In a New York Times article found here, there is evidence that Wall Street's problems are finding their way to Main Street:

Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.

    

Notice how the "Flight to Quality" - meaning the purchase of U.S. Treasury Bonds rather than other Bonds - is very evident in the "spread" between AAA rated Munis and T-Bonds.

Tight money is already becoming apparent in some states. In Montana, officials had planned to sell $130 million of bonds to the public last December to pay for a new emergency room, cancer center and improvements at the Billings Clinic, a 272-bed hospital in the state’s largest city. But they were dissuaded by higher interest rates even then.

There a many other examples in today's article but the scary part is that the financial crisis caught so many of us off guard because the Treasury Secretary (Paulson) decided that Lehman Bros. was not too big to fail!!!  Another post will have to source the great Wall Street Journal article detailing the actual process - the "too big too fail" syndrome.

However, cities MAY just have to do the unthinkable:

Municipalities will probably be able to function, but may not expand services, said John V. Miller, chief investment officer at Nuveen Asset Management, a municipal bond investment firm. “For some, the level of service they provide will decline.”

Some governments, already straining to balance their budgets, will have to cut payrolls, he said, and others may decide to raise taxes.