I agree with most of what Stan and Pete have already posted.  Paul Krugman nicely pointed out the obvious: " ... California has immense human and financial resources. It should not be in fiscal crisis ..."  California's current predicament has been caused by its self-imposed political dysfunction.

There are plenty of resources in California to tax to pay for the state's budget.  If the California legislature is unable to raise the needed revenue or cut the excess spending beyond the revenue it can raise, then the governor may have to go hat in hand to Washington.  What should he find when he gets there?  A firm response that a precondition for any special assistance in the short term is a set of fiscal changes that ensure that there will be more than enough money in the state's general fund to pay back the money, at a high rate of interest, over the long term. 

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.

Bailing out states is not new.  In 1790, Alexander Hamilton bailed out the New England states following the Revolutionary War by having the federal government assume the debt of the states.  New England states had born a disproportionate share of the costs of the war, and Hamilton cleverly bought off the southern states by giving them the capital.  The plan worked so well in restoring our young country's credit that fiscal policy experts still study its lessons.  Wikipedia has an excellent article on it.

No state has gone bankrupt, but New York City famously became insolvent when it couldn't roll over its debt in 1975, although technically it wasn't a bankruptcy.  Up until then, City leaders kept increasing spending until creditors wouldn't lend to them anymore.  In 1976 and 1978, Congress revamped Chapter IX of the U.S. Bankruptcy Act of 1898 to provide for an orderly renegotiation of New York City's debt.  The GAO report on this makes sobering and familiar reading.

The National Retail Federation asked for one on December 23.

The head of the Kennedy Center for the Performing Arts asked for one this morning.

This horror movie keeps getting worse.  This morning's New York Times details how Citigroup, under CEO Charles O. Prince III and Robert E. Rubin, took on too much risk in search for every growing profits, only to find the whole enterprise crashing down around them when those risks proved excessive.

What's ahead?  My Washington banking sources expect a backdoor nationalization of Citigroup, possibly before 6 p.m. today, when Asian financial markets are poised to hammer Citi stock from $4 to far less 90 minutes from now.  That after Citi fell from a 52-week high of $35 in early December, 2007, to its Friday close of $4.

After weeks of debate, we're no closer to consensus in Washington on a bailout for the Big Three auto companies.

White House Press Secretary Dana Perino just said the White House would support an amendment to the Section 136 Department of Enerngy program to speed up those loan guarantees of up to $25 b.  "We think there is a bipartisan path to getting this done very quickly -- this week."  She said Senate Democratic leaders had not revealed their amendment yet or offered to negotiate a compromise.  A Senate vote is expected Wednesday.  Senate Democratic leaders and the Big Three auto companies want $25 b. from the $700 b. Troubled Asset Relief Fund.

Perino reiterated the Administration's opposition to using TARP to help the auto companies.  "That won't happen." she said.  When asked if a bankruptcy declaration by any of the auto companies would be acceptable to the White House, she responded that would be "the companies' decision."

President-elect Barack Obama supports direct aid for the Big Three, but he has said taxpayers should be protected too.

Most successful horror movies have multiple sequels; most government bailouts have sequels whether they are successful or not.  Treasury's Troubled Asset Relief Program started out as a program to buy toxic mortgage assets, but after the program was enacted on October 3, Treasury Secretary Hank Paulson had second thoughts.  Several influential Wall Street investors persuaded him and key members of Congress that it was much more efficient to inject capital directly into ailing financial institutions.  That was true, but that hasn't worked too well either, at least not yet.

It turns out that some financial institutions didn't think of themselves as troubled.  They didn't want to have their reputations diminished by accepting TARP capital injections.  Treasury solved that by forcing them to accept so that no large bank could say it hadn't accepted some TARP money.

Worse still, even the most troubled institutions didn't use the TARP capital injections to make new loans.  They hoarded that capital.  Most still pay dividends, and a few are considering using their improved capital to takeover other banks -- not exactly what Congress intended.

Brad Delong, who obviously never sleeps and, therefore, makes it hard for the rest of us who do to keep up, has an interesting post from Dean Baker (follow the bouncing ball here) about how those who expouse free market capitalism whenever and however they can are getting on board the notion of a federal bailout for Wall Street and homeowners.

As I've said before, as soon as the Bear Sterns deal became acceptable, it was only a matter of time -- in this case, really only a matter of days -- before a homeowner bailout was discussed seriously. Yesterday, two days after the end of the Easter recess, Congress confirmed that when Senate Democratic Leader Harry Reid and Republican Leader Mitch McConnell agreed that a plan had to move forward. The resulting bi-partisan vote to consider specific plans was overwhelming.