California Gov. Schwarzenegger has written a letter to the US Treasury Secretary Hank Paulson stating the the State of California needs an emergency $7 billion dollar loan just to pay on going operating expenses such as teachers salaries, to maintain nursing homes, law enforcement and every other state funded service this month.

“The federal rescue package is not a bailout of Wall Street tycoons - it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake,” Schwarzenegger said.

As the State of California has a GDP that is as larger than all but a few countries in the world this is a very big deal. Of course, California is the state where excesses in the housing market boom were the most extreme so it is not surprising that it is now experiencing some of the most severe fallout from the housing and credit crunch. The scary thing is that California is often a bell-weather state and leads the way in national trends.

Certainly as the recession takes hold across the nation more states must be in a severe budget squeeze. No doubt other states are already looking to the Federal government to bail them out of financial disaster.

The big unanswered question is who is going to bail out the federal government as the credit crunch intensifies? Those who think that the $700 billion bailout plan (with added pork increased to about $850 billion) will solve the problem are dreaming. The plan will actually probably make things worst over the long run as it will give false hope that the crisis has somehow been averted.

It’s the big elephant in the room that we all have to worry about. The 56 trillion dollar derivative market time bomb is still ticking away. When that bomb of toxic waste impossible to evaluate and market pile of junk goes off we will indeed be lucky if the entire house of cards financial system doesn’t completely melt down.

Our army of Wall Street and government financial geniuses may have unwittingly devised a way to send us all back to small farming self sufficient barely surviving communities before this disaster has run its course.

The next currency that has any real value may turn out to be cans of pork and beans and the like. Better start stocking up now before the super markets become far less than super.

In the meantime if you are a teacher, law enforcement officer, or state employee in the late great State of California you had better hope that $7 billion from across the nation can be funneled into your own state coffers. It’s best to be at the front of the bailout line than anywhere near the rear. The battle for survival is on.

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