The California Crisis

For those of you who are oblivious to the desperate nature of our economy: the State of California announced today that it was experiencing financial difficulties and may need to be bailed out. The problem seems to be that the state cannot get its usual short term loans from banks to cover the budget shortfall that typically opens up prior to the quarter end tax revenue inflow.

This is a very normal cash flow management issue: both companies and states even out their cash positions by borrowing for short periods during the year in anticipation of cash inflows. They borrow for periods as short as a week and sometimes up to a few months. Banks lend the money knowing that the revenue the repay the loan is arriving soon.

The fact that the banks refuse to make these usual loans to California is a very worrying development. It means one of two things: either the banks don’t think the revenue is arriving … in California’s case tax revenues are falling due to that collapse of the real estate market and the general slow down in business conditions; or there is no liquidity in the credit markets so the banks have to hoard cash rather than lend it.

I would guess that the truth is that both causes have come into play.

And that’s even more worrying.

We are in recession. There is no longer any doubt. Buckle up it’s going to get rough.