Friday, October 3, 2008

Will the Treasury Start Bailing Out States With Funding Problems?

More evidence we may be headed into a period of remarkable inflation.

California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. 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.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.

"Absent a clear resolution to this financial crisis," California Gov. Schwarzenegger wrote in a letter Thursday evening that was e-mailed to Treasury Secretary Paulson, "California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing."

Will the Fed print money to bailout states with funding problems? Is there even a chance the Fed, Treasury and the Bush Administration have the backbone to just say, "No"? Unlikely. Very unlikely.

-Robert Wenzel

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