless spending.

Posted at 10:08 am by Glenn Reynolds

Sgt. Joe Friday said at May 21, 2009 3:29 PM:

Indeed. And here in the OC, we have "students" at UC Irvine marching to support the DREAM Act. Boy, there's a real good use of the taxpayers' money - these fucktards don't get it that we're broke. I wonder how many of these kids are are studying a major that ends in the word "studies"?

At some point the Chinese are going to stop buying our debt, the dollar will fade away as the world's reserve currency, and our treasury notes will be nothing but tarted-up junk bonds. The interest we'll have to pay out will be huge. In other words, we're on our way to being Argentina.

Randall Parker said at May 21, 2009 6:16 PM:


I really want to know whether we are headed for hyperinflation. If we are then I want to buy a big house with a big mortgage. The hyperinflation will pay off the mortgage.

In a deflationary depression cash is king. In a hyperinflation debt is king.

Sgt. Joe Friday,

The cost of a UC education is going to skyrocket. The state of California can not afford to provide money to the University of California or to the Cal State system. The state needs to stop all optional outlays.

I want to know a lot more about the California state government budget and where the money goes. If anyone comes across some good URLs on this then please post them here or email them to me.

Anonymous said at May 21, 2009 7:34 PM:

"If we are then I want to buy a big house with a big mortgage."

Better buy some guns and ammo too.

Randall Parker said at May 21, 2009 8:23 PM:


The level of social capital and law abidingness varies greatly across the United States. The key is to choose a place where people will remain fairly civilized even in very deteriorated economic conditions.

Of course, guns, ammo, and good guard dogs all will help too.

Peter North's stunt double (but definitely not gay). said at May 22, 2009 2:33 AM:

......and it's good news for Pornoville!!!

Just think with all that desperation going on in SoCal - and all those multiracial, fit young sluts out there, millions upon million live in SoCal,ad now that triple anal penetration is the 'industry norm'- just think what acts of multiple perversion the pornmeisters have in store for us, flooding the world with their filth, whether through the internet or DVD, hell even the most horrid, scurvy toothless tribesman holed up in cave in Afghanistan gets his jollies night after night watching the fuck-bunnies of SoCal get right royally rogered.
God Good, now that 'big porn' is lA's biggest industry, it must be it's biggest tax-getter , so the thought of all those pampered, useless AA hire 'college administrators on the big salaries actually getting paid from the DP pumpings of pay for-hire trashy sluts, somewhat jars.
Only in America!!!

Anonymous said at May 22, 2009 6:50 AM:

"The level of social capital and law abidingness varies greatly across the United States. The key is to choose a place where people will remain fairly civilized even in very deteriorated economic conditions."

Yeah, right. Our elites and immigration diversity freaks will see to that. Where'd they settle those Somali animals? Lewiston, ME!

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