California's getting to be such a drag

Reuters columnist James Saft is finding that the Golden State has lost its shine and Californians are gambling to fix a hole in their budget bucket. Some excerpts from his ruminations made whilst sittin' on the dock of The Bay:

The figures are pretty bad. The median home price has fallen by 29 percent in the year to March, according to the California Association of Realtors, and repossessions are surging. Unemployment has risen by 24 percent, to 6.2 percent, in the same period.

But most importantly, in the 10 months to the end of April sales tax receipts in California are actually down in absolute terms.

the picture is clear: Californians are tightening their belts.

And California matters. It accounts for 13 percent of U.S. GDP. It was also where more than a third of the non-mainstream home loans such as subprime and Alt-A were made in 2006 and 2007, making it very important to the health of the banking system.

"California is big enough that it is going to drag a lot of the nation down with it," said Christopher Thornberg of Beacon Economics consultancy in Los Angeles.

"You can't have collapsing consumer demand in California and not expect it to have an influence."

"People have racked up a phenomenal amount of debt, savings rates have been at zero and the piper has to be paid," Thornberg said.

Vallejo, in northern California, last week said it would file for bankruptcy, prompted by rising costs and falling tax receipts due to the housing slump.

And Governor Arnold Schwarzenegger is expected to unveil plans for $15 billion in bonds backed by lottery revenues to help plug a budget hole.

[In] Modesto, Stockton and Merced the unemployment rates are above 10 percent while more than 60 percent of loans are close to being underwater, or larger than the value of the underlying house. Serious delinquencies in those areas are above 18 percent, while the national average is 3.6 percent, according to Barclays.

"Savings rates should probably have to rise to five to six percent in the next year or two to get us back to a stable position," said Thornberg at Beacon Economics.

"If you have a five or six percent rise in the savings rates, it's functionally a five or six percent decrease in consumer spending.

"We've never seen that kind of drop in consumer spending in the U.S. economy."

The mascot of the University of California is the Golden Bear. Nomen est omen?