Want a classic example of how the real estate slump is affecting not only the construction industry and home owners, but also states and municipalities, as well?

Consider the plight of the nation's largest city, the City of New York.

Wall Street's mortgage losses have ballooned to such a degree that some firms may pay small or no taxes for years, Bloomberg News reported. That's right: no taxes for years.

Rising tax revenues, no more

For much of the current decade, indeed for much of the 1990s as well, the city could count on rising tax revenue from Wall Street firms -- based on increased securities industry business -- as a starting point for the city's budget. Not now: the city, which derives about 20% of its revenue from Wall Street businesses, is projecting a decline in revenue from Wall Street firms -- a contraction that is expected to widen the this year's $1.5 budget deficit in fiscal 2009 to $2.3 billion next year, fiscal 2010, and then to $5.96 billion in fiscal 2011 budget deficit, Bloomberg News reported. The city's budget for fiscal 2009 is $59.1 billion.

The Wall Street recession has put the social service goals of Mayor Michael R. Bloomberg on hold, for the most part. Bloomberg has already asked city department and agency heads to implement a 6.4% spending cut; he will likely ask department heads to identify other cost savings of up to 3%, should revenues continue to come in below projections.

Bloomberg's goal is to achieve spending reductions through increased efficiency and avoid cuts to essential services, like police protection and garbage collection. Economist Glen Langan said avoiding cuts in essential services may not be possible, given the scope of write-downs on Wall Street.

"This is not an isolated, idiosyncratic event, the way the losses from the September 11, 2001 terrorist attack were. This is a structural, sector-wide downsizing stemming from business errors," Langan said. "The scope and size of the losses suggest it could be more than five years before these businesses fully recover, which will really depress city and state revenue from taxes, securities fees and capital gains for a long time." Financial firms have recorded more than $500 billion in write-downs, globally to-date, Bloomberg News reported.

Langan's tonic for the New York's Wall Street-related revenue shortfall? Diversification into other sectors, and thus further broadening its revenue base. The City of New York initiated this new strategy after the September 11 attacks, including encouraging nonfinancial businesses to locate in Lower Manhattan (where Wall Street is located) and other businesses to establish offices/branches in the city. The tactic is succeeding, Langan said, but the new revenue will not be nearly enough to offset revenue losses from its primary industry, finance, during this restructuring period.

"At the end of the day New York's primary industry and role is finance," Langan said. "New York is and remains the financial capital of the world, and as Wall Street goes, so goes the City of New York's finances and budget."

Economic Analysis: The New York-area is experiencing a triple-whammy, of sorts, during the current U.S. economic slump: a hard-hit Wall Street sector, to go along with an advertising/media slump, and the housing recession. Moreover, at this juncture it looks like the city-wide slump will extend well in to 2009, before certain segments show signs of recovery.