California is Too Big To Fail; Therefore, It Will Fail

Bill Watkins
Executive Director of the Center for Economic Research and Forecasting at California Lutheran University

Cross-posted at NewGeography.com

Back in December I wrote a piece
where I stated that California was likely to default on its
obligations. Let’s say the state’s leaders were less than pleased.
California Treasurer Bill Lockyer’s office asserted that I knew
"nothing about California bonds, or the risk the State will default on
its payments." My assessment, they asserted, "is nothing more than
irresponsible fear-mongering with no basis in reality, only roots in
ignorance. Since it issued its first bond, California has never, not
once, defaulted on a bond payment."

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How California Went from Top of the Class to the Bottom

Bill Watkins
Executive Director of the Center for Economic Research and Forecasting at California Lutheran University

This article originally appeared on NewGeography.com.

California was once the world’s leading economy. People came here even during the depression and in the recession after World War II. In bad times, California’s economy provided a safe haven, hope, more opportunity than anywhere else. In good times, California was spectacular. Its economy was vibrant and growing. Opportunity was abundant. Housing was affordable. The state’s schools, K through Ph.D., were the envy of the world. A family could thrive for generations.

Californians did big things back then. The Golden State built the world’s most productive agricultural sector. It built unprecedented highway systems. It built universities that nurtured technologies that have changed the way people interact and created entire new industries. It built a water system on a scale never before attempted. It built magnificent cities. California had the audacity to build a subway under San Francisco Bay, one of the world’s most active earthquake zones. The Golden State was a fount of opportunities.

Things are different today.

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What happens when California defaults?

Bill Watkins
Executive Director of the Center for Economic Research and Forecasting at California Lutheran University

The California Legislative Analyst’s Office recently reported that the State faces a $21 billion shortfall in the current as well as the next fiscal year. That’s a problem, a really big problem. My young son would say it was a ginormous problem. In fact, it may be an insurmountable problem.

Our governor and legislature used every trick in their books when they created the most recent budget. They even resorted to mandatory interest-free loans from the taxpayers. Now, they have no idea where to go. The Democrats have declared that they will not allow budget cuts. The Republicans will not allow tax increases. They have probably run out of smoke and mirrors, although their ability to engage in budget gimmickry is enough to make an Enron accountant blush. No one is considering raising revenues by increasing economic activity.

In my opinion, California is now more likely to default than it is to not default. It is not a certainty, but it is a possibility that is increasingly likely.

Then what?

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