When they let their guard down, politians can say the most revealing things.  In today’s Wall Street Journal, representatives of local governments in California attacked Governor Schwarnenegger’s plan to borrow $2 billion from local property tax revenues to cover some of the state’s budget shortfalls.  In response, Don Knabe, chairman of the Los Angeles County Board of Supervisiors said, “They’re hijacking our dollars.  They don’t have the money to pay us back.  It’s a joke.” 

Given that California doesn’t have the money to pay back borrowing from its local government, it’s likely they might not be able to pay back borrowing from private investors either.  To solve this problem, we have the Municipal Bond Insurance Enhancement Act, on which the House Financial Services Committee held a hearing this week.  To encourage investors to buy California’s risky debt, the federal government would cover any losses to the investor.  We’re told that the federal government would charge bond-issuing governments insurance premiums to cover any losses, but the federal government’s history of setting rates based on politics rather than risk (have you looked at the health of the National Flood Insurance Program lately?) guarantees that the taxpayer would likely have to cover billions in losses on any guarantee of California’s debt.