The road from Wall Street to Main Street runs through Colorado.
The panic in the nation’s financial markets is now hitting Coloradans where they live, putting construction projects on hold and threatening the ability of local governments and special districts to meet their payrolls.
The state government itself is well insulated from the financial turmoil, with about $2 billion invested in ultra-safe U.S. Treasury notes, according to state Treasurer Cary Kennedy.
But local governments are another matter. Colorado is home to 271 incorporated municipal governments, 64 counties, 176 school districts and about 2,500 special districts.
The special districts, which handle local chores ranging from libraries to fire protection in unincorporated areas, are especially vulnerable to the lack of liquidity now gripping the money markets. They usually get their income in property taxes once a year but have expenses throughout the year.
They may borrow money in anticipation of those taxes. When the taxes come in, they repay those loans but have a lot of money left over. Rather than stick it under their mattresses until payrolls come due, the districts may put it into money market accounts to earn some interest.
This is sound money management, far removed from the highly leveraged loans that have brought Wall Street to the brink of the worst crisis since the Great Depression.
But money market funds are not, at this point, insured by the federal government. As a result, even sound funds are vulnerable to “runs” if panicked investors try to withdraw all at once. That is forcing some funds to exercise rules that allow them to delay withdrawals — meaning the Smallville library district may not be able to pay the librarian this week.
There is an answer to this problem, and it’s reportedly part of the bailout deal that was being hammered out behind closed doors Thursday. When similar bank runs developed in 1933, President Franklin D. Roosevelt declared a “bank holiday” while Congress hurriedly passed what became the Federal Deposit Insurance Corp. When the banks re-opened, reassured depositors then deposited more money in the banks than they withdrew.
For many reasons, including ludicrously low interest rates as low as 0.1 percent paid by commercial banks on savings accounts, money markets today have largely replaced the insured FDIC accounts for many routine cash management functions. It’s thus time to transfer the FDIC principle to their modern counterparts, while requiring sound management of such funds and a surcharge for the insurance, like that charged by the FDIC.
There are, of course, other local impacts from this crisis. Several schools and special districts report they can’t sell bonds because they can no longer buy bond insurance. And many private investment decisions are now also on hold.
Congress needs to take a hard look at the final bailout package. But inaction is not an option.
