When Gov. David Paterson sat before Congress yesterday to plea for assistance with the state’s rapidly distending budget coffers, he blamed Washington for the dire situation. “The failure of our federal regulatory system has caused too many innocent bystanders to suffer,” he declared.

Indeed, after the near collapse of insurance behemoth A.I.G., the governor filled the regulatory void for credit default swap markets — to the extent jurisdiction allowed. Credit default swaps are similar to insurance policies, but can be bought and sold without much oversight. (Click here for an illustrated explanation.) Paterson’s administration was able to regulate about a fifth of the $62 trillion market, which is twice the size of the entire U.S. stock market.

But Albany’s finely cultivated spending habits deserve a starring role in this financial drama as well, note fiscal watchdogs. While tax receipts grew over the past four years, E.J. McMahon writes at NY Fiscal Watch, Albany “managed to spend the money on practically everything other than roads, bridges and waste-water projects,” and go even deeper into debt.

“They really built their spending on a house of cards last year,” Elizabeth Lynam, of the Citizens Budget Commission, told the New York Times.

Blame aside, the idea of diverting more federal money to states and localities makes sense to some. Jonathan Cohn at The New Republic thinks such a move would boost the economy as a whole. The “extra money would allow [states] to push ahead with infrastructure projects they’d otherwise have to delay or postpone. That creates jobs.”

Paterson might have been speaking to the right people. Charles Rangel, chair of the House Ways and Means Committee that Paterson testified at, is on board with the goal. “Our hope is that the leadership of both parties will be able to confer and come back after the election,and see what we can do to provide assistance to our local and state governments, as we have been able to do for our banking and finance industry,” he said.

The New York Post, however, places the onus on the state to shed some weight. “Washington’s own cupboard is bare. (How many blank checks can Washington write, after all?) But the good news is that New York’s budget is so bloated that finding fat to cut shouldn’t really be all that hard. “

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