States Facing Critical Budget Shortfalls

Massachusetts has joined California in approaching the federal government for emergency funds to deal with cash flow problems.  In the case of MA, the state indicated a possible need for $7B in emergency loans.  Massachusetts faces a $233M shortfall in revenue for its first fiscal quarter due to a slower economy according to a brief New York Times story (p. 35) on Sunday.  But apparently the federal loan being contemplated is more related to the current credit crunch that is clogging up the banking system and in the case of the state preventing it from obtain commercial loans that it apparently was counting on. 

California may have its own particular fiscal problems due to its unusual political and financial posture, but I doubt there is much unique about Massachusetts.   If these states are facing cash flow problems I have to believe others are as well.  The idea of the states of the union being unable to meet payroll without federal help is a bit nervous making.

As an investor my reaction is to hunker down in advance of a possible fiscal crisis in states - on top of the corporate banking crisis in the U.S. and Europe that is causing Western governments to put forward one rescue plan after another over the past weeks.  No matter how compelling the values of the stocks of many fine companies may seem  now does not seem like the time for an individual investor - or a fund, for that matter - to reduce his allocation to cash. 

This time period is looking increasingly unique and dangerous.  One assumes the world will get past it, that liquidity will be re-established and that the global economy will eventually return to its growth mode.  But as Lord Keynes once so brilliantly observed, the market can stay irrational longer than you can stay solvent.  Let’s be careful out there.

Comments

[Smarty_Pants:]

Sound advice.

Looks like the next round of dominos will be state borrowings from the FED.

Fortunately there isn't any problem that can't be fixed by printing or borrowing more money. At least the government seems to think so.

2008 Oct 06 11:07 AM

[Paul Killinger:]

Of course the more profligate of our political subdivisions will approach our even more profligate central government so they can avail themselves of the illusory benefits of deficit spending, as well.


But where would it end? Even the tiniest of municipal entities, such as firehouses and local libraries, would want to get in on this run of "free" money.

Sooner or later, the only logical answer is FISCAL DISCIPLINE. Unfortunately, the Big Spenders in Washington haven't learned that yet. But one way or the other, they will!

2008 Oct 07 09:27 AM

[fran:]

this situation, while nasty and hurtfull, may be beneficial in the long run. failure of finances by several state gov'ts may be the catalyst leading to finance reforms throughout the country. if states reform, perhaps the affect will ripple into the federal system. if change does not occur, gov't will be recognized as our last remaining industry.

total industrial/business base nationalized. there is probably a term for that. HMMM!

signed: GERRY MANDER

2008 Oct 08 10:54 PM