Aftershock: Can California recover?

It has been a year since the US government had to bail out the mortgage giants Fannie Mae and Freddie Mac.

One year on, the BBC is taking an in depth look at the crisis in our Aftershock season.

Claire Bolderson is in southern California where the sub-prime mortgage industry had its roots.

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Fannie Mae and Freddie Mac were holding or guaranteeing half the mortgage debt in America and were posting billions of dollars in losses as an increasing number of homeowners stopped paying back their loans.

Many borrowers were high-risk or sub-prime borrowers and their defaults triggered the biggest financial crisis in a generation.

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The US economy has long been heavily dependent on consumer spending; it makes up two-thirds of US economic activity.

But with many consumers losing their jobs and their homes, spending has dropped dramatically.

This has dragged down the whole economy, as Claire found out when she visited the Port of Los Angeles.

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The drop in consumer spending does not only affect business at the port, it also affects the wider economy.

Robert Reich was President Clinton's Labour Secretary.

He is now a Professor at the University of California at Berkeley.

Claire asked him whether he thought the US economy could recover if the consumer's old spending habits do not?

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California has long been seen as the land of opportunity and, in its boom years, it attracted people from all over the US.

So maybe it is not surprising that small businesses are the backbone of the economy there, providing more than 80% of private sector jobs.

So how are the people who own those businesses faring in the recession?

Claire has been talking to 60-year-old Jim Hunter, who runs his own plumbing business.

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So if it is like that for those already in the formal economy, what about the people struggling to get a foot on the ladder?

The people with no skills or training, who have served time in prison, been involved with drugs, who've never had a job but want to start now?

Those are the type of people who turn up at Homeboy Industries, a charity in Los Angeles where the slogan is "nothing stops a bullet like a job".

Claire went to meet some of the ex-gang members involved.

Two months ago, the state of California was close to insolvent.

It did not have a budget for this financial year and it had started paying its bills with IOUs.

A deal was then worked out between Republican Governor Arnold Schwarzenegger and the Democratic-led legislature meaning cuts in numerous state-funded programmes from education to welfare and public works.

But it also allows the state to claw back some of the tax and other revenues destined for California's cities.

That is bad news for the Mayor of the biggest city in the state, Los Angeles, Antonio Villaraigosa.

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Part of California's problem is its complex political system which makes it almost impossible to sort out the state's $26bn budget deficit.

There are restrictions on borrowing and restrictions on raising taxes, so the politicians have had to make spending cuts instead.

They are just starting to kick in - and they hurt.

The pain that Californians are starting to experience provides a taster of what heavily indebted governments all over the world are going to have to face when they start to balance their books.

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Los Angeles is a big, sprawling complex city with many needs and an economic crisis of its own.

How are the middle classes, the people still working and secure in their homes, coping?

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First broadcast 7-9 September 2009

click Click here to see more pictures of the people and places in Claire's reports at flickr.com