Not Just the Feds

Much of the focus this past week has been on the Mother of All Bailouts and the collateral damage the meltdown in the financial sector will cause to the federal budget. However, the bursting of the credit bubble and the accompanying tide of red ink has already stirred up serious problems for government finances -- namely, those of state and local governments. In. "Financial Crisis Blows Holes in State Budgets," the Associated Press reports on one costly side effect of an overdependence on Ponzi finance..

‘We’re keeping our seat belts on pretty tight as the roller coaster continues’

The crisis in the financial system will almost surely blow gaping holes in the already tattered budgets of New York, Connecticut, New Jersey and other states that rely heavily on tax revenue from investment banks and the big salaries and million-dollar bonuses doled out to Wall Street professionals.

The downfall of such giants as Lehman Brothers, Merrill Lynch and Washington Mutual, and the turmoil at other financial institutions, could mean tens of thousands of layoffs of investment bankers, stockbrokers, traders, analysts and other employees.

Even before the crisis, many state governments had been forced to cut spending because of the shaky economy, soaring gasoline prices and the rising tide of foreclosures earlier in the year. How much damage the latest trouble will cause is not yet clear.

"We're keeping our seat belts on pretty tight as the roller coaster continues," New York Comptroller Thomas DiNapoli said Tuesday. "There's a huge hole right now. That hole is likely to get bigger."

New York and other states could be forced to make even deeper spending cuts and take money from such things as schools, road repairs and health and welfare programs.

In New York, New Jersey, Connecticut and Massachusetts alone, the securities sector last year employed 338,000 people and generated $104 billion in payroll, according to the U.S. Bureau of Labor Statistics.

About a fifth of New York state's revenue comes from Wall Street.

In a forecast that came out even before the turmoil of the past few weeks, New York state projected a deficit for 2009-10 of $5 billion and growing. On Sept. 16, the day after the Dow Jones average fell more than 500 points, the steepest plunge since the 2001 terrorist attacks, state officials estimated New York could lose up to 40,000 private-sector jobs and $3 billion in tax revenue over the next two years.

New Jersey faces the fallout on two fronts: as the location of many Wall Street spinoff firms, and as home to thousands of financial sector employees. An estimated $8.4 billion a year in payroll in New Jersey is derived from Wall Street.

In Connecticut, where many financial-sector workers also live, Gov. M. Jodi Rell said that even before the meltdown, the state's projected deficit had more than doubled in a month to over $300 million.

Massachusetts and California also have large numbers of financial service professionals, and both were grappling with big deficits even before the latest crisis.

Wall Street's problems could also prove costly to state governments in another way: The credit market has tightened up, making it more expensive to borrow money.

"It increases taxpayers' costs, and that means the state and local governments' ability to finance bonds for critical infrastructure is hampered," Tom Dresslar, spokesman for California's treasurer. "There's a lot of craziness, a lot of irrationality out there."

Comments

[roger]

The idiotic Ideology of deregulation is over.The US can no longer
longer lecture other countries on fiscal responsibility,it has
lost its global clout and is now viewed as a totally corrupt society
as for the future our fate is sealed by the interaction of war and debt.
If these problems where happening in China we would be reading about
the horrors & failures of the communist system but in Capitalist
Anglo Saxon media its only happening because of individual greed
and bad management,its an INDIVIDUAL thing not a system failure...
YEA RIGHT!

[Abbott_Of_Iona]

Financial Armageddon is ahead of the problem as usual.

Not to dismiss AP.

But let's say that Hank was being economic with the truth.

If the bailout of Wall Street goes through, how much "money" is left to bail out the States that make up the United States.

Bailing out Wall Street may be the greatest misallocation of State finance in history.

$700 would go a long way for States and State Banks.

Just an opinion.

[mw]

Everybody talks about getting Banks to loan again. What came first-the chicken or the egg? What came first- the Banks/loans or the Consumer/Borrower?? My contention is that you have to have a HEALTHY Consumer/Borrower for the whole game to work. If you have a creditworthy consumer-- "They will Come" (the bankers with their credit/money..

[Black Star Ranch]

Think about this - brilliant in its simplicity. The problems affecting this country and being used as the reasons for the bailout are: home prices are depressed - too much red ink on mortgages, economy is in the toilet, inadequacy of capital, overabundance of debt, Low or non-existent percentage of personal savings, frozen financial markets, and local & state finances with much red ink, and lets not forget the underfunding of entitlement programs like Social Security, Medicare, & private pensions. Take care of it ALL with the same $700-billion. Instead of giving it to the wall-street bankers, divide it amongst the adult CITIZENS of the USA (about $530K per adult) and tell them to go spend! - The middle class would pay off their mortgage and bills, open a savings account, invest, buy a new car, start a business, etc. Advise them this is in lieu of all SSI payments and have the government stay the Hell out of the way. Spending must be done within the US & let the people spend the money as they see fit - wiping out all debt along the way and igniting the US economy. Inflation might be a problem but, oh-well, it'll be a problem in the future anyway. The main stated problems - decreased property values are a moot point as troublesome mortgages are paid off, and low-income citizens become home owners if they desire. LOL. It's crazy enough to work? Think about it....

I'm glad we had this talk, I'm feeling MUCH better now.

[mw]

Black Star Ranch--- That's one VERY INTERESTING concept. Maybe the big boys are reading this blog.. and will get some ideas.

[TomK]

So here we are - everybody is talking bailouts of historic proportion. So many billions. Unfettered capitalists turned unfettered socialists overnight.

Do folks know that it took a mere $10B dollar to develop the ultra sophisticated Boeing 787, a liner which will fly untold millions of people for decades, generating many may thousands of good jobs, help create tremendous economic wealth, yield great satisfaction for those who design and built it and those who operate it. All for a drop in the bucket compare with these bailouts.

And what do these bailout do - they buy nearly worthless financial papers from failed or failing banks who face failed business models - who basically gambled trillions of other people money and lost their shirts. So the government now want to 'invest' a trillion dollar to these banks, banks who make absolutely nothing, create absolutely zero industrial value of their own.

Yup, the game is over. Not only for the banks. But for the US of A as a major power, as a country people respect.