If Bear Stearns is too big to fail, what about New Hampshire?

by: Nate W

Thu May 08, 2008 at 14:42:51 PM EDT

As part of the deal, J.P. Morgan Chase, a major Wall Street bank, will buy Bear Stearns for a bargain-basement price, paying $2 a share for an institution that still plays a central role in executing financial transactions. Bear Stearns stock closed at $57 on Thursday and $30 on Friday. J.P. Morgan was unwilling to assume the risk of many of Bear Stearns's mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments.

The Fed "is working to promote liquid, well-functioning financial markets, which are essential for economic growth," Chairman Ben S. Bernanke said in a conference call with reporters last night. Treasury Secretary Henry M. Paulson Jr., who was deeply involved in the talks though not a formal party to them, indicated support for the actions.

The Fed's moves were meant to reverse a rising tide of panic that has buffeted Wall Street as banks and other institutions have found it increasingly difficult to get credit.

This report from the Center on Budget & Policy Priorities shows that the states are now being hit hard by the same hard economic times that dropped Bear Sterns. And New Hampshire is no exception:

• Substantial cuts are made to NH health care programs.  The $22 million cut from New Hampshire's Department of Health and Human Services the state's largest department included $7 million in payments to hospitals for patients receiving Medicaid, state-federal health care for the poor and disabled. The impact of the cut is deeper when the loss of matching federal funding is taken into account.
• Rising number of families across NH need food stamps.  Figures reflect increased demand for other social services, as rising food and fuel costs drive more residents to food pantries.

Two things jump out at me:

1. The amount of U.S. taxpayer money risked to bailout Bear Stearns -- $30 billion -- is almost as much as what it would take to bail out the 22 states that are experiencing shortfalls this year.
2. Bear Stearns is considered "too big to fail" because its failing threatens other big Wall Street entities. The 22 states who are sinking under mountains of debt will have to cut their spending and that will hurt millions of Americans.

As the Center on Budget & Policy report points out, those consequences will be severe:

In states facing budget gaps, the consequences could be severe -- for residents as well as the economy.  Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets.  Even if the economy does not fall into a recession as it did in the earlier part of this decade, actions will have to be taken to close the budget gaps states are now identifying.  The experience of the last recession is instructive as to what kinds of actions states may take.

• Cuts in services like health and education.  In the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care.  In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.
• Tax increases. Tax increases may be needed to prevent the types of service cuts described above. However, the taxes states often raise during economic downturns are regressive -- that is, they fall most heavily on lower-income residents.
• Cuts in local services or increases in local taxes. While the property tax is usually the most stable revenue source during an economic downturn, that is not the case now. If property tax revenues decline because of the bursting of the housing bubble, localities and schools will either have to get more aid from the state -- a difficult proposition when states themselves are running deficits -- or reduce expenditures on schools, public safety, and other services.

There's a lot more detail on consequences of letting a majority of our states go into budget shortfall here.