01 October 2008

Credit Frostbite: Government Spending

Because some writers talk of a "credit freeze", I in turn like to talk about "credit frostbite"--the damage done by the freeze.

Today, the New York Times has an article on how the freeze is affecting city spending.

Cities and states are good examples, you see, of a business that relies heavily on borrowing to do its day-to-day work. A road needs paving? Let's sell bonds to raise the cash. New park? Sell bonds. This sort of thing allows a government to work around its tax budget for a given year to get things done that seem to need doing. It's also a good way to finance longer-term projects. You know (or at least hope) you're going to get the tax revenue for it, but the contractors want to be paid now. So you float a bond, pay your contractors, and pay the bond off with property taxes, rather than paying for the project with taxes directly.

So far, so good. But now, there are two concurrent problems:
  1. Property values are still slumping, taking property tax revenues with them. The first-order cause we all know about: the sub-prime debacle causing massive foreclosure and otherwise a sudden glut of available housing. There's now a second-order cause, however, at least in big financial-center cities like New York, which is that, as financial institutions fail and consolidate, jobs are eilminated, and commercial real-estate needs dry up. 
  2. The bond market is sluggish to stopped, along with most other debt-related markets. It's virtually impossible for even a well-rated city to float a bond issue right now to raise cash.
Results? Some projects that have been in the queue for years, confidently waiting their turn, are simply not happening. The Times article, for example, cites a new emergency room project in Billings, Montana, and a highway project in Maine.  

These should have been easy targets to raise money to construct, but the bond market is hibernating.

New York City just tried to kick the bond market in the pants by offering higher rates of return on its bonds, but that option isn't necessarily open to everyone, and wasn't entirely successful--the bond issue didn't sell out. A small town may simply not feel it has the revenue to support a higher rate of return, especially with revenues slumping.

So: credit frostbite has claimed the bond market, claimed the projects that could only be funded on the bond market, and will almost certainly start claiming the jobs associated with those projects that will now not happen.

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