Mortgage Meltdown and State Recessions

Associated Press: Many states appear to be in recession as deficits grow.

  • In a nutshell, states are not merely facing declining revenues. 
  • They are facing increasing costs from inflation and devaluation, decreased purchasing power, decreased cash reserves when they find out that what they had  in “cash equivalents” were partially invested in collateralized mortgage obligations, decreased prospects for real revenue growth (as opposed to the magic produced by by inflation and devaluation), and no reasonable prospect of help from Washington until the full damage is done and long over. 
  • If there is going to be relief, it will come from the states themselves as they sludge through economic data and decide on economic policies at a level that they were not previously expected to master. 

As we projected, states are feeling the hurt from the dive in housing prices and housing activity which in turn has caused a massive holdback in consumer spending. Unfortunately, there is only a very small number of people who have sufficient knowledge to understand and analyze the economic impact. Most legislators are caught in this mess like a deer in headlamps on a mountain road.

This includes all three of the candidates for President (although I think we probably should be talking two candidates if we are addressing reality). None of them has issued a comprehensive statement about the mortgage meltdown, the credit crisis, the flood of money created by Wall Street, the declining ability of the Federal Reserve to achieve monetary control. They don’t appear to be able to describe it, much less suggest something palliative other than bullet sound clips. It seems that either their economic advisers are either asleep at the wheel or the candidates themselves are not taking the time needed to get acquainted with the real problems they will inherit on “Day 1.”

On the State level, legislators have never been particularly strong at macro-economic policy initiatives and frankly nobody ever expected them to have this ability. The STATE ECONOMY seems always to hold the back seat even though it has a front seat impact on real people when there is a crash.

About the only good thing you can say about the figures coming out of the state governments is that they are not nearly as mangled and manipulated as the federal figures. Thus we can start to assess the real damage and potentially come up with some answers.

In a nutshell, states are not merely facing declining revenues. They are facing increasing costs from inflation and devaluation, decreased purchasing power, decreased cash reserves when they find out that what they had  in cash equivalents” were partially invested in collateralized mortgage obligations, decreased prospects for real revenue growth (as opposed to the magic produced by by inflation and devaluation), and no reasonable prospect of help from Washington until the full damage is done and long over. If there is going to be relief, it will come from the states themselves as they sludge through economic data and decide on economic policies at a level that they were not previously expected to master. 

  1. Our suggestion is that the only way the States are going to lead the nation into a recovery with a solid foundation (in lieu of the house of cards of booms and busts) is by forming alliances between states and forming relationships with foreign countries in the European Union and elsewhere. 
  2. The National Conference of State Legislatures is potentially a good place to start. 
  3. And Bruton’s appearance in front of the NCSL tomorrow, representing the European Union, could be the immediate kickoff for exploring economic options and getting help on policy from people whose only act to grind is to see the dollar and the U.S. Economy recover. 
  4. It is possible that European central bankers could come to the aid of anxious American states faster than they can deal with the highly politicized Federal agencies of Treasury, Federal Reserve and Bureau of Engraving and Printing. At least the States are trying to publish true figures instead of hiding the truth behind lies (justified by not creating a panic).
  5. It is possible that the Euro could provide safe haven for states and their residents while Washington continues its ideological gridlock.
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  MSNBC.com

Many states appear to be in recession as deficits grow

By ANDREW WELSH-HUGGINS
Associated Press Writer
The Associated Press
updated 5:17 a.m. MT, Fri., April. 25, 2008

The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that’s true for the nation as a whole, a survey of all 50 state fiscal directors concludes.

The situation looks even worse for the fiscal year that begins July 1 in most states.

“Whether or not the national economy is in recession _ a subject of ongoing debate _ is almost beside the point for some states,” said the report to be released Friday by the National Conference of State Legislatures.

The weakening economy is hitting tax revenue in a number of ways: People’s discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house.

The situation is grim in Delaware, with a $69 million gap this year, and bleak in California, with a projected $16 billion budget shortfall over the next two years, the report said. Florida does not expect a rapid turnaround in revenue because of the prolonged real estate slump there.

By mid-April, 16 states and Puerto Rico were reporting shortfalls in their current budgets as the revenue those budgets were built on _ typically, taxes _ fell short of estimates. That’s double the number of states reporting a deficit six months ago.

The NCSL said the news is even worse for the upcoming fiscal year, with 23 states and Puerto Rico already reporting budget shortfalls totaling $26 billion. More than two-thirds of states said they are concerned about next year’s budgets.

The results are consistent with a drumbeat of bad economic news for states that several budget groups have produced in the past few months.

Last week, the Washington-based Center on Budget and Policy Priorities said 27 states are reporting projected budget shortfalls next year totaling at least $39 billion.

President Bush said Tuesday that the economy was not in a recession but a period of slower growth. However, some economists have pointed to the string of declines in manufacturing orders to argue that the economy has fallen into a recession.

Bolstering their position, the Commerce Department reported Thursday that sales of new homes plunged in March to the lowest level in 16 1/2 years. The government also reported that orders to factories for big-ticket goods fell for a third straight month in March, the longest string of declines since the 2001 recession.

Some states “have declined so much that they appear to be in a recession,” the NCSL report said.

It also noted the silver lining for states where the economy is based on energy, such as North Dakota and Wyoming. Alaska is making so much money from oil that it announced an estimated surplus next year of $8 billion, almost twice the state’s annual budget.

In North Dakota, revenue is above legislative predictions by 13 percent, and in Louisiana, the oil and gas sector is robust.

“For energy-producing states, the fiscal situation is strong and the outlook is good,” the report said.

Among other findings:

_More than half the 16 states reporting deficits this year have cut spending, including $1 billion by Florida lawmakers last year and across-the-board cuts in Nevada. At least eight states are debating raising taxes or fees, including a proposed $1-per-pack cigarette tax increase in Massachusetts to raise $175 million.

_Twelve states, including Georgia, Idaho and Illinois, reported that personal income tax collections were failing to meet estimates, and in eight of these, collections were even below a reduced forecast.

_Many states, including Alabama, Arizona, Massachusetts, Minnesota, Nevada and Wisconsin, plan to tap their rainy day funds, which contain money set aside for fiscal emergencies. Nevada may use its entire rainy day balance.

___

On the Net:

NCSL: http://www.ncsl.org

URL: http://www.msnbc.msn.com/id/24303867/


© 2008 MSNBC.com

2 Responses

  1. […] increasing costs from inflation and devaluation, decreased purchasing power, decreased cash reshttp://livinglies.wordpress.com/2008/04/25/mortgage-meltdown-and-state-recessions/Transcript of an Address at the Council on Foreign Relations IMFTOM KEENE, MODERATOR: I have the […]

  2. […] london communists wrote an interesting post today onHere’s a quick excerptThe National Conference of State Legislatures is potentially a good place to start. And Bruton’s appearance in front of the NCSL tomorrow, representing the European Union, could be the immediate kickoff for exploring economic options … […]

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