California asks the Federal Government for emergency loan

cnyexpat: California asks the Federal Government for emergency loan

The credit crisis is spreading. If you read this article you will see that for the first time ever, the State of California needs to ask the Federal Government for a $ 7 Billion loan to be able to make payments to schools, payroll, and also pay unemployment benefits. The need to borrow money is normal because cash collections from taxes are uneven relative to the time payments have to be made.

Normally, state governments and municipalities borrow money in the form of short term loans from the credit markets. But the credit markets have been shutting down, no one wants to take the risk of lending money to someone else and risk not getting paid back. The interest rates on the loans that are available are sky high. Lenders are worried that California's economy may collapse and they won't get paid back. Other states are canceling plans for infrastructure projects as they can't borrow funds.

The government bailout is desperately needed to calm down the markets.

What started the rush for a bailout?

People don’t understand or remember that just 2 weeks ago, two money market funds announced that the value of investor’s principal dropped below $1 a share. Money market funds are supposed to pay interest on a fixed principal amount that is deposited. They are supposed to be the safest place to put cash besides a T-Bill or a bank savings account.

Guess what, when the news came out that the principal amount that people had invested dropped below their original amount at these two money market funds, the funds suddenly looked very risky - like a stock mutual fund. Why did this happen? - its because the government allowed Lehman Bros to fail due to bad mortgages. Those two money market funds had substantial investments in Lehman Bros loan portfolio.

A panic run started where individuals and institutions started pulling money out of what they thought were “safe” money market funds. Those money markets had to sell a lot of bonds to raise the cash for redemptions, further driving down prices of everything.

This event is the one thing that caused Secretary Paulson to put together an emergency plan overnight. To stop worldwide investors from pulling out of everything, including money market funds. Money markets are very important as they provide short term loans (30 to 270 days) of their deposits to businesses.

Folks - Forget about the fat cats. This is all about you and your financial security or lack of it.