We all know states are hemorrhaging jobs, gutting services and even facing bankruptcy in some cases. More layoffs loom on the horizon.

As former Labor Secretary Robert Reich describes it, as a result of the economic crisis, "state governments [are] now mounting an anti-stimulus package (tax increases, job cuts, service cuts) of over $200 billion this year and next."

That’s why federal aid to assist states is so necessary to prevent this downward spiral.

It’s not just about saving public jobs and services (though that alone is a worthy cause). Ethan Pollack, a policy analyst at the Economic Policy Institute (EPI), notes that many state and local services are provided by private employees using public funds. Also, public employees use materials provided by the private sector such as office supplies, vehicles, and manufacturing equipment. Finally, consumer spending decreases no matter who is laid off.

"If we do nothing, the entire economy will suffer," Pollack says.

So EPI and other smart thinkers and activists are absolutely right to fight for direct fiscal relief from the federal government to help state and local budgets.

But I would like to float another modest proposal: why can’t states get the same kind of favorable treatment from the Federal Reserve that is extended to Wall Street?

I know states need to deal with balanced budget mandates and debt ceilings, but I also know there is some flexibility there. Shouldn’t states have access to zero-interest credit just like the Banksters? And couldn’t that make a significant contribution to their overall fiscal picture?

"Even if it just made short term loans–90 days, for example–it could still save California and other struggling states a lot of money," said Dean Baker, co-director of the Center for Economic and Policy Research. "If it reduced their rate on short-term borrowing by 1 percentage point, this could be worth $100 million a year or so to a state like California that would have to do lots of short-term borrowing."

The Fed has the authority–granted by law in the 1930s–to lend to virtually any public or private entity in emergency conditions. At a time of emergency in the states–with schools being shuttered, libraries closed, and health services gutted–isn’t it time to use that power to help devastated state and local governments?