RSS Feed for This PostCurrent Article

As California Goes…

By Larry Doyle on May 14, 2009 at 8:15 AM in Economy, Sense on Cents (Larry Doyle blog)

Political hacks assert, “all politics is local.” In a similar vein, armchair economists propose, “as California goes, so goes the country.” Why is that? California represents such an enormous part of our country in many respects, including the following:

– 8 of the 50 largest cities

– population of approximately 37 million people (that we know of), a full 12% of our national population

– an economy similar in size to Italy, ranking it as one of the top 10 in the world (I have seen rankings of 8th and 9th)

– California’s economic output represents 13% of our national GDP!!

– an unemployment rate north of 11% compared to the national average of 8.9%. With a high unemployment rate amongst illegal immigrants, it is not a stretch that California’s unemployment rate is approaching 15% and its underemployment rate is greater than 20%!!

The results of the Bank Stress Tests indicated that Bank of America and Wells Fargo had the greatest capital shortfalls. Why is that? BofA already had a huge market share in California and it grew exponentially with its purchase of Countrywide. Wells Fargo also had huge market share in California and it only grew with its purchase of Wachovia. Hey LD, Wachovia is a North Carolina based bank, how could that correlate into increased California exposure? Wachovia purchased Golden West Financial, a southern California based bank which had been one of the most aggressive lenders of a mortgage product known as pay-option ARMs. Suffice it to say that product has been a disaster in terms of delinquencies, defaults, and foreclosures.

Earlier this year, California faced a massive budget shortfall and experienced significant political turmoil in passing a budget. Well, the Governator Arnold Schwarzenegger is right back in the ring as California’s fiscal situation is faced with more sinkholes. The WSJ reports, Cuts Loom in California if Propositions Fail.

While politics may be local, the economic fallout from California can not be walled off from the rest of the country. The capital cushions that BofA, Wells Fargo, and many other banks are forced to set aside against consumer, corporate, and municipal defaults literally ripple across our entire country. The WSJ reports:

California’s fiscal plight is worsening. In a letter sent Monday to the state’s legislative leaders, the governor said the Golden State now projects a new $15 billion shortfall, up from a previous estimate of $8 billion, because of plummeting tax revenue amid the recession. That figure would jump to $21 billion if Californians next week defeat the propositions, Mr. Schwarzenegger said.

Professors Ken Rogoff and Carmen Reinhart, in a dissertation, “Aftermath of Financial Crises,” highlighted declining tax revenues as one of the driving forces to increased fiscal deficits, greater government borrowing, further crowding out, and an underperforming economy. While the Governator is locked in a battle with the legislature, municipal unions, and other constituencies over the state’s fiscal follies, is California an opening act to the same show in Washington over the next few years?

Would our friends from California please share some perspectives? I thank you.

LD

  • Tom Cat “wodie j” Jefferson Esq

    I can’t believe that Wells has an issue w capital. By who’s determination, tax cheat Geithner?? They have raised about 1/2 of what they were told they needed but I think it’s ridiculous to say they don’t pass the “stress test” by 13.5 billion dollars. This is total and utter bullshit. It’s just a ploy for Obama and the Dem’s to try to control the largest banks in the country. Wells didn’t even want any tarp money but did so after being urged to so they could help stabilize the market. They were DUPED.

    • politicalidentitycrisis

      I know someone at Wells Fargo who said they were forced to take the bailout money and then realized they didn’t need it, nor did they want the strings attached. I think those who didn’t want to get in bed with Barrakula and co. are being punished and put on the bad list and Barry and the boys are trying to force the nationalization of these bad list banks. In my opinion, banks are on the bad list if they don’t need the Government. That way, the Government can scare away some customers and have the bank begging for their hostile takeover help.

      • http://www.sonicninjakitty.wordpress.com Sonic Ninja Kitty

        Where is the judicial system? Why is there silence?

      • politicalidentitycrisis

        BTW, the banks are not allowed to just give the bailout money back if they don’t need it. They have to apply. Per my friend, Wells Fargo was going to apply, but it is a very strange process. Whoever heard of a company not being allowed to pay money back that it didn’t need?????

        This banking mess is very unAmerican!

    • trixta

      I saw a headline yesterday in the Bay Area that the state gov of CA may grab monies from municipalities to make up for it’s shortfall. I don’t know if this will happen or not, but cities (like struggling Oakland) are livid about this state money grab.

  • LisaB

    Very sobering. Thanks for the great articles LD!

  • Republicans are choking CA

    Here I sit in San Francisco, and what I find incredible is that there is very little criticism of Arnold in his management of the fiscal realities of the state since he took office. Remember how Gray Davis (D) was recalled in a special election drummed up by Republicans because of supposedly mismanaging relations with Enron and others? (I remind everyone that Pete Wilson (R) was the pre-Davis Governor who deregulated what the electric utilities could pay to outside interests while capping what they could charge to consumers thereby hiding the graft of Enron for several years). No one seems to be criticizing Arnold and no one is reminding him of how he failed to do what he promised after arranging for Davis to be yanked out of office when the economy under Davis was really much sounder than it is now.

    • trixta

      As a Californian, this very thought has been on my mind. But as you say, where is the public outrage at Arnie — and the Recall itself? Wasn’t Arnie supposed to have saved us from ourselves—and from Gov Davis? Davis should never have been recalled, since back then during the Recall election Arnie was real cozy with Bush/Cheney and Enron. At least, Davis put up some fight against the oil industry and tried to expose their shenanigans. Davis wasn’t perfect, but I doubt we’d be in quite this financial mess if he’d still be in office. But ya never know how things would have worked out …. I never anticipated an Obama as president ….

      • Ellen D

        Another Californian here – I liked Gray Davis. He only did one stupid thing. When we were flush he lowered the car registration fee. He didn’t have to do that, he could have put the extra money away in a rainy-day fund. And now any going back to previous levels is called a raise in taxes. Just like Washington terminology.

        One of the first things our bought and paid for Gov. did (recall collectors were paid per signature) was to put through propositions allowing the state to borrow an enormous amount of money just to meet continuing expenses. And this was in good times. Stupid stupid stupid.

        But we got Arnold the same way the country got Obama. The “wouldn’t it be cool,” factor.

    • Ben

      The problem is not the Governor, it is your state legislature, House and Senate, that keep spending money you don’t have. Your debt has grown to a point where your bonds are not thought of favorably since they may not be paid back as required. Your legislature ignores the cost of harboring illegal immigrants and supplying them with services you can’t fund.

      Your state government is in big financial trouble and if the propositions don’t pass, which I’m inclined to beleive they will not, you will be laying off more teachers and civil servants and services will need be slashed. But you’ll still be in debt with no way of finding the funds to satisfy the projects and services your legislature keeps passing.

      But keep talking about the Governor even though all he can do is veto bills which will then be overridden by the legislature again.

      • skinny malinky

        The legislature actually doesn’t have a whole lot of control over spending, thanks to the referendum process. Something like 80% of the budget is locked in due to propositions.

        • imustprotest

          Skinny and Ellen D are correct. The problem is the referendum process, flawed as skinny says, the same type of process is what gave us Arnold, as Ellen D said…..propositions and ARRRNold, both bad for California.

    • Senneth

      RepbchokingCA
      I’ve wondered about that as well. Arnold has no experience and I doubt knows enough to get his state out of the mess. I don’t understand how California residents continue to vote for movie stars to their government. It’s all a mystery to me, but unfortunately your title of this post, LD, is so very true, as California goes so goes the nation, I mean people voted for an American Idol who is now residing in the WH and many are still in love with him. What about that makes any sense?

  • Pat Racimora

    I’m here. I’m scared for so many friends and some of my family.

    For example, here is the kind of decisions that they have to make. “Should we sell our home now for 200k less than we paid for it because we cannot afford the inflated mortgage or try to stick it out for 6 months or a year to see if prices go up again?” “Now that I am laid off my job, should I move somewhere else, but then what if I can’t sell my home?” And on it goes.

    I feel so fortunate because I live in the home I want to die in (almost paid off).

  • I’m a Linda too

    And, what was the brilliant garbage that spewed from Obama’s mouth yesterday, hitting the news cycle this morning?

    …More bailouts on homes. The administration is considering allowing short sells. For homeowners to sell their homes at what every they can get and not have to be penalized or pay back the difference.

    AND someone allowed him to even say that? I called my congresscritters before even making hubby’s breakfast after hearing that garbage.

  • http://! stodgie

    i believe they were talking about politics for the most part with california. however in recent years the idea of california leading the pack has lost any credability. the democratic legislature has been spending like there is no tomorrow with all these give aways.

  • skinny malinky

    It’s bad in CA. My wife is a teacher and will (hopefully) get to keep her job, but a lot of her friends won’t be. After the government layoffs that will happen if the props fail (which they probably will) unemployment will be a lot higher.

    This state’s government is so screwed up. I blame the referendum process; it ensures that spending decisions are made by a public that isn’t informed, because it’s virtually impossible to be informed about all the different propositions. So much money is tied up in departments and purposes created in these props, which say that the money can’t be used for anything else. It’s a stupid system that no one is really trying to fix.

    • allimom99

      The initiative system does make it impossible to have reason in our state. If you have enough money to buy the signatures, you can put ANYTHING on the ballot (like depriving people of rights they already have), and create an ad campaign to get it passed. I’m guessing most don’t bother even reading the props (I do), so no surprise we are in this situation.

      Then we have the legislature – votes are commanded and negotiated by the parties in a neverending pissing contest. The true interests of Californians are seldom considered.

      So yes, right now we are pretty screwed here in the Golden State. On a personal level, I guess it’s a good thing we are used to living a cash lifestyle, so we are better prepared than most, but it looks like it will be a long, painful path out of this for the left coast.

  • Kat5

    CA sales tax revenues were down over 50 percent in April from a year ago. State individual income tax revenues were down something like 43 percent for the same period. Since CA is something of a bellwether…. Numerous state bailouts can’t be far down the road.

  • http://noquarter foxyladi14

    the rich get richer..and the poor go hungry.

  • beachnan

    We are having a really hard time in California. My husband, a self-employed building contractor, only had work for about 4 months out of 12 last year. They don’t even count him in the unemployment statistics because he is self-employed and ineligible to receive unemployment benefits. If he does find work, a lot of the time it is at a rate of 1/3 of what he used to make. We are upside down in our home, and are partners in a project that now includes 3 worthless lots, and one house already built, that must be rented because the sale will not cover our expenses. We are hoping to hang onto it, and sell it, if the values of property ever go up again. We invested our entire nest egg into this venture. I’m not sure what the answers to California’s problems might be, but I would like to ask everyone a question. I value our police and firemen. They do an outstanding job, but I know a couple of policemen who consistently make over $110,000 every year. They brag about how much overtime they get, and they tell me that they can retire after 30 years on the force, with 80% of their salary every year. Is this part of the reason our communities are going bankrupt?

  • ritamary

    In 2005 I moved to Encinitas, CA. I chose this particular area of Encinitas because there were two bus lines with stops about a half block from my apartment.

    Schwarzenegger took away ALL state subsidy money for public transportation to balance the budget. Now the two bus lines are gone. Many elderly people live in this area and depended on the bus to get around. What are they doing now for transportation? Who knows? Who cares?

    Schwarzenegger is actually the first American Idol political candidate. He has absolutely no qualifications to be governor but all the hype and backing by powerful interests put him in office.

    • imustprotest

      It was young college aged kids who voted for him, the same demographic that voted for Obama. I guess they didn’t care that he was a Republican, they just liked him because he was “cool” and quoted his own movies in his campaign rhetoric “I’m gonna blow up some boxes”……”hasta la vista”, etc. Arnold said nothing in terms of policy or solutions, just stupid movie lines.