The Moral Hazard Argument Against Bailing Out Cali

From Megan McCardle:

I'm pretty sure that the feds can afford to bail out California. I'm pretty sure they can't afford to bail out fifty states who have learned that if they are just intransigent enough about spending more money than they make, Uncle Sugar will come in and pay the bill.

Presumably, the way you avoid this is by putting harsh conditions on the money. But what harsh conditions can the Feds impose? California has the largest and most powerful Congressional delegation. And I'm struggling to think of any penalty the Feds can hand down without alienating critical constituents like the public sector labor unions.

The Obama administration will most likely bail out Cali, primarily because moral hazard has not, thus far, deterred it from bailing out everything under the sun that it deemed "too big to fail." California has one of the ten largest economies in the world. Too big to fail? Dur. I am curious to see what kind of conditions the administration would put on the bailout money.