Default, Cali Style

Some things to keep in mind about California's budget disaster:

California cannot legally declare bankruptcy. No state can under US law. Cities and counties can and have done so before, but a state cannot declare bankruptcy.

A state however can default on loan payments and wreck their credit rating as a state. That means getting state bonds issued to fund spending will be wildly more expensive. We're about to see if California will be the first state to actually default on a bond payment, and what happens to the people, cities, and counties within as a result.

California will want to get billions in loans from Wall Street...but I can't imagine any Wall Street firm wanting to loan California a dime. That means Obama will have to step in and cut a deal with Treasury. With nearly all 50 states running deep in the red, I can't imagine too many Democrats in Congress are going to object ("There but for the grace of God go I" and all). Republicans of course will do everything they can to bury California and blame the Dems.

Obama will get his deal however. There are too many country club Republicans and corporate interests in the state to let California default. It will be ugly however, and there's the little matter of what California is going to give up in order to get the money...perhaps having to come up with a specific plan to get back in the black like the automakers did...or else.

Defaulting on said bonds would almost certainly cause a raft of lawsuits to be filed against the state forcing them to pay. At some point, somebody's going to have to decide who gets paid, California or its creditors.

That will certainly have to go to the Supreme Court.

[UPDATE] Megan McArdle has a point: once Obama bails out California, it's implied that he will bail out every city, county, and state government currently buried in red ink.