California: Obama says no to aid

The Washington Post is reporting that the Obama administration has rejected initial pleas from the State of California for U.S. Government aid. However, the post report reveals that Tim Geithner told California it must get its fiscal house in order, suggesting that aid would be forthcoming if it did so.

Doubt lingers as to whether Obama will come to California’s rescue. This can’t be good for the municipal bond market. And it also makes it clear that the U.S. Government is going to have to get its own house in order if it wants any credibility on the fiscal discipline score. Let’s see what that means in the weeks and months ahead.

Calif. Aid Request Spurned By U.S. – Washington Post

  1. aitrader says

    Amazing – the top ten banks and AIG are “too big too fail” and get whatever funding they ask for, but the world’s tenth largest economy teetering on the brink of insolvency gets the federal government’s figurative middle digit.

    Just how is it that Obama & company calculates California’s solvency crisis won’t domino?

    1. Edward Harrison says

      aitrader, you point out something that I initially was not thinking about: this shows yet again differential treatment for financial services and everyone else. I agree that California’s problems will domino via the muni market and via the knock-on effect on employment and housing.

      Another question is: will the EU do the same i.e. let Ireland or Greece implode if and when they have the same types of problems. I reckon the Ireland question is going to present itself eventually given the course they are presently on.

  2. aitrader says

    I live in the EU and would add that I have very little faith in its cohesion to dampen this “downturn” with any substance when the choices become “which countries can we save and which must we cut loose.”

    Ireland and Spain may make the “save” list. I suspect most of the recent EU additions further East will not.

    The EU was always first and foremost about economics and an internal free-trade zone. The politics are really a corollary and modeled loosely on fuzzy European view of the U.S. To date no real test of the ECB has occured, this being the first. If I were a betting man my money would not be wagered on the ECB or even the EU union itself surviving this – or at least surviving as we understand the EU today.

    I believe it will either move toward more central control, just as the US did after its Articles of Confederation failed, or – more likely – it will splinter and cede much of its current centralzed control to the member countries, some of whom will no longer be EU members after the dust settles.

    1. Edward Harrison says

      aitrader, interesting thesis. this is indeed a first test for the ECB. Obviously, anything could happen but your expectation of centralization is as good a theory as any. I just linked out to an FT article which reminds us that the British and others are going to be very resistant to that sort of thing. If we do get any centralization, you can count the Brits out.

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