Last month the Federal Reserve stepped in with $30 billion in tax payer money to bail out the failing Bear Sterns investment bank. The argument was that Bear Stearns was “too big to fail.”
The Fed “is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” Chairman Ben S. Bernanke said in a conference call with reporters last night. Treasury Secretary Henry M. Paulson Jr., who was deeply involved in the talks though not a formal party to them, indicated support for the actions.
The Fed’s moves were meant to reverse a rising tide of panic that has buffeted Wall Street as banks and other institutions have found it increasingly difficult to get credit.
This report from the Center on Budget & Policy Priorities shows that the states are now being hit hard by the same hard economic times that dropped Bear Stearns:
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The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $39.1 to $40.8 billion, averaging 8.9 – 9.3 percent of these states’ general fund budgets.
Two things jump out at me:
- The amount of U.S. taxpayer money risked to bailout Bear Sterns — $30 billion — is almost as much as what it would take to bail out the 22 states that are experiencing shortfalls this year.
- Bear Sterns is considered “too big to fail” because its failing threatens other big Wall Street entities. The 22 states who are sinking under mountains of debt will have to cut their spending and that will hurt millions of Americans.
As the Center on Budget & Policy report points out, those consequences will be severe:
- Cuts in services like health and education. In the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.
- Tax increases. Tax increases may be needed to prevent the types of service cuts described above. However, the taxes states often raise during economic downturns are regressive — that is, they fall most heavily on lower-income residents.
- Cuts in local services or increases in local taxes. While the property tax is usually the most stable revenue source during an economic downturn, that is not the case now. If property tax revenues decline because of the bursting of the housing bubble, localities and schools will either have to get more aid from the state — a difficult proposition when states themselves are running deficits — or reduce expenditures on schools, public safety, and other services.