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.

Bear Stearns: privatized gains, socialized risks

The Bush administration and federal regulators are largely to blame for the nation's growing financial crisis. Their laissez faire practices fostered the housing bubble, putting people in homes they couldn't afford and allowed financial speculators to mask the risk by slicing and dicing loans to the point that they could no longer keep track of them while earning billions.

Alan Greenspan and other high-ranking Federal Reserve officials watched as the bubble inflated, or worse, blew more air into it by encouraging "innovative" lending schemes.

Once the housing bubble blew-up, the Bush administration has refused to help homeowners who, having been enticed into taking out loans they could not afford, are now facing foreclosure.

The President justified federal inaction less than a week before the Fed bailed our Bear Stearns, asserting that "one of the worst things you can do is overcorrect." Resurrecting Republican arguments against raising the federal minimum wage, he said that federal intervention "would make a complicated problem even worse - and end up hurting far more homeowners than we help."

The administration didn't harbor the same concerns about a federal rescue of the nation's financial elite, guaranteeing $30 billion for J.P. Morgan Chase' s firesale purchase of Bear Stearns, one of the industry's most aggressive and reckless investment firms.

A New York Times editorial, "Socialized Compensation," notes that: "The ongoing bailout of the financial system by the Federal Reserve underscores the extent to which financial barons socialize the costs of private bets gone bad.

Compared to the cold shoulder given to struggling homeowners, the cash and attention lavished by the government on the nation’s financial titans provides telling insight into the priorities of the Bush administration. It’s not simply a matter of fairness, though...if the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.

The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers’ appetite for walking a tightrope...

...until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.

The editorial is linked here.

Fed bails out Bear Stearns: welfare for Wall Street!

In light of the Fed's announcement that it will bail out Bear Sterns, Dean Baker, the co-director of the Center for Economic and Policy Research (CEPR) asks:

"Why is the Fed, an agency of the government, using our tax dollars to keep Bear Stearns and its rich managers and shareholders above water?

Baker continues: After all, the government supposedly doesn't have enough money to provide kids with health care and childcare, to guarantee families decent housing or to meet a long list of other needs. Why do we have the money to lend tens of billions of dollars to Bear Stearns at below market interest rates?

There are two points about this bailout that should be clear. First, this is a bailout - we are handing money to Bear Stearns. Second, we don't have to hand tens of billions of dollars to the country's richest people to save the financial system.

The politicians will try to do their best to obscure the first point. They say, "we aren't giving them money - we're lending money and we're getting interest, so the government can make a profit."

This is what politicians tell people who they think are stupid. No private bank would lend money to Bear Stearns at the same interest rate and under the same terms as the Fed. (We know this for certain; otherwise, Bear Stearns would not have run to the Fed.) When the government makes a loan at below market interest rates, it is giving away money. People on Wall Street know this very well, that is how they got to be fabulously rich: They borrow money at a lower interest rate than they lend it out.

If they can't get away with the "no bailout" nonsense, the Wall Street welfare boys will then try the route of claiming we have to bail them out in order to prevent the whole financial system from collapsing. Such a collapse could turn the recession into a depression leaving millions unemployed for years.

This is also nonsense."

Read the entire column