This will be a rather short post, but I’d like to highlight the video below with Philadelphia Mayor Michael Nutter, who recently went to DC seeking to expand the TARP program to provide liquidity for cities as well. Now, he was rather clear that he is not looking for a bailout, per se, but rather help in making sure that his city has access to the credit markets. The more jarring part of the video was his description of the economy in Philadelphia, where he began by saying that business tax receipts had started to “slowly erode” before quickly correcting himself and saying “not so slowly, actually, erode pretty rapidly.”

The video is about three minutes long, and a good example of how things have come full circle to hit government too.

It’s very clear that a reinforcing economic down cycle is in full swing. Those are very difficult to stop, and I’m not sure that letting lower quality borrowers (corporations or cities) leverage off the federal government’s borrowing ability is going to make things truly better; debt levels are already too high across the board, and playing a giant game of funding cost arbitrage with Treasuries is only going to work for so long. At some point, I think Treasury buyers will have to open their eyes and say, the USA might be a AAA credit (something I’m not personally sold on, but for argument’s sake now…) but then we have X dollars lent out against questionable collateral under the Primary Dealer Credit Facility, Y dollars invested in banks via TARP, and Z dollars shoring up AIG and others – none of this is AAA, so eventually Treasury borrowings will be priced at some weighted average of those ratings.

If there is some intervention action that I might support, it would be the suggestion of Mayor Nutter (and several other big-city mayors) to borrow funds from the government for purposes of infrastructure spending. Most of this work needs to be completed anyways, and it might be the only area that could actually absorb capital spending dollars at an economical rate – perhaps the much-needed foothold to begin reinflating the economy.

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Disclosure: I’m from the Greater Philadelphia region, have family that work in the city, and know people both in construction and various government positions in the surrounding area.