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Federal Reserve chairman Ben Bernanke, back in 2002, intimated he would be ready to drop money from a helicopter to provide liquidity to the economy; too bad he did not stick with that plan. The outgoing Congress and Administration has been working under the assumption that no entity existed that could suck money into a black hole like the federal government, and then came along a parade of bankers, insurance companies, stock brokers and car companies to prove them all wrong. Next in line are cities and states who will be seeking to be bailed out.
The State of New Jersey is facing a 2 billion dollar shortfall in its budget. The financial cuts are expected to seriously impact local municipalities who last year needed to adjust budgets to reflect unexpected cuts. Although unions have already begun lobbying that tax increases should be considered in order to provide the scheduled salary increases, there will be intense political pressure on Governor Corizine to resist. On a list of the top 10 counties in the nation with the highest median property tax, New Jersey claims seven of them–with neighboring New York claiming the top two spots.
Bergen County’s own economy, and its proximity to Manhattan, originally kept the area from feeling the full impact of the stagnation that has affected the state for years. This is no longer the case as the growing number of foreclosures continues to act as a barometer for a failing economy. In the next week there are 5 foreclosures scheduled for Franklin Lakes, 4 for Oakland, and 2 for Wyckoff. As the bailed out banks continue to restrict credit by using the taxpayer rescue package to fill financial gaps in their ledgers, many economists expect a new wave of foreclosures to begin over the next year.
Last years delayed state budget created problems for many local municipalities who saw significantly reduced state aid. Budgets were often not passed till the summer months as towns waited to see exactly how much the state would be forwarding. It is expected that the forthcoming cuts will create similar problems for locally elected leaders. “I think mayors and governing body officials are bracing themselves for what can be the most difficult time in recent memory,” said Bill Dressel, executive director of the New Jersey League of Municipalities.
Mr. Dressel is a proponent of Governor Corizine’s desire to allow municipalities to defer pension payments they are required to pay in April, but this short term relief may cause even greater distress when the piper wants to be paid in full three years from now. Even Governor Corizine is not a fan of his own proposal saying, “Under normal circumstances, I would never have proposed the pension deferral. I think it’s bad long-term fiscal policy. I think it’s good fiscal policy when the only alternative is to see either significant layoffs or a hike in property taxes for the public. And that’s the circumstance we live in today if we cut municipal aid. We don’t have the money.”
Many states, cities, businesses, and individual Americans are hoping for passage of the stimulus package proposed by the president-elect. But apparently America’s biggest source for borrowing may also not have money, nor the inclination, to lend for this cash injection. The last 12 months have seen China increase its holdings of treasury securities from 460 billion to 650 billion dollars, making it America’s number one banker; this number does not include Hong Kong which individually holds 65 billion. There is no guarantee that communist China will be interested in buying more debt, although it is assumed that a large chunk of the money will find its way back in the form of manufactured goods exported to the United States.
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I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.