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One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises, very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is. Neither does Cleveland. (source of Cleveland story: Minyanville.com)

  • Cleveland Mayor Frank Jackson said today that he and top advisers are working to stave off a money crunch that could jeopardize large capital projects on the horizon. Such projects, ranging from roads and bridges to developments such as Bob Stark's $1.5 billion plan for the Warehouse District, rely on the city's ability to borrow money.
  • But several factors have combined to cripple that ability. Among them: Successful appeals of property tax assessments and disappearance of the tax on business equipment.
  • "There's no room for us to borrow money," Jackson said in an interview with Plain Dealer reporters and editors Tuesday morning. "That means I have to find a new way to do business."
  • What I don't want is anyone to interpret this in any way to discourage investment or induce panic that the world is ending, because it's not," the mayor said. (no, it's never panic time... it's always contained.... right Paulson?)

Again, it is so easy to peg the blame on 'those lousy subprime borrowers.'  This is such a bigger issue than that. Subprime lending was a symptom of the disease, not the root cause. Just as a virtuous cycle of more and more credit leverge happens during the good times, the reverse appears to be happening on the down side. It will hit the Midwest first, and I would be very surprised to not see a major hit taken in CA and FL next. But maybe not until 12 months from now. Until then - well it doesn't matter.

As an aside, after doing some reading on the latest plan by central banks to induce lending, I expect this to be just step one of a many pronged approach. LIBOR rates (the rates banks use to lend to each other) are still not budging. That should scare people... coordinated actions by central banks that are ineffective. But there is nothing to fear but fear itself. Inflation. Recession. Housing Bust (now in full effect in Spain, spreading to UK next). Credit crunch. It's all good. Markets off 4% from all time highs. Sensible...

Source: Web of Credit Snares Cleveland