Monday, January 31, 2011

Threat of US Municipal Default


The debt being carried by state and municipal governments in the United States generates a risk massive financial problems for the U.S. economy, according to one widely published banking analyst. Meredith Whitney manages her own advisory firm, and is a frequent contributor to CNBC, Fox Business, and Bloomberg News programs.

The state and local governments have been getting by on the billions of dollars handed out by the federal stimulus programs, but the debt is making investors on Wall Street nervous about another big bailout.

“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy,’ Whitney said.

Whitney added that people are not paying attention to the state of the local governments, “Cause they don’t pay attention until they have to.”

“There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” Whitney predicted, which could include 50 to 100 defaults adding up to hundreds of billions worth of damage to the financial system (Meredith Whitney: State Economic Crisis Is being Ignored; Crisis on the Way,” http://www.streetinsider.com, Dec. 20, 2010).

In a rebuttal, a spokesperson for the National League of Cities wrote:

“The municipal bond market remains strong for a variety of reasons: Local and State debt levels are low; borrowing is longer-term and predictable; local and state governments have balanced budget requirements; rules require preemptive steps to prevent defaults.

“Sky-is-falling reports about the municipal bond market are a distraction from a much more common and economically significant story about cuts in other arenas – cuts in services that impact the quality of life in communities; job losses in the public sector; cuts in pension and health care benefits for employees and retirees as local and state governments seek to rein in liabilities” (“Crying Wolf On Muni Defaults: 60 Minutes And Wall Street Analyst Miss The Real Story,” press release from PR Newswire quoted on www.thestreet.com, Dec. 22, 2010).

Inspired commentary

There is no doubt that money, representing security can be a major motivating factor the the behavior of individuals and groups. Some future crisis will ignite a call for a Sunday law to try to win God’s favor:

Those who honor the Bible Sabbath will be denounced as enemies of law and order, as breaking down the moral restraints of society, causing anarchy and corruption, and calling down the judgments of God upon the earth. ... Ministers who deny the obligation of the divine law will present from the pulpit the duty of yielding obedience to the civil authorities as ordained of God. In legislative halls and courts of justice, commandment keepers will be misrepresented and condemned (The Great Controversy, p. 592).
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