The next economic bubble
Written by Michael Vass
For all the stimulus, the deficit spending, the promises of “saving” jobs the economy has not improved. Unless you count the 400,000 temporary Census jobs as growth. Otherwise things are not better off for the average American or business. In fact they may be getting ready to get worse.
Paul Krugman wrote in an NY Times Op-Ed
“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression [of the late 1800s], than the much more severe Great Depression. But the cost–to the world economy and, above all, to the millions of lives blighted by the absence of jobs–will nonetheless be immense.”
That is a troubling thought from a well respected economist and Nobel winner. But what if that is correct.
Currenly New York State, the 3rd largest State population and the 16th largest economy in the world (as of 2007), faces an $8.5 billion deficit (as of May 27, 2010). Unemployment in the State is 8.2% as of April 2010, off the peak but double the rate of 2007.
The Governor of New York has proposed multiple new taxes to try to eliminate the gap. The reality is that in the recession, with so many unemployed and underemployed (14.3%), adding taxes to a population already struggling to make ends meet only exasperates the problem. Worse, higher taxes reduces the number of small businesses and the jobs they provide. In essence, trying to fix the deficit by increasing taxes but not reducing benefits makes the deficit worse.
New York State has roughly $59.3 billion in municipal bond debt. That debt is not included in the deficit. It’s a rotating debt. But if the recession grabs hold of the nation, and unemployment rises higher as Krugman believes, then States will fail. That means that muni bonds will not be paid off. The State and local governments would not be able to pay off the debt. There just won’t be enough revenues, no matter what the tax rates increase to.
If California, and New York, and even 1/4 of the other 44 States currently in a deficit fail, what will that do to the economy? If the mortgage crisis created a credit crunch because some 5% of individuals could not pay off their higher mortgage payments, what happens to the faith in the U.S. economic system when 25% of the States in the nation fail to pay obligations backed by the faith of the Government?
If a State can’t pay it’s government workers, its financial assistance and food stamps, its road and bridge maintenence, it basic needs and public obligations, or even if it can only make those payments by defaulting on the muni bond payments - what kind of panic will flood the markets. Who will be able to get a loan if New York State can’t qualify for a loan or bond?
IF Paul Krugman is correct, and another leg of the recession drops then it is reasonable to expect that muni bonds of at least some of the 46 States in deficit now will default. Worse yet is another thought that Krugman proposed
“Unfortunately, most Western economies are now thoroughly addicted to government spending. Each fiscal and monetary injection into zombie banks will likely have to be larger in order to offset the withdrawal symptoms of losing the last stimulus plan.”
That sounds exactly like what President Obama has proposed at the recent G20 meeting. More, larger, stimulus spending. Which means more, larger, State deficits. Which means the likelyhood of a muni bond collapse is that much more likely. The dominoes fall one by one.
It is terrifying to envision, but it is possible that the mortgage crisis may be the happy days of this recession.
