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If Bear Stearns is too big to fail, what about Ohio?
Submitted by Nate W on Fri, 04/25/2008 - 6:14pm.
Last month the Federal Reserve stepped in with $30 billion in tax payer money to bail out the failing Bear Sterns investment bank. The argument was that Bear Stearns was "too big to fail."
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 more than 27 of the states are now being hit hard by the same hard economic times that dropped Bear Sterns. Ohio is one of the hardest hit. As Senator Sherrod Brown said:
“With faltering infrastructure, disappearing jobs, underfunded schools, and spotty access to health care, rural communities are fighting an uphill battle without the federal support they need,” Brown said. “The president’s budget is shortsighted and wrong.”
And these budget cuts impact critical services in Ohio. Like hospitals, where we face a $207 million shortfall:
In Ohio, Medicaid provides health care coverage to more than 2 million low-income citizens each year—covering 1 of every 6 Ohioans, 1 in 3 children, and 1 in 10 seniors. It also infuses more than $12 billion into Ohio's economy.
The federal government offers roughly 60 cents for every 40 cents provided by state funds for Medicaid. Every dollar cut from the state Medicaid budget makes a $2.50 impact on hospitals' ability to provide care.
The gap between the cost to Ohio hospitals to provide Medicaid services and reimbursement widened to $204.2 million in SFY 2005. These losses compound the more than $665.5 million in care hospitals provide to the 1.3 million uninsured Ohioans.
Two things jump out at me:
- 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.
- 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.
Help States, Not Bear Stearns
Billions of dollars are spent by the government. Recently, the federal government helped save Bear Stearns while in continues to spend and spend in Iraq. Yet as Iraq fails to substantially stabilize, it is important for governments to look at the costs of such policy choices. While companies like Bear Stearns are rescued by policy makers in Washington, states are not as fortunate. All across the United States, people are losing their jobs, homes, and ability to sustain their usual standard of living while gas and food prices continue to climb.
Ohio has spent nearly $20 billion in support of the war in Iraq. That money could have been spent elsewhere for a more beneficial purpose. More than 170,000 affordable homes could have been built for struggling Ohio families. 20 million homes that use renewable energy more efficiently would be available to purchase. And perhaps most important, more than 11 million children could now receive quality health care. So as Washington continues to turn a deaf ear to the needs of the states, people need to come together and demand their government aid states before Wall Street.