Whatever we know about today's financial crisis. Think we know. Eventually will know in the fullness of time. This time is really different. In 1922, Henry Ford put it this way in his book titled My Life and Work:
"The [economy's] primary functions are agriculture, manufacture, and transportation. Community life is impossible without them. They hold the world together....The great delusion is that one may change the foundation. The foundations of society are the men and means to grow things, to make things, and to carry things."
Real enterprise producing value. Tangible products. Not casino capitalism. Computerized gambling. The illusion of wealth. Disappearing once liquidity dries up. Or even now when it's abundant. With a keyboard click, or when investors fear an approaching economic storm.
Until recently, and even now, many observers pretend that the US and major world economies will avoid recession. Or at worst experience a mild one with healthy growth resuming in 2009. Slowly and grudgingly, opinions are changing. Output is falling. Unemployment rising. Wages stagnant. Personal consumption falling and so are equity, bond and commodity prices. At the same time, households are way over-indebted and so are businesses, states, cities and the federal government. At issue is how bad things will get. For how long, and what, if any, corrective measures at this stage can stabilize and reverse conditions.
Its effects are broad-reaching. Chicago mayor Richard Daley faces a $469 million budget gap. As a result, he'll shut down "non-safety related city services" for six days over the holidays to save millions of dollars. California "faces the potential of a perfect storm created by the financial crisis effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget," according to governor Schwarzenegger's communication director. Another administration official agreed and said "the (revenue) window is shut, and if it stays shut, we are in deep trouble." The state needs an emergency $7 billion loan. It wants Washington to buy that amount of state bonds that it can't sell in the marketplace due to current conditions.
Other cities like New York are also strapped. With a projected $2.3 billion revenue shortfall in 2009 and gaps of around $5.2 billion in 2010 and 2011. To combat it, Mayor Bloomberg ordered a $1.5 billion spending cut and may raise property taxes by 7%. Other measures will follow as needed.
The Center on Budget and Policy Priorities reported that 39 or more states (and the District of Columbia) face an estimated $48 billion in total budget shortfalls for FY 2009. Unlike the federal government, states and cities can't run deficits or borrow like Washington for operating expenditures. They can only use available reserves, cut spending or raise taxes. Choosing the latter two will contract their economies further and contribute to a national slowdown.
Mountains of debt and multiple imploding bubbles are the problems. The housing one especially crucial for millions and the states where they live. It hits property tax revenues. Sales taxes from furniture, appliances, construction materials and other housing related products. Incomes taxes also from employment cutbacks at the same time demand for city services is increasing. Instead they're being cut for public health, education, the indigent, the elderly and disabled, and public workforces. All of which makes a bad situation worse. And according to some astute observers, it's only the beginning. The worst is yet to come.
