How It Starts

There is an absolutely outstanding article today by Steve Malanga that discusses how California might default on it's loans. It's not a rant against this politician or that, instead it's an examination of the mechanisms by which this has happened before in smaller instances. It's worth reading the whole thing, but this snippet in particular was instructive.

To understand what I mean it's worth looking at the whopping New York City default in the mid-1970s. Like California, New York spent years building up a spending regime that went beyond its resources, built on locked-in costs like employee pensions and municipal debt obligations that are not so easily cut or deferred, and which ultimately left city leaders with the politically unpopular choice of cutting services sharply or reneging on their other obligations.

Like California, New York addressed these problems initially by rolling them over into future years with accounting gimmicks and mounting borrowing that did nothing to fix the underlying, structural nature of the problem. When the end came, it was not because the city could not meet some single big debt payment. Rather, it was when officials recognized that enough investors had fled the city's debt instruments that New York could no longer float even short-term financing notes, the sort of borrowing that many governments engage in to smooth over the cycles in tax collections and other revenue streams that make paying bills tough.

There's another bit near the bottom of the article that is particularly appropriate given Obama's recent turn towards leftist, class-warfare rhetoric.

For one thing, when a budget crunch gets so severe that bondholders start to worry about their investments, it usually means that politicians are facing the choice between paying off a government's senior obligations and cutting services to the bone. Yes, the state's bondholders might be citizens, but under budget duress they will inevitably be characterized (rightly or wrongly) as rich citizens whose demands for payment are being made at the expense of those getting their programs and services cut.

Emphasis in the original.

I think Obama's reaction to the Scott Brown victory is instructive for California. He's grown more combative and is clearly digging in to fight an ideological battle in favor of yet more government control over the nation. The Democrats who control California are of the same ilk. The budget crisis has not changed their minds about setting rational limits on government power. Instead, as the crisis deepens, they've become ever more strident defending their bloated government programs. I'm a UCSD grad and I've been receiving frequent emails from them asking me to help them defend their budget from any kinds of cuts at all.

Clearly, their world view is beyond the reach of fiscal reality. Mr. Malanga is dead on - the rich capitalist pigs who own the California bonds are the ones who are going to take a beating.

These people look like they make decent money and might even be investors. They're probably out there trying to make a profit. Are you going to let them slash education and savage social services for the poor just so they can salvage their investment portfolios?