Home OP-ED Big Mortgage. Bigger Gamble?

Big Mortgage. Bigger Gamble?

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It’s easy to sign a check when it’s not your money.

That’s what President Obama is getting set to do as he signs into law one of the largest pieces of legislation in U.S. history, a $787 billion behemoth that combines massive tax breaks and government spending intended to resuscitate the moribund U.S. economy.

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Not since the first 100 days of Franklin Delano Roosevelt’s time in the Oval Office, has a more complex chunk of legislative measures been signed into law with such alacrity.

Critics of the President’s plan, primarily of the Republican stripe, are skeptical about the efficacy of the measure, especially its emphasis on spending. Their opposition is focused on the $200 billion for modernizing the nation’s infrastructure and especially, the $250 billion to aid distressed states and individuals.


Obama Leaves Room to Maneuver

Some are referring to the President’s package as the biggest mortgage in history – trading against the good faith and credit of future taxpayers.

His supporters see Mr. Obama’s gambit as being bold, and argue that he and the Congress have little choice but to act swiftly because the risk of doing nothing is even greater than the impact on the already mammoth federal deficit.

For his part, the President is hedging his bets.

Despite the unprecedented size and scope of his rescue package, his tone is cautionary. He seems to understand that no matter what steps he takes, the economy may not be able to overcome the gravitational forces of the deepest recession since the 1930s.

States like California are emblematic of the problem.

California’s $42 billion shortfall is larger than the budgets of most states. If California were a country – some argue it should be – its economy would be the eighth largest in the world.


Here Come the Changes

Because of the recession, California’s tax collections have fallen, resulting in a severe shortfall. The state has already stopped paying tax returns. With the legislature deadlocked on a budget resolution, it’s set to start sending its creditors IOU’s. With the impasse in Sacramento, Gov. Schwarzenegger is poised to shut down hundreds of public works projects already in progress, causing approximately 32,000 in associated layoffs, and to send pink slips to 20,000 state employees.

Unlike the federal government, states like California have constitutional provisions that prevent them from running in the red. They must pay as they go, and cannot incur a deficit.

The budget proposal, which is backed by the state's Republican governor, would raise the state sales-tax rate to 8.25 percent from 7.25 percent; boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile; add 12 cents to the per-gallon gasoline tax; reduce the dependent-care tax credit to $100 from $300, and impose a surcharge on income taxes of up to 5 percent.


Sinking to Last Place

Like many overextended consumers, California's ability to borrow has been severely hampered by its credit rating. Standard & Poor's cut the rating on $46 billion of California's bonds to A from A+, giving it the lowest credit rating of any U.S. state.

Even though California's legislative process in requiring a two-thirds majority to pass any budget is matched by only two other states, the financial problem is far more common.

Time and again, California has been a trendsetter. What happens in the Golden State is frequently a predictor of what will happen nationwide.

Although California will certainly benefit from the financial aid earmarked for states in the President's rescue package, it will not be a panacea. Even with the federal monies, states like California still will be compelled to make hard choices. Cities and counties around the country will likewise have to face the same consequences.

The President should be lauded for taking prompt action. But after the applause has stopped, it's time to hear what hard choices he, along with the Democratic Congress, is willing to make to foot the bill.

There is no free lunch Mr. President.



John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com