State Level Concerns & Fed Intervention

In June I proposed that if you Think Things Are Bad Now, Wait Til The States Cut Back.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

This is now becoming a reality and catching on in the mainstream media. So far, it's limited as California grabs headlines, so publicly it hasn't gained the recognition it needs yet to truly spread fear. But just wait, shortly the reality will be panic as State Budget Troubles Worsen:

States are facing a great fiscal crisis. At least 43 states faced or are facing shortfalls in their budgets for this and/or next year. States are currently at the mid-point of their fiscal year — which started July 1 in most states — and are in the process of preparing their budgets for the next year. The outlook for state budgets remains grim.

Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps have opened up in the budgets of at least 37 states plus the District of Columbia after they struggled to close the largest budget shortfalls seen since the recession of 2001. And these problems are expected to continue into next year.

Current estimates are that mid-year gaps total $31.2 billion — 7.2 percent of these states’ budgets — but they will almost certainly widen as the continuing economic turmoil causes revenues to come in below estimates in more states.

The 37 states facing mid-year fiscal year 2009 shortfalls are Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, and Wisconsin. In addition, the District of Columbia faces a budget shortfall. These budget gaps are in addition to the shortfalls that these and other states faced as they adopted their budgets for the current fiscal year.[1] At that time, 29 states faced a total of more than $48 billion in combined shortfalls.[2]

The article is in depth and has some very cool graphs. I encourage you to read the article in full as it is a serious eye opener, but I must highlight one more part:

Based on past experience and the depth of this recession it appears likely that all but a handful of states will face shortfalls in fiscal year 2010 and these deficits will end up totaling over $100 billion.[4]

Yowsers! First, let me say that the amount of job loss as a result of this will be sad and tremendous. Second, though it may sound cold, the sooner these budget shortfall expectations are met and adjusted for the sooner society as a whole can realign their own plans and adjust. Right now there is only a linger of uncertainty in the air. The fact is that states are (were) levering up just as much as banks and our government is and was therefore distorting the market. As they cut back the sooner private land and capital can be reallocated more efficiently. There's no easy solution, years of mal-investment on enormous scales ends in difficult (to say the least) corrections. Heli-Ben and Handy Hank might have you think otherwise, but wait, speaking of them.....Bernanke: Fed's Hands Tied In Aiding States:

The central bank’s hands are legally tied when it comes to directly helping U.S. states and municipalities overcome financial challenges, Federal Reserve Chairman Ben Bernanke said in a letter sent recently to a key U.S. lawmaker and obtained by Dow Jones Newswires. (Read the letter.)

“The Federal Reserve Act provides the Federal Reserve with only limited ability to purchase directly the obligations of states and municipalities,” Bernanke said in the letter to Rep. Paul Kanjorski (D., Penn.). “In addition, the Federal Reserve generally has little or no authority to lend directly to a state or municipal government.”

That said, local governments might be better off talking to U.S. Congress and Treasury Department officials about ways they can obtain direct aid, Bernanke said. He listed federal grants, loans and guarantees as possible options.

This hasn't stopped Heli-Ben before, what's changed? What's changed is that pressure on Big Ben to address the issue of states hasn't reached critical mass yet as the effects of state cut backs are still in the preliminary stages of setting in. Just give it time, I suspect the states will be eating a strict diet of alphabet soup in the future with tax payers eating the pavement. The mere fact that this issue is being raised with the Fed chairman is a good indicator that officials are wising up to the problem and that programs are on the way. Please see Mish's Fed Uncertainty Principle for more on this. I could be wrong, but then again Ben sets the precedence.