Feds need to bail out states and economy!

Now that the Fed has bailed out one of the nation's most aggressive and reckless investment firms, Bear Stearns, President Bush and his economic advisers should turn their attention to helping the states and the American people.

At least 25 states are expecting budget shortfalls for the 2009 fiscal year. It is the largest number since 2002, when in the aftermath of the 2001 recession 37 states were forced to cut their budgets.

Many of these states owe their problems to stark declines in tax revenues after an implosion in housing markets. California is looking to fill a $14.5 billion hole for its next fiscal year, and Arizona’s $1.8 billion budget gap is 16 percent of its general fund, the largest percentage in the nation.

Wisconsin's deficit now stands at more than half a billion dollars ($527 million).

If the states cut their spending, government demand for goods and services will decrease , exacerbating the recession at the very time that fiscal stimulus policies are needed.

States, unlike the federal government which is allowed to engage in deficit spending, are required to balance their budgets. As a result, most states are cutting spending, particularly in education, as revenues decline.

According to the New York Times:"... eight states are cutting into the budgets for higher education, and nine states are cutting into their financing for primary and secondary education.

Delaware will not finance new school construction, and in Arizona, where school enrollment continues to explode, the Legislature, which wants to continue to pay cash to build schools, is fighting the governor, who would prefer to borrow for that construction in light of the state’s woes...

To help close a $600 million budget gap in Virginia, the state made hundreds of thousands of dollars in cuts at universities, including dorm cleaning staff, library budgets and graduate assistantships...

In California, Gov. Arnold Schwarzenegger’s proposed budget for 2008-9 includes a $4.4 billion cut in public education, the largest ever considered in the state. School districts, preparing for next year’s budgets, are already contemplating cuts to their staff. In the Alameda school district in Northern California, trustees voted to reduce the $83.7 million budget by cutting $200,000 to the sports programs, eliminating music programs for all children below fourth grade and increasing class sizes in ninth grade to an average of 29 students, up from 20.

If it appropriate for the federal government to lend hundreds of billions to banks and unregulated investment firms that financed a mountain of risky mortgages now headed toward default, then it is reasonable to assist states that are struggling under the weight of the mortgage meltdown and the financial crisis that followed.

The Bush administration and federal regulators are largely to blame for this mess because they turned a blind eye to reckless lending and investing. Their commitment to deregulation fostered the housing bubble, putting people in homes they couldn't afford and allowing financial speculators to mask the risk by slicing and dicing loans to the point that they could no longer keep track of them.

Officials, like Alan Greenspan, whose job it is to oversee these types of excesses, sat quietly by as the bubble inflated, or blew air into it by encouraging "innovative" lending schemes.

Now that the President and federal policy makers admit that the economy is in deep trouble, they have a responsibility to help the states cope with the fall-out by providing them with the revenue they need to balance their budgets without cutting education or other necessary funding.

A failure to assist the states will cause increased suffering and deepen the recession.