The Bailout Bill is the beginning, not the end of a long crisis

Odd that 1975 should seem a model of better economic management, looking at the picture. You'll also note the horror of the Dow 'going down 12'.

It is all very well to sit atop some pile of books or blog links and to blame journalists for playing stories safe. They are as beholden to their corporate bosses and to their customers as anyone else these days. I have noticed a pattern to the reportage of the American crisis however.

Journalists seem to be beholden to the national picture and to the 1920s. So the federal government's $700 billion dollar bail-out of banks is deservedly big news, and as the monster of a bill now looks as though it will pass in multiply amended form, readers and viewers are being encouraged to breathe a sigh of relief.

You shouldn't. That Asian central banks, uncertainty over the euro, and the use of the dollar as a reserve currency are stopping a disastrous dollar plunge at the minute carries with it a rather sad coda. Monetary debasement within the United States is now almost inevitable.

Neither that nor the recession we are in, nor the consequences for the west of waking up from the delusion that bricks, mortar and ephemeral shares are some sort of ultimate growth industry, worry me most.

Something else occurred to me today. You'll see it too, if you understand that the US now has more in common with South American economies of the past than with Europe. There are fifty states. 49 of them have balanced-budget amendments, passed in the intoxication of Republican rule in the early nineties. They have no slack.

Such States can't run deficits, and they have to either raise taxes or get hold of debt if they do, which they will soon if they don't already. Either that or they dump their constitutional provisions on state deficits. There are plenty of cities and states worth tens of billions each.

Many, like California, consolidated their debt recently and issued huge new collections of bonds which they roll over each year. Some local authorities may even have flirted with British-style private finance initiatives that are euphemistically termed 'public private partnerships'. These depend upon the share values of companies and the state of the markets.

What happens when states near bankruptcy and when they try desperately to suck up money or the diminishing pool of capital as the federal government directs its debased currency to banks which use it to pay off foreign debt?

What, in short happens when the debts of California, New York and Florida get called in? Will the next President, or this one, or Speaker Pelosi have to repeat Gerald Ford's (misreported) response to a bankrupt New York City in 1975 to 'drop dead'?

Look to the States. They are a second front as the long crisis begins to unfold, and they won't be the last.