As the economic crisis deepens virtually every governor in the U.S. is facing tough decisions when it comes to dealing with their state budget deficits that are expanding at a rapid clip.

In this regard there is no more important state than that of California and its actor turned governor Arnold Schwarzengger who is struggling t deal with a projected $40 billion deficit over the next two years.

When Schwarzengger was elected in 2003 his platform was based on restraining spending, not increasing taxes and less debt financing.  Well what a difference a few years make.  After being soundly defeated in his effort establish budget reform the state budget has grown to a staggering $144.5 billion – up 40% in just four years.  No wonder he has a deficit problem.

Granted Schwarzenegger has been dealing with a Democratically controlled legislature, but instead of hewing to his campaign promises he has completely caved in to the liberals wish list.

Remember that no tax increase pledge?  That’s gone out the window with his proposal to increase the state sales tax rate by 1.5 percentage points for three years which will push the overall sales tax rate to over 9% in some areas making it one of the highest in the country.  All this in the face of a nasty downturn that already has consumers keeping their wallets closed.  He also wants to triple the car tax which isn’t likely to generate as much money as he thinks with people abandoning their cars for mass transit.  Plus who is in the market for a new car these days?  Just look at the Big Three automakers begging for a taxpayer bailout if you don’t think the auto industry is in trouble.

The governor is so enamroed by his own proposals that he has been quoted saying that his tax plan will “invigorate our economy and generate jobs” and conveniently neglects that higher taxes does exactly the opposite.

Despite the fact that he thinks that tax increases are the way to solve his budget woes,  Schwarzenegger has been stymied by the Republicans in the Assembly where tax increases require a two-thirds vote to pass and the Democrats are 3 seats shy of that magic number.

What the state needs right now is the tough guy persona that Schwarzennegger portrayed in his action movies.  He should trim the budget by cutting government programs that were expanded under his watch and show some fiscal responsibility.  Except for his legacy as governor though there isn’t a lot of incentive for him to do much.  He can’t run for office again and if he can somehow finagle his way out of this budget crisis he probably will and saddle his successor with even more unpalatable choices.

The lesson here is that you can’t tax and spend your way to prosperity.

For all that talk about the $700 billion bailout package and what it will ultimately cost taxpayers the Federal Reserve gave us a glimpse recently when they announced that the mortgage debt they took over in teh Bear Stearns rescue has been written down from $29.5 billion in June to $26.8 billion at the end of September.  That’s $2.7 billion in just three months or a  decrease of $900 million per month.  If that keeps up taxpayers would see nearly $11 billion in losses after a year.

The Fed is counting on the market stabilizing and for a return to normalcy in the credit markets but that is far from assured at this point.  Another problem is that taxpayers really don’t know what is in the Bear Stearns portfolio.  There could be some reasonably good debt that will regain its value but there is just as big a chance that much of the debt is of poor quality and that the writedowns will continue for the forseeable future.

It looks like we have truly mortgaged our future with the government rescue plans and our children and grandchildren will pay a very heavy price for this folly.

In Hamlet Lord Polonius offers his son dome advice as he returns to school;

Neither a borrower or a lender be;

For  loan often loses both itself and friend,

And borrowing dulls the edge of husbandry.

Perhaps John  McCain would have benefited by having read some of this sage advice before announcing his own economic rescue proposal during Tuesday night’s presidential debate.

As if it wasn’t bad enough that our government has already bailed out Fannie Mae, Freddie Mac and insurance giant AIG at taxpayer expense and the president signing the $700 billion bailout bill now McCain is jumping on the bandwagon in an effort to lure voters to his side.

Under McCain’s plan the government would purchase some $300 billion in mortgages at their full value and then re-write them to take into account the current home value and make the payments more affordable to homeowners.   It sounds great if you are a homeowner who is struggling to meet mortgage payments and is now upside down due to falling home values but why should taxpayers foot the bill for someone else’s mistakes?

Most of the homeowners who are in trouble purchased more home than they could afford thanks to easy credit and low interest rates that were only guaranteed for a short period of time.  When the rates reset to market rates suddenly these homeowners found themselves rapidly falling behind on their mortgages.

Now in desperation to attract voters McCain has come up with a scheme to help out these troubled homeowners by turning the government into a mortgage lender and servicer.  How in the heck does that benefit most taxpayers?  Neither the mortgage holder or the borrower will lose undet this plan as the government will essentially make them whole. That’s financial responsibility?

Or what about homeowners who used the inflated value of their home to borrow more money and are really in the hole.  The taxpayers are supposed to bail them out as well.  I have a friend who is in sch a fix.  He borrowed against his home  to fix it up for sale and when it came time to sell the market was far too soft for the price he sought.  He has lowered his price several times but is now at the point where if he did sell he would owe the bank money so he is considering walking away from the house.  While I have sympathy for him I think he should pay the price for being overly optimistic on what price his house would fetch.  A the same time at least he borrowed to legitimately improve the home.  Most home equity borrowers took their  booty and spent it on vacations and investments that have now turned south putting them further into debt.  Now they too are looking for the government to bail them out as well.

Who’s to say that the McCain plan isn’t just another step along the path to socialsim?  Since when does a capitalsit society ask the government to step in and in essence nationalize the financial system?

Yes this economic crisis is painful.  Costs for food and energy are putting a squeeze on the middle class like they haven’t seen since the Carter years.  Fear and panic on Wall Street is as bad as it has been since the crash in 1987 if not 1929 as politicians of all stripes have preferred to to put their fingers in the dike rather than take strong decisive action to calm the markets.

The end result is that this plays right into the hands of liberal Democrats who stand to clean up in November and pick our pockets starting in January.  Voters should beware of what they wish for when they vote for change next month.