Friday, October 3, 2008

California is Running Out of Money Due to Global Credit Crunch

The LA Times recently ran a story that hits home exactly how the crisis on Wall St. directly hurts Main St.  In a letter to US Treasury Secretary Hank Paulson, our Governor, Arnold Schwarzenegger stated that California needs an emergency loan of $7 billion dollars in order to cover California's day to day expenses.  According to the LA Times, this means that " 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."  

Why, now, is California asking for this money?  Well, California relies heavily on short term debt in order to meet its budget obligations.  Indeed, it relies on taxes, of course.  But, until money rolls in from tax season, and sales tax revenue from the holidays, it needs to float short term loans to get immediate cash.  This means that in order to raise money, California sells short term bonds to investors.  This money goes to pay salaries and fund schools.  This is a pretty standard practice for California; indeed for most businesses.  

The financial crisis we are in has caused considerable fear in the bond market- i.e. where California gets its money through short term loans.  Investors are simply unsure of the market and as a result, there is little trading, meaning there are few buyers for people wanting to sell their debt.  This means California cannot get people to buy it's loans.  When investors don't buy their loans, California doesn't receive cash.  When California doesn't receive cash, employees don't get paid.  When employees can't be paid, employees get laid off.  When employees get laid off, they can't purchase as many goods from local retailers. When local retailers lose business, they go out of business.  And so on and so on in a downward cycle.  This exact situation applies to many other employers who take out short term loans to meet payroll or need the money to add extra inventory for the Christmas season.

The Senate recently passed its rescue plan.  Let's hope that the House, which votes on their resucue plan Friday, can get it together to pass theirs.  We simply cannot afford to have states, like California, running out of money.  This, I'm sure, is in all of our interests.   

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