Too Big To Fail; Too Dumb To Live....

According to Clusterstock.com, California has 50 days to live. Given the pathetic level of fiscal probity shown by the state government, I’m fairly pissed that they’ve been given a 50 day reprieve. But therein lies a tale.

Is it economically possible to let the cancer-ridden patient just expire? How would such euthanasia work when applied to a federalist government entity? The answers, regrettably, are “No,” and “you are an idiot if you’d like to find out.”

Yet, on some discernable level, I can’t help but think they have it coming in spades. California has enjoyed booms in precious metals, oil, agriculture, entertainment, aerospace and all but single-handedly commercialized the Internet after a British engineer at CERN successfully codified HTML and HTTP.

In other words, California has more economic assets than 90% of the rest of the planet. Given the proper leadership and a populace that engaged in civil discourse above the level of a squalling temper-tantrum, California should be the dominant gravamen of America’s future. Instead they’ve accomplished a transubstantial transmutation of gold into worthless pig iron. It’s as if Arnold Schwarzenegger, Gray Davis and Jerry Brown have discovered the Philosopher’s Stone of ineluctably stupid social policy.

As a result of profligate enstupidation, wastrel dissipation, and a complete defocus away from cold, hard budgetary reality, Arnold Schwarzenegger has just received the ticket from State Controller John Chiang. It doesn’t require J.P. Morgan’s ghost to figure out that there isn’t enough credit left on the Visa to pay for this mess. Therefore….

State Controller John Chiang told Arnold Schwarzenegger last night that the state has 50 days before it hits a financial meltdown. So in that time, it either needs a bailout, massive budget cuts, or a brand new bubble (green tech, internet, real estate, something like that).

We all know well what comes next. The Federal Government must ride to the rescue. To do that, they must assume control. Like in the old Roman Republic, the state will assume temporary dictatorial powers in order to assuage the self-inflicted damage to California’s now moribund state economy.

But unlike Cincinnatus, Rahm Emanuel knows what to do with a crisis. The Federal Government will rape it for what it is worth, prolong it for as long as possible and then never relinquish the supposedly temporary powers. All of that will happen because California’s moral senescence grew so pronounced that the state qualified, en banc, for assisted living.

Every Federal power grab occurs under the mantle of benign intention. Like an Army Division’s HHQ, they are always here to help you. Federal intervention can maintain California on life support for a long stretch. The current administration could even ride the difficulties out past their upcoming fight for reelection. But it won’t sap the roadblocks preventing statewide prosperity in The Golden State.

So despite the fact that President Obama will feel overwhelmingly obliged to intervene in California, on a similar scale to that which the Soviet Union intervened in Czechoslovakia, the situation tees up an interesting debate over governmental priorities. Should we really be helping California? This is a distinct query from the overdetermined inquiry of “Will we be helping California?” Free Exchange.com summarizes the pro’s and con’s of a Bear Flag Republic Bailout.

The negatives of the bailout are obvious. It rewards stupidity and encourages the other 49 states to waste money as rapidly as California so that they can catch up and be rewarded in turn. As Free Exchange puts it, moral hazard abounds.

Save California, it’s argued, and they’ll never have to come to terms with and repair their broken government. What’s more, other states will be encouraged to budget irresponsibly and will require larger disbursements from the federal government next time around. Moral hazard abounds.

Yet, there are also serious problems faced when cutting the heroin junkie off from the state-sponsored methadone. It’s the response we’ve all become sick of being hit with. It’s the hated negative externality argument. California, like Goldman-Sachs, GM, and President Obama’s overweening ego, is simply too big to fail.

The response to this, on the other hand, is that California is simply too big to fail. And truthfully, it is. California is the world’s eighth largest economy, and it contributes roughly an eighth of total American output (and drives much of the output in surrounding states). It’s very difficult to imagine the European Union standing by and allowing a budget crisis to ravage the German economy, or the IMF doing nothing at all to assist a Russia or a Brazil as they melted down.

So here’s the Repair Man Jack proposal to prevent the further Californication of the taxpayers. It’s time to bring back Civil War-Era Reconstruction. It’s time to divide California into three separate states, and then put each territory into a financial receivership. The three states could be Hollyorc (Southern California, starting perhaps 30 miles North of Los Angeles to the Mexican border), Midland Vale (from 30 miles North of Los Angeles to 30 Miles South of San Francisco), and Ecotopia (from 30 miles South of San Francisco to the Oregon border).

Unlike the Dreaded Reconstruction, there would be no military occupation. The three states would elect provincial Congressional Representatives and Provisional Senators. These individuals would have voting rights similar to DC and Puerto Rico until the three new entities each successfully drew up, enacted and spent three years living under low-deficit, logically planned budgets. Until this criterion was met, each state’s capitol would not be allowed to play in the bond market. (Municipalities could issue debt, but not in conjunction with state government projects.)

All of this sounds draconian, but I fail to see why that constitutes a problem. Draco, Solon, and Hammurabi could all three come off as tools, but each man took care of anarchy quite nicely. If only Barack Obama were audacious enough to actually follow in those hallowed footsteps. The solution I’ve proposed solves two problems.

It solves the negative externality problem by pumping Federal largesse into the coffers of failing institutions, like a much-needed blood transfusion. Unlike the bailouts and the stimulus plan thus far proffered, it also takes a serious bite out of moral hazard. Even ex-Movie Stars aren’t vapid enough to want to run for Governor so that they can see their state get occupied and liquidated by the Federal Government.