Pete has nicely summarized the history of the ongoing budget situation in California and state and local government bailouts in general.

But Pete missed the most important point as he retold the important story about Alexander Hamilton: the move was also intended to show the bond market of its time that the new United States government was worthy of its confidence...and its money.  Hamilton was convinced that no one would lend to the new U.S. if it didn't assume the debts of the colonies and instead repudiated them as being someone else's responsibility.

That's the real lesson here: The state of California may be a government with an economy larger than most countries, but since 1850 it has been part of the U.S.  A default in California will have disastrous effects not just there and in the other 49 states, but also for every county and municipal government that borrows and, inevitably, for the United States itself.  Some governments will be unable to borrow at all.  Those that are able to borrow will be required to pay much higher interest rates for the privilege.

Indeed, the uncertainty surrounding the California situation has likely already affected interest rates for all municipal bonds.

This problem will not be confined to the states: the federal government's credit rating will also be affected.  That could make Bill Gross's otherwise outlandish prediction that the U.S. could lose it's AAA credit rating come true.

In other words, whether you call it a bailout or something else, for financial reasons alone the federal government really has no choice but to prevent Calfironia from defaulting and to ride to the rescue.

Plus...California has 55 electoral votes.

There are lots of good and quick histories of how California got to this embarassing situation.  Many, like this one from Louis Warren writing for The Edge of the American West, are worth a few minutes of your time.

But I care far less about how California got here than what should be done about it.  Some quick thoughts:

1.  As Pete points out, we crossed the threshold issue of federal involvement in state and local finance a long time ago.

2.  I don't care what David Axlerod has said so far: Barack Obama does not want the LA Times and San Francisco Chronicle to write the same devastating headline about him that the New York Daily News wrote when President Ford initially refused to provide help to New York City: "Ford to City: Drop Dead."  The Democratic Party subsequenty ran posters all over the city with a copy of that headline that said "Don't Get Mad, Get Even" and Ford and the Republicans lost New York even though Ford eventually relented.  Obama has to be seen as the savior not the executioner.

3.  The assistance Washington has already provided for AIG, Fannie Mae, Freddie Mac, Chrysler, General Motors, and just about every other big and small financial company you can name has come with shackles rather than just strings attached.  California should expect no less.

4.  But there is a problem attaching strings...or chains...to assistance for California: the state is a government, not a corporation.  There is no board of directors for Washington to replace.  It could ask the governor and assembly speaker to resign in much the way that it forced the General Motors CEO out of his job, but the constitutional implications of that type of move raise important questions (and perhaps law suits).

5.  Ultimately, like grant-in-aid requirements, federal assistance could be predicated on the state government taking certain actions -- on taxing and spendng, for example.  But in the current political environment in California and constitutional rules on its budget, it's not clear whether those changes could be enacted.  After all, if those changes were possible the state wouldn't need federal assistance to begin with.

6.  The Obama administration can't provide California assistance without getting something that looks and sounds like reform in return.

To me, this sounds like we're in for several weeks of dancing about federal assistance for California.  Washington can't provide it without getting something in return and it's not yet clear what that can or will be.