TUESDAY APRIL 6, 2010

A sign of things to come?

The markets are in a tizzy once again over Greece.  A news report stating that Greece did not want the International Monetary Fund (IMF) involved in its bailout generated fears that the bailout package was faltering.  Greece quickly denied the report, but the damage was done.  Greek bond yields shot up to 7.1%, the Euro dropped and markets around the world slumped.  It seems that Greece may be baulking at some of the austerity measures being prescribed by their benefactors.  It demonstrates just how bad things must get before a government is forced to take dramatic action on its fiscal world.  Given Greece's dire situation, one would think it is in no position to argue.  Yet they are, and it is hurting the whole Euro economy.

In my opinion, this might be a sign of things to come here in the U.S.  The fiscal path of both federal and state government spending is unsustainable.  Everyone knows it...everyone will say it.  However, few will articulate or accept the necessary steps to fixed it.

For example, yesterday, NYS State Comptroller, Thomas DiNapoli issued a report detailing how the State of New York has played a "shell game" with funds of special revenue accounts, which are funds dedicated to a specific cause (snowmobile fund) or program (Power Authority), to create the illusion of fiscal health.  So, NYS's share of the tobacco settlement, in theory to be used for health education, is siphoned off to mask the shortfall in the general fund.  According to the report, in 2009-2010, NYS used approximately $6.4 billion in fund "sweeps, shifts and temporary loans"  and rolled nearly $3 billion in delayed payments into the new fiscal year.  And NYS still had a $2 billion deficit and is forecast to have an $8 billion deficit in the next fiscal year.  At least we think, as the NYS State budget is late again.

Other examples abound.  Last night, the Hannibal School District board faced an angry crowd after they eliminated all after school activities to save funds.  The Governor of NY asked the government workers to forgo their schedule 4% raise and the unions said no.  New Jersey will forgo nearly $3 billion in pension contributions this year.  In California, students protest the increase in their subsidized tuition rates while the average CA government worker makes $73,000 per year.   Today, LA Mayor Antonio Villaraigosa called for shutting down "non-essential" (Well, why do we have them then?)services two days a week.  Shell games indeed!  We must stop spending, but don't touch my sports/salary/pension/tuition/benefits and/or my non-essential services!  While all of these actions may be necessary in the here and now, they do nothing to change the long-term structural cost structure of government.  

As Greece and NYS demonstrate, once the shell game starts, it is very painful to stop.  The game allows for structural spending to occur far beyond anticipated revenues.  When the game ends, the prescribed corrective action is draconian and politically very difficult to implement...until the government is forced, like Greece, by a rude awakening of significantly higher interest rates.  A sign of things to come in the U.S.?  I hope not.  But honestly, I just don't see the political will power to correct this before it gets ugly.

POSTED AT 1899-12-30 11:16:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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