Meredith Whitney: Next Financial Crisis To Come From Local Government Defaults

The next major financial crisis could come from a crisis in local government budgets, according to a new report from analyst Meredith Whitney.

State budgets were over-extended in the years leading up to the recent financial crisis, Whitney says, as relayed by this Fortune piece. The situation is so bad that states are spending 27 percent more than they're earning in taxes.

The state fiscal situation may be dismal, but Whitney's thesis says that a future crisis won't be cause by states directly, since they have a safety net from the federal government. Instead, the local municipalities -- cities and towns -- which, as Felix Salmon points out, are financially dependent on the states, would default on their debt.

"The state situation reminded me so much of the banks pre-crisis," Whitney told CNBC's Maria Bartiromo Tuesday. In 2007, Whitney predicted doom for Citigroup and was immediately vindicated when the bank's stock price fell and the then-CEO Chuck Prince resigned.

"The similarities between the states and the banks are extreme, to the extent that states have been spending dramatically, growing leverage dramatically. Muni debt has doubled since 2000, but spending has also grown way faster than revenue," Whitney told CNBC.

States, most of which are constitutionally required to have balanced budgets, have paid for this spending by using money that would otherwise have gone to pension funds, Whitney, who is CEO of Meredith Whitney Advisory Group, said. "You borrow from future dollars to benefit the present, basically generational robbery," she told CNBC.

The worst states, according to the 600-page report, are California, New Jersey, Illinois and Ohio. The best, with the most conservative fiscal policies, are Texas, Virginia and Washington.

Comments

[rkblueangel]

12:35 PM on 10/05/2010

Notice the states that have systematically increased spending in excess of revenue are Democratic. No surprise. On the other hand, the tea party formed out of frustration with reckless spend and tax policies by Republicans and Democrats. Our political system is reactive. Default and bankruptcy is the only option for most. The greedy unions will not negotiate and their pensions will be reduced to nothing. We need to cut spending and we need to increases taxes on the wealthy. Otherwise we default on all of our debt in time as people abandon the currency, see the price of gold, it has already started.

[changling]

07:25 AM on 10/01/2010

President GW Bush began taking money from the cities in his first year to gear up for the wars he created. Just like the money the big financial guys/gals took... it all needs to be given back so we can begin anew.

[rkblueangel]

12:38 PM on 10/05/2010

Democrats controlled Congress for the last four years. GW Bush is a poor argument. Lets face it the Dem's reckless spending..welfare for all destroyed the country. That is your legacy.

[changling]

07:16 AM on 10/07/2010

You are misguided and ill informed. Social Security was always paid for until the fund was raided and now the Republicans want to privatize it so they and their friends can funnel all the current funds going in to their companies while most likely cutting benefits (just one example). Republicans say the Democrats "Tax and Spend" which is a good thing because you need to pay for things and need an income. The Republicans "Spend and Spend" and this is what always tanks our economy after many Republican administrations. If you check your facts you will see that President Obama can not get things done due to the fact that the Republicans are obstructing progress via fillibuster and other rules that allow them to keep him from doing anything. Check your facts and vote for your well being not the well being of the Republican elite and their friends. Can you afford to support yourself without social security when you retire. Can your mom and dad? Can your neighbors, rich or poor, who lost their jobs and some their homes survive without assistance? Are you a Christian? Love thy neighbor. Think about all the starving Americans whom only have a small stipen to get through (Katrina victims, Gulf spill victims etc). Without public benefits many more than are suffering now would be destitude. Get a conscience and stop listening to Foxe's talking heads. They are highly paid entertainers not role models.

[Chicagowill]

10:40 PM on 09/30/2010

At least where I sit, much of the issue will come due when the off balance sheet liabilities of unfunded pension liabilities come due. What will happen? I would be willing to bet the municipalities try to stiff their pensioners. Will they succeed? Don't know.

[mountainweb]

04:27 PM on 09/30/2010

And the majority of the broke cities will be in California. A state rushing headlong into being broke itself...

[JoeBlough]

04:00 PM on 09/30/2010

Time to lay off the mercenaries. At 250K per head, who can afford them?

[Detainee1]

01:45 PM on 09/30/2010

it will be fascinating to see what happens in Chicago as our Seven Term Mayor resigns, and all of the payoffs and subdeals come to light...and the new crowd of wannabe Mayors Promise to Clean up the City....whereas in fact they just want money and power like everyone before them...

[Chicagowill]

10:37 PM on 09/30/2010

The bulk of our Republicans are just as corrupt as the bulk of our Democrats. I just wish for an honest, civic minded politician from either party. I believe Governor Quinn to be one of those, but he's one of the few.

[CosmicIrony]

12:48 PM on 09/30/2010

I wonder what it really means for a city to be bankrupt - can a city be liquidated? What happens to the citizens? Sold in bondage? If a company fails, its assets can be sold off, the employees have to find new jobs, and the company disappears. If a city fails, what can be done?

[techBob]

05:07 PM on 11/17/2010

Guess we'll have to wait and see.

[Levittown]

11:47 AM on 09/30/2010

If local governments don't watch their checkbooks the money going out isn't always for service rendered. Perks,extras for management employees sometimes are very large and undeserving. Case in point. The $ 6.000. a year given to many in the Palm Beaches for auto expense even though the actual amount spent was less than 100 or 200 dollars per year. I am sure the moneys trail when fully investigated nationwide will eventually find many abuses and millions lost.

[JoeBlough]

03:55 PM on 09/30/2010

I'm sure revenue lost to marginal consultants is in the millions, too.

[nycrichie]

08:56 AM on 09/30/2010

I'm positive most states will default like they did during the first depression. Mom & pop will be wiped out, the majority holders of state muni-bonds. All the major Wall Street holders of these toxic assets have been dumping thier holdings....they know what's coming. All the while they are still selling these investments to clients, scammers.

[ntmessage]

08:17 AM on 09/30/2010

The reason the financial system tanked was due to politicians, mostly Bush that allowed Glass Steagall to apply to the secondary markets and leverage up to 100x. The reason the state and local governments are in bad shape? Politicians. Again.

If we really want to fix this, all government employees except police and fire (but including teachers), need to understand that this is our money that pay their salaries. They should all take a 10% pay cut, just like many in the private sector and have the egregious pension system reviewed until the states are solvent.

If not, well perhaps we can now have a real depression without banks to blame. Banks did not cause the mess for anyone that paid attention. It was, investment brokers and mortgage companies and insurance companies along with Fannie and Freddie. We will then see that it was the politicians all along that screwed America.

[rak6748]

04:26 AM on 10/01/2010

Nice try BUT Glass-Steagall was repealed under Clinton, not Bush.

[dukeitout]

12:36 AM on 09/30/2010

Ms. Whitney should be viewed like E.F. Hutton. When she speaks, listen. On 10/31/2007 she exposed the Citigroup mess; and the rest is history.

[shantanum78]

10:34 PM on 09/29/2010

Hate to break it to you, but the states beat the cities to the punch.

[FogBelter]

09:25 PM on 09/29/2010

I was thinking that the reason for Meg Whitman's run for Governor was so she would be in place when the State of California's economy collapses and would ensure that the Bond Holders wouldn't be wiped out via a default.

[RunningBecky]

10:53 PM on 09/29/2010

Well I know she's not doing it because she wants a job. Nor has she ever shown any indication that she cars one bit about people. So yea. She's fighting and spending millions of her money because it makes good business sense. For her. Not for California! Huggs Becky

[alithegreat]

08:36 PM on 09/29/2010

well obviously the answer is more tax cuts.

[GenosseJoe]

09:00 PM on 09/29/2010

Yes, because money taken by government out of economy is largely wasted.

If you disagree that nobody can better manage your money than you, send me half of your salary.

[alithegreat]

10:24 PM on 09/29/2010

well i'm a housewife, so i don't earn a salary, but you are more than welcome to half of the nuthin i earn each year.

hope you enjoy it more than i do, far as i'm concerned, this gig is for the birds. i'm not sure the point of your reply.

[tjconkster]

10:38 PM on 09/29/2010

That's right don't pay taxes...cut the troops pay & benefits....but still expect them to fight YOUR wars...yeah you love/support our troops don't you.....why don't you send half your salary to a soldiers family....then maybe we'll take you seriously...

[enviro1]

05:29 PM on 09/29/2010

I find it sad that most people on this site sit back and argue republican vs. democratic values, when in fact, both sides are corrupt, and both sides have caused the debacle that we are currently in. When you look at the international redistribution of our tax dollars, it is quite frightening....how many major companies have just announced manufacturing in China.....Ford, Caterpillar, GM, Dell, just in the last week.....then you have our government doing the same thing with bills like the clean energy bill....70% of that went to overseas manufacturing and research.....to China, Austrailia, France, Germany and India.....5.6 Billion Dollars....now look at oil......we can't compete because we are sending our money everywhere else and we are putting more and more regulations on our manufacturing here in the country......it is economic suicide by international redistribution of our tax dollars.......pretty soon it won't just be our states that are bankrupt.....

[MrUnlimited]

07:59 PM on 09/29/2010

Your first sentence should be required reading for...EVERYONE. The rest of your post is good, too.

Maybe some people are comforted by the delusion that the "other party" in our 2 party system is the one that's filled with bad people.

[capitaldysfunction]

08:03 PM on 09/29/2010

Both sides are corrupt because our moneyed politics is corrupt. Only one side overwhelmingly supports that mode of campaign finance. Only one side refuses infrastructure improvements and investing in R&D. Only one side supports reducing the deficit and the debt, while simultaneously promoting policies that increase the deficit and the debt. One could dismiss this as politics if the threat to shut the government down if they regain power in the legislative branch were not an even bigger threat to our stability and the fragility of our economy.

Yes, that side is same side whose oversight brought our economy to its knees in the Great Depression and again in the Great Recession. Reagan turned this country's economy into an unstable plutonomy ready for another crash. Please spare me the both sides argument.