The Fed Needs to Create a Local Government Lending Facility

Many state and local governments are facing a triple whammy in 2009 as the recession deepens: their biggest budget deficits in 25 years, a shrinking market for their debt offerings along with increased borrowing costs.

According to the Center on Budget and Policy Priorities, 44 states will face budget shortfalls totaling an estimated $350 billion through their 2011 fiscal years.

Source: Center on Budget and Policy Priorities

As a result, officials will look to fill the expected shortfalls by cutting back on things such as infrastructure projects, education, and social services while they raise taxes and fees on everything from driver’s licenses to cable television bills. Jobs will be lost while additional burdens are placed on lower and middle income earners already beset with losses on their two biggest assets, homes and retirement plans. Quality of life conditions will worsen as funding for police, fire and sanitation departments are reduced.

Spending cuts and tax increases will only further slow a state’s economy and contribute to the further slowing of the national economy during what is likely to be the worst recession since the end of WW II,

At the same time, borrowing costs for local and state governments have increased as the global credit market contracted in 2008. According to Municipal Market Advisors, yields on AAA debt rose to a record 2.2 times Treasury yields from the historical average of about 0.96 times. New York City is paying 165 basis points more on their 20 year bonds this year than last.

Hedge funds, banks and other institutions who borrow money to buy municipal securities will also face increased borrowing costs and less availability of credit. According to a report by Citigroup analyst George Friedlander, the amount being used by investors in that type of strategy fell to about $12 billion in 2008 from a peak of $120 billion in 2007.

The cutback on infrastructure spending by local governments is likely to have a detrimental effect on the economic stimulus plan which the incoming Obama administration intends to implement soon after the inauguration. As states reduce spending and therefore the amount of workers, the national plan will merely replace those jobs lost, leaving less of an overall net gain in employment.

In order to decrease borrowing costs and make credit more available for state and local governments, the Federal Reserve needs to step in and create a facility designed to lend specifically against municipal credit obligations, a Local Government Lending Facility (LGLF) if you will, much as it has created lending facilities for mortgages and other types of consumer lending such as auto and credit cards.

Comments

[Paul Price:]

Instead of ledning money to states that are deep in deficits we should force them to CUT SPENDING.

That's the only way they'll survive long-term.

Yesterday's WSJ noted that 93% of all the jobs created in New Jersey between 2000 - 2007 were government positions. This is lunacy! We need less government spending and that starts with fewer workers and fewer programs.

Government entities should not dominate all aspects of life.

2008 Dec 31 09:56 AM

[User 328725:]

Cutting out some of the fat is a good idea when an economy is going well. Cutting spending in the midst of the present circumstances is a recipe for disaster.

2008 Dec 31 10:07 AM

[User 328725:]

The market for state and local borrowing is not functioning properly. These entities need to borrow and the costs must be brought down.

2008 Dec 31 10:10 AM

[CautiousInv...:]

Stop spending and cut back on pork laden pet projects. The Conference of Mayors has developed their own version of an "infrasturcture" stimulus program which just so happens to include funding for swimming pools, tennis courts, polar bear parks, skateboard parks and many other things we do not need and we cannot afford.

2008 Dec 31 11:21 AM

[User 328725:]

You will not find an economist that agrees with the idea of cutting back government spending in the middle of a huge contraction.

At this time "pork" will provide needed nourishment. And who exactly is the arbiter of what is needed? My kids can enjoy the swimming pool at the park while I play tennis so to me these are quality of life issues.

2008 Dec 31 12:21 PM

[Socialism c...:]

"In order to decrease borrowing costs and make credit more available for state and local governments, the Federal Reserve needs to step in and create a facility designed to lend specifically against municipal credit obligations, a Local Government Lending Facility (LGLF) if you will, much as it has created lending facilities for mortgages and other types of consumer lending such as auto and credit cards."

Wrong. Too much government and too much credit are what got us here. It's that simple. Government needs to be taken out at the knees!!

2008 Dec 31 05:37 PM

[Socialism c...:]

And those economists have proven their worth exactly how??? Big government is what created this mess. More of that is not the answer.

Quality of life issues?? Are you serious? Was there no quality of life before there were public pools and tennis courts? Maybe kids will get back to plain old running around outside...kicking a soccer ball around in unregulated fashion in the local empty lot or park. We don't need fancy complexes. They are nice, but we need to wake up to a REAL definition of what is needed vs. luxury, and what government OUGHT to be doing for us. Your opinion of "quality of life" is the very definition of spoiled American entitlement thinking!!


On Dec 31 12:21 PM User 328725 wrote:

> You will not find an economist that agrees with the idea of cutting
> back government spending in the middle of a huge contraction.
>
> At this time "pork" will provide needed nourishment. And who exactly
> is the arbiter of what is needed? My kids can enjoy the swimming
> pool at the park while I play tennis so to me these are quality of
> life issues.

2008 Dec 31 05:40 PM

[mrbill:]

"...the Federal Reserve needs to step in and create a facility designed to lend specifically against municipal credit obligations..."

Perfect!

Who needs private investors with you have "thE fEd"!!

This will help offset the horrible deflationary situation we're in!

With all the direct lending and stimulus...

My Stocks will go Higher!

w00t!

And...

I will pay more at the pump!

The doctor!

The grocery store!

This will offset *DEFLATION* - I ASSURE YOU!

I love zero-sum investing!

That's why my two favorite (and only) stocks are:

BGZ
BGU

You have to try them!

2008 Dec 31 07:42 PM

[User 328725:]

I can understand why you might think a swimming pool and tennis courts would have an elitist image, but in this case you're mistaken.

If you go to a NYC public pool, you will only working class families using the facilities. The same with tennis courts; it's the people in lower income brackets that use the public ones.

The facilities are far from fancy.

Bur very little of the spending goes there anyway. The really important quality of life issues have to do with education, healthcare, police, sanitation etc. We can't afford to cut back on essential services so local governments need properly working credit markets.

Jan 01 12:37 AM