California in Financial Crisis

10-10-2008 11:00

U.S. is in the midst of a financial crunch and so is California which felt the squeeze as the Governor Arnold Schwarzenegger sent a letter to Henry Paulson, the Treasury Secretary requesting a $7 billion loan for the state which is required for financing the daily operations of the state. The Governor asked the federal government to release the same in few weeks as the state is in urgent need of the same and was having problems accessing short term loans from bond market in the light of a credit crunch.

California almost broke

California used to access short term loans like other business to remain solvent but this time the problem is immense and the need of the loan is of utmost importance to the state. Any delay in availing this loan would result in immediate lay off of state employees as the payment to government agencies and schools will have to be suspended. The Governor in his letter mentioned that the state is unable to acquire the required financing which has left no option other than turning to the federal treasury. California has $16 billion budget deficit but there is no reason why it cannot access the credit line. The main reason lies behind the hype which is being created throughout which forces the state government to turn towards the federal treasury.

US Bailout to help the state Governments

In another statement by the economist, David H. Wang, it became clear that the financial crunch is growing he said that Governor Schwarzenegger’s statement is a strong clue towards the affect financial crisis has made on government organizations in the country.

Wang further commented that “Corporations are scaling back bond sales or seeking funding sources, bond sales by state governments are being put off, and lines of credit are being renewed at higher interest rates. These are all signs of increased apprehension by banks and other lenders.” He also said that measures should be taken to address this financial crisis which is growing badly.

The bailout package by the U.S. House of representatives is a positive step in the crisis situation and it will help reduce pressures from various bond markets and ease the payment systems which are suffering as the crisis is hyped more than it actually is.

The rescue plan will help stabilize the financial system in U.S. and the Federal Reserve along wit U.S. Treasury will have powers to employ various fiscal methods for regaining stability in the system.