The United States of Disintegration
The story of the day must be Steve Kroft’s 60 Minutes segment that aired yesterday under the title “The Day of Reckoning” (see video below). While it’s sort of a shame Kroft didn’t interview, say, California’s outgoing and incoming governors Arnold Schwarzenegger or Jerry Brown, there’s still plenty of good stuff in the show, in particular his conversations with Meredith Whitney and New Jersey Governor Chris Christie.
Whitney predicts -at least- between 50 and 100 municipal and county defaults in the US within the next year. “You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”
Christie is his usual “lovable” blunt self: “I have no money”. Or this gem about public employee pension systems: “I think the general public thinks: I can’t believe anyone gets a pension anymore”. And on the same topic: “If you don’t partner with me to get this done, in 10 years you won’t have a pension”.
Only the Federal Government can go over budget -seemingly- as much as it wants; lower levels of government need to balance their budgets. And they can’t. They live on money they themselves borrow from Washington, and/or that their creditors borrow from financial institutions, just to stay afloat while waiting for what the states owe them. As illustrated by the fact that, as per Kroft, the state of Illinois spends twice as much as it collects in taxes. And even then can’t pay either its employees or its creditors.
A strong indication of how hard it will be to even begin to solve these issues comes from Meredith Whitney. When Kroft asks her: “How accurate is the financial information that’s public on the states? And municipalities?” , Whitney says: “The lack of transparency with the state disclosure is the worst I have ever seen.” “Ultimately we have to use what’s publicly available data and a lot of it is as old as June 2008. So that’s before the financial collapse in the fall of 2008.”
In other words, it’s safe to assume that the financial situation the majority of states is in is worse, if not much worse, than is known today. Still, Meredith Whitney thinks states will honor their debts. Only, they will achieve this by squeezing the last drops of financial blood from those levels of government that are lower than they are: counties and municipalities. I wonder if Whitney’s right here, but if she is, that will be one painful squeeze at municipal and county level. And a very temporary “solution” to the problems.
Steve Kroft concludes: “No one is talking about it now, but the big test will come this spring. That’s when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out. The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.”