The next chapter in the U.S. financial crisis

 

“Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again,” the New York Timesreported on Saturday. “Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.”

Despite claims by some analysts that the national economy is recovering, continually burgeoning state debt would indicate that municipal bankruptcy is becoming more and more likely.

Next year is predicted to get worse, but the danger doesn’t end there. “Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt—several trillion dollars’ worth, with much of it off the books and largely hidden from view—that it could overwhelm them in the next few years.” The Times continues:

Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with ious last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring.

Meanwhile, Arizona has sold off its state buildings for millions of dollars upfront, but the cost of leasing the buildings back over the next 20 years will result in $400 million more in interest in the long run. States like New York and New Jersey are shortchanging their pension funds, while Idaho and other states are cutting back on state aid programs, firemen and police forces.

“[S]ome states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed,” the Times continues. “It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.”

Even if complete default is unlikely, a more probable danger is the collapse of interest by investors willing to finance their debt: “That would force a crisis, since states cannot operate if they cannot borrow. Such a crisis could then spread to healthier states, making it more expensive for them to borrow, if Europe is an example.”

Despite this worrisome trend, “credit ratings of a number of local governments have improved this year, not because their finances have strengthened somewhat, but because the ratings agencies have changed the way they analyze governments,” notes the Times (emphasis ours). One reason credit agencies still rate states as lower-risk investments is due to the belief that the federal government would be even more likely to bail out faltering states than bankrupt corporations.

The problem is, continues the Times, these are the same rating agencies that “also dismissed the possibility that a subprime crisis was brewing.”

“There are eerie similarities between the subprime debt crisis and the looming municipal debt woes,” the article continues. Among these are the fact that both municipal bonds and the housing market were once considered sure things, and that much of the actual debt of states and cities remains off the books and hidden, similar to the subprime debt crisis.

The result is that “states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists ….”

While some continue to bury their heads in the sand, an ever increasing number of analysts are becoming more alarmed at the nation’s seemingly unsolvable financial crisis—something the Trumpet has warned about for years.

“Most financial crises happen in unpredictable ways, and they hit you when you’re not looking,” said former Under Secretary of the Treasury Jerome H. Powell. “This one isn’t like that. You can see it coming. It would be sinful not to do something about this while there’s a chance.”

Said Felix Rohatyn, one of those instrumental in saving New York City from bankruptcy in the ’70s: “It seems to me that crying wolf is probably a good thing to do at this point.”