State Budgets Collapsing; Funding Absent

Massachusetts has joined California in approaching the federal government for emergency funds to deal with cash flow problems.  In the case of MA, the state indicated a possible need for $7B in emergency loans.  Massachusetts faces a $233M shortfall in revenue for its first fiscal quarter due to a slower economy according to a brief New York Times story (p. 35) on Sunday.  But apparently the federal loan being contemplated is more related to the current credit crunch that is clogging up the banking system and in the case of the state preventing it from obtain commercial loans that it apparently was counting on.

California may have its own particular fiscal problems due to its unusual political and financial posture, but I doubt there is much unique about Massachusetts.   If these states are facing cash flow problems I have to believe others are as well.  The idea of the states of the union being unable to meet payroll without federal help is a bit nervous making.

As an investor my reaction is to hunker down in view of a possible fiscal crisis in states - in addition to the corporate banking crisis in the U.S. and European that is causing Western governments to put forward one rescue plan after another over the past weeks.  No matter how compelling the values of the stocks of many fine companies may seem  now does not seem like the time for an individual investor - or a fund, for that matter - to reduce his allocation to cash.

This time period is looking increasingly unique and dangerous.  One assumes the world will get past it, that liquidity will be re-established and that the global economy will eventually return to its growth mode.  But as Lord Keynes once so brilliantly observed, the market can stay irrational longer than you can stay solvent.  Let’s be careful out there.

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