Can You Say, “Moral Hazard”?

Despite the fact that his state was facing a $15 billion deficit (and the fact that he vowed not to sign any laws until the legislature solved the deficit crisis), California Governor Arnold Schwartzenegger signed legislation to put high-speed rail on the ballot on August 26. If voters approve, this bill will immediately add at least $650 million to the state’s annual deficit, and in the long run (assuming voters later decide to build more than from San Francisco to San Jose) much more.

Last week, on the eve of House passage of the $700 billion bailout bill, Schwartzenegger sent a letter to Treasury Secretary Paulson warning that California will need its own bailout soon. Supposedly, this is solely due to the credit crunch. But if the state were not spending so much beyond its means, it wouldn’t have this problem.
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This suggests that voters can approve the high-speed rail proposition this November with complete confidence that, when California defaults on the bonds, the U.S. will step in and bail it out. If the measure passes, federal taxpayers can look forward to adding at least $10 billion, and possibly $430 billion, to their future obligations.

How Long Will the Recession Last?

Now that is is pretty clear that we are in a recession, the natural question to ask is: how long will it last? Will it be as long as the Great Depression, or as short as the post-dot-com-crash recession?

According to a couple of economists who write for Forbes and work for an investment firm, “any velocity-driven economic slowdown will likely be very short lived.” They predict a “one-quarter slowdown” followed by “a relatively quick recovery in 2009.” Thus, they suggest you take advantage of today’s low stock prices and buy buy buy now now now!

But then, they also say the problem was caused by the Fed cutting interest rates last year, and their solution is for the Fed to cut interest rates now. Say what?

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