SAN FRANCISCO (MarketWatch) -- You've got to give California Gov. Arnold Schwarzenegger credit for being the first to stick his hand out.

Even before the vote on the $700 billion bailout bill last week, the wily Terminator of fiscal discipline had a letter on the desk of Treasury Secretary Henry Paulson making the case for a $7 billion loan to keep the nation's most populous state running past October. Arguing that California -- and many other states -- have been frozen out of the credit markets like a subprime homebuyer, Schwarzenegger said the state needs the money to pay teachers, cops, firefighters, nurses, and other state-funded enterprises of some importance.

California was quickly followed by Massachusetts, whose reputation as "Taxachusetts" hasn't seemed to help it stay above water. And now the race is on to see whether any of these states can tap into the bailout frenzy before all the money goes to save Iceland.

So the question that Paulson and Fed Chairman Ben Bernanke always ask themselves at times like this is whether the foundering entity is too big to fail? Bear Stearns was. Lehman, not so much. AIG? You bet. But what of California?

Sure, we're a blue state, with a large bear on our state flag. And yeah, the housing crisis that is now plaguing the entire world probably started here. And, uh, Nancy Pelosi is our senior representative. We want to preserve the salaries and lifestyles of our Hollywood fat cats. We've been known to favor gay marriage, smoke dope, prance about in garters, save owls and seals, and generally flip a silver-studded finger to any Bush & Co. suggestion or policy over the last eight years. Oh, and we think Barry Bonds got a raw deal.

But should that exclude us from a federal handout at the expense of the Red State gun-toting, Sarah Palin-loving taxpayer? All I can say is thank god it will never come to a nationwide vote. We'd be on our own quicker than you can say, uh, Arnold Schwarzenegger.

If the now famous Joe Sixpack doesn't understand that saving Wall Street means saving his job and bank account, there's no way he'll listen to an argument about California's importance to the fiscal health of the country.

Hey, if President Ford can tell New York to "drop dead," during its last major fiscal crisis in the 1970s, who's to guarantee Bush won't do the same to California when the time comes? Because if there is anything more unpopular then bailing out Wall Street, it is bailing out a group of politicians who can't manage their budget. In California's case, that's $15 billion worth of mismanagement.

Our only hope, of course, may be with Paris Hilton, who still seems to have money and whose shadow campaign for president could be the October Surprise to end all surprises. See US Magazine video of Hilton bailout plan.

Barring that -- or a remarkably quick thaw in the credit markets -- it's likely that California and a host of other states and municipalities may soon start dialing down on essential services and jobs as this credit creature's grip goes from banks and bankers to local, state, and national governments.

With more than $7.4 trillion in market value wiped off the U.S. stock market in the last year, since the Dow Jones Industrial Average peaked above 14,000, and some $2 trillion in retirement savings accounts zapped, it's hard to believe that things could get much worse.

But even as the disaster unfolds on our computers, television sets and BlackBerrys, and in our bank accounts and broker statements, at least the trains are still running and bridges are still open and police are still catching bad guys. The potential for things to quickly deteriorate on a social level is no more crazy an idea than the thought a year ago today at the Dow's peak that Wall Street as we knew it would be gone in 12 months.

For all of the jokes about him and his wacky state, Schwarzenegger isn't acting this time.