California update: Gov. Arnold Schwarzenegger (R-Calif.) is expected to ask President Obama to ease federal mandates and minimums on social programs to save the state up to $8 billion.

The action is needed because California, which has already cut programs to eliminate previous budget deficits, faces up to a $21 billion budget deficit for this fiscal year, Bloomberg News reported Thursday.

This is unbelievable! California (my home state) is going to issue I.O.U.'s to seniors, disabled and welfare recipients starting tomorrow because our State Legislature cannot agree on a budget. This is outrageous beyond belief!

Next time someone refers to California as the "Golden State" the laughter from all corners of the nation will be deafening. They say that California Bonds and Schools will not be affected.

What I want to know is whether the politicians will be getting paid in I.O.U.'s. There are many people in the land of the petition and ballot initiative that would be in favor of a law that says the politicians do not get paid for twice the time it takes to settle the budget beyond yesterdays (June 30) deadline.

The state of California is nearly out of money and nearly out of options.

According to the San Francisco Chronicle, Gov. Arnold Schwarzenegger sharpened his attack Wednesday against his fellow Republicans as he declared that California's budget shortfall has grown to $14.8 billion for the current fiscal year -- several billion more than the shortfall legislators already have been unable to solve.

One option to balance the budget is to cut state services. Politicians rarely like that. It looks bad to the voters. The Legislature could raise taxes on homes and businesses. That looks bad to the taxpayers, too. With falling home prices, failing businesses, and rising unemployment, getting more money into the state treasury may also be impractical.

That brings the conversation around to what happens on the day California can't pay its bills -- any of them. State workers don't get checks. Neither do contractors. Business failures and unemployment gets worse. The house begins to collapse in on itself.

It is too early to make a definitive statement about the eventual solution, but the only ready source of the magnitude of capital needed is the federal government. That would be the same federal government that is printing money to save banks, car companies, and mortgages. How many states will get into real trouble in the next couple of months? Add Michigan and Florida to the list. Unemployment is rising and property prices are plunging. The situation could give the bailout war a whole new front to fight on.

Douglas A. McIntyre is an editor at 247wallst.com.

It's a market and an economy that's offering few bright spots, so you take them where you can get them.

One bright spot occurred late Wednesday in the credit markets. California increased the amount of bonds/short-term notes the state had planned to sell to avoid a cash shortage, after bond demand proved to be solid, Bloomberg News reported Thursday.

California State Treasurer Bill Lockyer said he's increasing the note sale by $500 million to $4.5 billion while also lowering the yield range, or interest rate, to a maximum of 4.25%, Bloomberg News reported.

'I wish they all could be California...bonds'

California is the largest borrower in the municipal bond market and no small barometer of lending and economic activity. If ranked as a country, California would have the ninth largest economy in the world as ranked by GDP.

Economist David H. Wang told BloggingStocks Thursday the solid demand for California's bonds should be viewed as incremental progress in public officials' efforts to unfreeze credit markets.

California Gov. Arnold Schwarzenegger has sent a letter to U.S. Treasury Secretary Henry Paulson indicating that the state may need up to a $7 billion loan from the federal government within weeks, because the state is having increasing difficulty funding day-to-day operations and accessing short-term loans, The Los Angeles Times reported Friday.

California routinely accesses short-term loans to remain solvent, but the state, like corporations and other businesses / organizations, is having trouble accessing funds from the bond market due to the credit crunch, The Times reported.

Lay-offs could follow

If the state is unable to access cash, payments to schools and other government agencies could quickly be suspended and state employees could be laid off, The Times reported.

Economist David H. Wang, although qualifying his comments by adding that he has not yet reviewed California's credit profile and cash flow, said Gov. Schwarzenegger's letter is another sign that the "financial crisis is affecting organizations and governments large and small."

"Corporations are scaling back bond sales or seeking other funding sources, bond sales by state governments are being put off, and lines of credit are being renewed at higher interest rates. These are all signs of increased apprehension by banks and other lenders," Wang said. "The financial crisis is getting worse, and we need to put measures in place to address it."

Wang said the U.S. House of Representatives' passage of the rescue package is a necessary step toward that goal. The U.S. House is expected to vote on the rescue bill today, following approval in the U.S Senate Wednesday, 74-25. "The House vote will reduce anxiety in the credit markets. There's a saying that 'a financial crisis is 30% reality and 70% worrying about the other reality.' Well, the rescue bill will address that 'other reality.' "

Reports of a mild winter have been lost on me. I watched reports of snow in Malibu, California last week with amazement. I do not remember the last time that happened. Everyone in my household had to see it to believe it.

The Governor is declaring the fruit-killing, grower-crushing, brutal cold a state disaster. He will be seeking Federal assistance on the matter. Commentators are forecasting a loss of billions to the state, affecting growers, workers and truck drivers, not to mention consumers.

What really frosts me are all the reports I'm reading on the mild winter -- widely cited as one reason oil has been dropping. Mild compared to what, the South Pole? The Himalayas? The chill between the Donald and the View? Actually it has been cold but not very wet around Southern California, yet. But oil prices have been coming down. My prediction? Temperatures will rise again...and so will the price of oil.

Commodity prices have been softening for many months while the frost has been turning California strawberries to mush. We can all look forward to that commodity rising in price, as well as oranges, for the next few quarters.

Perhaps the surfers in Malibu who are also snowboard enthusiasts will find a path from the snow passages in the hills to the chilly beaches with winter wave action, in the first ever sleet and surf event. I'm sure Governor Schwarzenegger will be among the crowd. He might even participate depending on how fast he recovers from his recent skiing accident. Get well soon, Arnold!

Check out my other posts for BloggingStocks here. Be sure and read You don't have to be 007 to find the best picks for 2007!

Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.