Financial crisis, part two, via California

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: The California budget crisis may well lead to a second financial calamity. Governor Arnold Schwarzenegger is struggling to find enough spending reductions to close the gap, but investors are skeptical.

California is more than $21 billion in the hole. According to Fitch, it has the worst rating of any state. The notion that California might default on its debt might seem farfetched.

The problem is that California’s politicians might get little notice. What happens if, seeing the catastrophic budget situation, lenders decide to shun California altogether?

If that happens, California would have to default on its obligations. Once a panic occurs, similar assets tend to be swept up in the wave. Bad news spreads. Witness the run that occurred during the Asian financial crisis of the late 1990s.

So if the unofficial eighth-largest economy fails on its debt, might the debt for the largest economy go with it?

A look at President Barack Obama’s budget suggests that the U.S. government’s fiscal situation is in worse shape than California’s.

What’s worse, the Obama administration’s attitude toward economic policy comes right out of the California playbook.

The Democrats have controlled the California legislature for most of the past four decades. In spite of protestations by the occasional powerless Republican governor, the Democrats adopted economic policies that define left-wing nirvana.

California is in crisis because state spending is so high that even those hefty taxes aren’t enough to balance the budget.

The Obama administration’s plan is to copy California’s policies.

Obama has proposed a massive tax increase on U.S. corporations by curbing the deferral of taxes on corporateincome earned abroad. He also has advocated higher marginal tax rates on the rich, by letting George W. Bush’s tax cuts expire.

Even with those tax hikes, Obama projects that deficits are here to stay because, like California’s Democrats, Washington’s can’t resist increasing government spending.

It is easy to see how investors might stop believing in California. If they do, it would be rational for the U.S. to be next.