The Worst Isn?t Over In the Real World - 08/11/09

August 11, 2009

The Worst Isn?t Over In the Real World
By Paul Vigna, The Wall Street Journal.com

The plight of Jefferson County, Ala., is the stuff of headlines. Faced with a budget shortfall that could push it into bankruptcy, Alabama?s most populous county had to lay off 80% of its staff last week, leaving essential services everywhere from the courts to nursing homes constrained. The county sheriff, his budget slashed and his manpower leveled, said he may need the National Guard to help patrol the streets.

It?s a mess, no doubt about it. The county?s problems began with some creative financing related to its sewer debt that blew up when the credit crisis hit. But while Wall Street?s busy celebrating the purported end of the recession and the crisis, the aftershocks are still being felt in real places all across America.

?The credit aftershock will continue to haunt the economy,? Doug Kass of Seabreeze Partners writes.

Those aftershocks are spreading from Hawaii to New Jersey, although they aren?t as dramatic as in Jefferson County. States are scrambling to find ways to make up for revenue shortfalls that are somewhere in the neighborhood of $160B. Municipal, county and state governments are buckling under the burden of funding their operations while getting less money from property and income taxes.

Whatever the ultimate solutions are, you can bet citizens - already struggling with flat wages, or in the case of 14.5 million unemployed, no wages at all - will be the ones to bear the brunt of it. ?Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom,? Kass writes.

?Municipalities have historically provided economic stability,? he also writes. ?No more.?

And The Washington Post says that even though states have been able to lean on federal stimulus this year, next year?s picture looks ?even bleaker.? Federal aid will be cut in half, and many state have already tapped out their emergency funds.

Household debt still stands at 128% of national output, FT?s Lex column points out, more than twice the level of previous recessions. ?With jobs still being cut, wages falling and households furiously adding to savings, it is hard to imagine what will prompt a return to free-spending days for the American consumer.?

Despite the general euphoria on the Street these days, corporate America isn?t free of all this. Retrenching consumers won?t be doing much to boost corporate profits. And a lot of that debt, like, say, mortgage debt, is still sitting on banks? balance sheets, essentially unaddressed.

Maybe the worst is over. Then again, maybe it isn?t.