kiplinger connection
The Economy • State Budgets • Shipping

The Economy: The what and the why of a looming recession.
State Budgets: Crunches could mean service taxes, project cuts.
Shipping: Upgrades of second-tier ports means major development.

The Economy
Credit market worries are rising ...
And with good reason. Recent troubles suggest that events may spiral out of control.
Firms still have access to capital ...
But there’s a real risk of a freeze-up. If the moves being undertaken by the big banks, with urging from federal officials, don’t work, the pain will spread throughout the economy.
Banks are hurting a lot as more loans backed by mortgages quickly go south, threatening many complex deals based on them.
The next few months will be crucial. $400 billion in commercial paper will come due, and if the banks holding it can’t roll it over, they’ll have no choice but to write it off. That would shrink available capital everywhere, hurting lenders and borrowers from Wall Street to Main Street, slowing the economy sharply.
That’s the reason for the latest move, a privately financed bank credit rescue fund. The goal: Build a confidence-boosting backstop, a buyer of last resort for commercial paper.
Will it work? That’s impossible to say. It will certainly help, but perhaps not enough. More U.S. and foreign banks need to buy into it, putting up money to fuel the new fund. It’s a bit of a shell game ... creating a new, off-the-books vehicle to buy assets falling in value. But the reality is less important than the psychological effect. If banks show confidence now, other investors may feel better and follow suit.
But reaction so far isn’t good. Investors see the stopgap fund as a sign of weakness, not a reason for reassurance. Few have committed.
Making matters worse: $300 billion in leveraged buyout money. If credit markets falter, banks will have to sell debt at big discounts.

The Federal Reserve is waiting in the wings. Chairman Ben Bernanke has made it clear that he will do what he must to keep credit flowing.
But the Fed’s tools are limited. Deep interest rate cuts would weaken the dollar, pushing up inflation. Moreover, higher inflation is sure to drive up long-term interest rates, further slowing growth.
And Congress won’t come to the rescue with a big bailout.

Bottom line: The pain big banks feel now could spread quickly, affecting smaller banks and other lenders plus the economy as a whole. Businesses would see their credit lines dry up or become more expensive.
Fact is, the economy is hovering near the edge of recession.

State Budgets
Several states need to tighten their belts in fiscal 2008, which ends June 30. Falling property values, high energy costs, and rising pension commitments to state employees are the major drivers. Deepest in the red: Calif., Mich., Fla., Md., Ill., Mass., and Va.
Businesses in affected states will feel the pinch as legislators scramble to balance budgets. Some tax breaks and research budgets are on the chopping block. There’s talk about taxing service providers, including financial advisers and landscapers. User fees will go up.
But no big tax rate hikes are on tap ahead of the 2008 elections. Raising income, sales, or gasoline taxes would be political suicide.

Shipping
Alternative ports are poised to alleviate costly cargo backups.
On the West Coast: Prince Rupert in British Columbia will soon hum with U.S.-Asia trade, linked by rail to Memphis and Chicago. Meanwhile, ports in Tacoma; Portland, Ore.; and Oakland are being expanded to take pressure off Los Angeles and Long Beach.
In the East: There’s a surge of new industrial building near ports in Jacksonville, Fla.; Savannah; Charleston, S.C.; Wilmington and Morehead City, N.C.; and the Va. ports. Note that most development is on the East Coast, where more land is available than in the West.