California goes bankrupt
Gold rushes come and go in the world’s innovation capital, California, but when they go … they really go.
We’re hearing that the City of Vallejo has filed for Chapter 9 bankruptcy, apparently a first for a municipality. Half Moon Bay, home to a few internet big shots, may well be next. According to John Moorlach, Orange County board chief, “This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California.”
What can it mean to people on the ground when their city goes belly up? What of their assets, houses etcetera? It will be interesting to watch this pan out.
According to Goldman Sachs and Lehman Brothers American house prices are likely to fall 25pc from peak to trough. With between 10m and 12m households in negative equity already, there’s still a way to go.
Shares across the developed world are set for big falls too. Albert Edward Société Générale’s global strategist says, “Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios. We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that ‘the worst might be over’ is truly staggering. Profits are disintegrating.”
Ambrose Evans Pritchard of the Telegraph (UK) — ever the Cassandra — says pointedly, “Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.”
The Bank of England and the European Central Bank are still stubbornly refusing to cut rates because of inflation fears, which will be the least of our miseries in the next two years and should abate soon as global demand falls off the much-imagined cliff.
It’s probably true that Ben Bernanke’s Federal Reserve has saved the U.S. and other countries from another Great Depression. But nothing can stop a slump now because it’s already happening.