Weekly Wrap

States are scrambling to fill budget gaps stemming from the Greater Depression. Nationwide, revenues for fiscal years 2010 and 2011 are now expected to fall short of budgeted expenditures by a combined $375 billion. That may sound like a big number--heck, it is a big number--but it is only half the amount that Congress set aside in 2008 to rescue banks in the private sector. That was the TARP bill that passed despite a public outcry. First things first.

But Congress did not stop there. Fully trained in spending money it doesn't have, it then went ahead and, a few months later, passed the American Recovery and Reinvestment Act (ARRA), the so-called stimulus bill. For the states, that meant about $140 billion in new federal aid to help balance their budgets. Not as much as the banksters got, but hey, every little bit helps. The only problem is that the money (light blue in the graph above) will run out by July 2011. If we don't hurry up and have a recovery by then, states will have to find other ways to manage their shortfalls.

Lord knows they are trying. Some are biting the bullet and raising taxes. Others are borrowing; most are cutting spending. Maine, looking at a shortfall of $438 million for its biennial budget ending June 30, 2011, is trying every trick in the book to avoid tax increases. First out of the toolbox is the McKernan Maneuver, named after the former governor who balanced budgets by pushing payments from one fiscal year to the next. Unfortunately, that one does not actually remove the obligation. We still need real money. So earlier this week we learned of a proposal to add new games to the state lottery. Now there's a winner!

Or how about this: on Wednesday the Revenue Forecasting Committee simply revised its revenue projections upward by $51 million. Problem solved, or at least mitigated. You see, the RFC detected a bump in income-tax receipts during December and January and decided to extrapolate that over the remaining sixteen months of the fiscal period. To which I say, Good luck. Those little green shoots are about to get roto-tilled.

What makes me say this? All week the economic news has been dismal. Home sales, both new and existing, were seriously southbound in January, despite the extended First Time Homebuyer's Credit. Auto sales are in the breakdown lane. Durable-goods orders disappointed. Initial unemployment claims are ratcheting back up toward the half-million mark. Bank credit continues to contract (over 10% since the recession began), and "problem" banks, according to the FDIC, are breeding like rabbits.

Option adjustable-rate mortgages are resetting, raising monthly payments for borrowers already struggling to pay the bills. New foreclosure filings are expected on three, four, perhaps even five million homes before the year is out. President Obama is toying with the idea of prohibiting banks from foreclosing on home loans that have not first been screened and rejected by the government’s Home Affordable Modification Program. This will allow borrowers to live rent-free for a few more months, but only delays the inevitable. This shadow inventory of homes in default hangs over the market like the sword of Damocles. Home-builders will not be hiring.

One more thing: at the same time as Maine's revenue estimates for individual and corporate income-tax receipts were revised upward, estimates for sales-tax receipts were revised downward by $30.8 million for the biennium. Someone please explain that one. I remain skeptical that a continued downward spiral in consumer spending, which accounts for 70% of U.S. GDP, will lead to higher incomes.

And it's not just me. Jamie Dimon, CEO of JPMorgan Chase, who makes way more than I do, agrees that the economic outlook is sketchy at best. At his bank's annual Investor Day yesterday, Dimon described his company as "cautious" about the immediate future. "We don't mind holding extra capital right now," he said, "because we don't know what's going to happen. There are huge potential negatives out there." Dimon reiterated that his firm, which currently pays a quarterly dividend to stockholders of a nickel a share, would like to raise it to as much as a dollar, but will do so only when the worst of the global financial crisis is over.

He's still waiting.