California’s brush with insolvency

Should we bail out California and other credit-starved states?

“Wall Street’s crisis is walloping state finances across the country,” said The New York Times in an editorial. California warned it will need a $7 billion federal loan if lending markets don’t recover soon; Massachusetts made a similar plea; and Wall Street–dependent New York can’t be far behind. Washington needs to help these and other struggling states “get past their short-term liquidity squeezes.”

If the states don’t get federal help, said David Callaway in MarketWatch, they’ll have to start cutting "essential services and jobs”—think cops and bridges—soon. It’s that serious. After saving Bear Stearns and letting Lehman Brothers fall apart, Treasury Secretary Henry Paulson now has to decide if “California is too big to fail.”

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