"As jobs are lost, mortgage loans will default and a surfeit of available property will push down property values still further.
In the US, this could lead to the next stage in the chain of events. Due to massive drops in tax revenues and a corresponding huge demand for services, state governments in the US are facing record budget deficits. California already has a crippling forecasted shortfall of $42bn over the next 18 months and Ohio is $7bn short.
Unlike the federal government, states have to legally comply with balanced budget laws. Even more critical, the market for state bonds has all but collapsed. Investors trust nothing other than federal treasury bills and those states that can borrow; do so at punitive rates."
This morning, a Reuters report said that the governors of 5 states will ask the Federal Government for a bailout on behalf of all 50. The governors are from New York, Wisconsin, Ohio, Massachusetts and New Jersey. They have collectively asked for $1 trillion dollars over 2 years in order to be able to supply basic services.
Former Goldman Sachs Director, Governor Jon Corzine of New Jersey has even asked for some of the TARP money to be used.
This money will be in addition to any state infrastructure plans and will only exacerbate the dollar weakening and major inflation to come. At some point, somebody has to say, "enough is enough". America will fast be on the road to bankruptcy, should they continue to pour more water on an ocean of debt. With the banks, the federal government receives beneficial shares via TARP. Hopefully, this will help repay at least some of the money provided for the bailout. The states, however, can offer nothing comparable.
I firmly believe that the first lesson that the Obama administration will have to learn, will be to say no. Money like any commodity only has value if its supply is controlled. The trillion dollars needed by the states, is undoubtedly vital. But that trillion dollars is a trillion dollars that somebody else is not going to get.
Moreover, Congress has to pass any future bailout. A coalition of Republicans and southern bluedogs could make it difficult to pass any future legislation.
UPDATE 1-US governors seek $1 trillion federal assistance
(Adds comment by Republican Governors Association)
By Jon Hurdle
PHILADELPHIA, Jan 2 (Reuters) - Governors of five U.S. states urged the federal government to provide $1 trillion in aid to the country's 50 states to help pay for education, welfare and infrastructure as states struggle with steep budget deficits amid a deepening recession.
The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin -- all Democrats -- said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues.
Gov. David Paterson of New York said 43 states now have budget deficits totaling some $100 billion as tax revenues plunge.
"It's clear that the federal government needs to step in and jump-start the economy," said Gov. Deval Patrick of Massachusetts.
The latest package calls for $350 billion to create jobs by building or repairing roads, bridges and other public works; $250 billion to maintain education; and another $250 billion in "counter-cyclical" spending such as extending unemployment benefits and food stamps, which are typically a responsibility of the states.
The remainder would be used to fund middle-class tax cuts, stimulate the embattled housing market, and stem the tide of home foreclosures through a loan-modification program.
Gov. Jon Corzine of New Jersey said he hoped some of the $700 billion authorized by Congress in the Troubled Asset Relief Program would be available to help the housing market.
The governors said during a conference call with reporters that the plan had been discussed with Congressional leaders and the incoming administration, which had indicated its willingness to help.
"The Obama team has been very receptive in listening to us," said Gov. Jim Doyle of Wisconsin. He said "quite a number" of other governors back the initiative.
The Republican Governors Association, however, said the level of federal aid being sought would create a burden for the future.
"The proposal by the Democratic governors goes beyond things like 'shovel-ready' infrastructure projects and is essentially a bailout of these states' general funds," Nick Ayers, executive director of the Republican Governors Association, said in a statement. "Now is the time to focus on finding cost-effective ways to provide essential services without burdening future generations with ever greater debt."
Doyle of Wisconsin said the plan would allow states to maintain essential services at about the current level until 2010, when the national economy is expected to begin a recovery.
The proposal comes amid expectations that the Obama administration, which takes office on Jan. 20, will provide hundreds of billions of dollars in economic stimulus to boost the shrinking U.S. economy and halt the loss of jobs.
Paterson of New York said his state's budget deficit has surged to $15.4 billion currently from $5 billion in April 2008, despite a 3.2 percent cut in the education budget.
Corzine said the money called for represents about 3 percent to 3.5 percent of the economy, equivalent to the amount that the economy is expected to contract by over the next two quarters.
In light of the $700 billion provided to bail out the financial industry, "It's not shockingly large," he said. (Editing by Leslie Adler)
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