Feeling Depressed?

This past week there was all sorts of good news about the economic recovery spinning forth from National Public Radio. In a sure sign the recovery is moving forward, Obama has decided to replace his recovery oversight team with some sort of a new job creation team. Apparently the recovery process is forging full steam ahead in the housing sector as well, with home sales on the rise nationwide. Now, increased sales would have nothing to do with the fact that there’s an unprecedented wealth of repossessed property hitting the market with hugely eroded value, of course… or that excessively positive spin from the media is influencing investor buying?

The media seems desperate to report something positive about the economy these days. I understand the draw. People are tired of the bad news and the tough times. The idea that things could get worse or go on like this for much longer is frightening. But isn’t the function of journalistic reporting to cut to the truth of the matter? I am coming to completely distrust anything positive I hear from the mainstream, even NPR. The atmosphere is verging on Orwellian these days, but with the ludicrous conflict of interest at play regarding sponsors such as the National Association of Realtors backing public radio and the commercial media already beholden to the designs of big business, it only stands to reason we are not going to get a clear picture of where the economy stands.

Surprisingly, one recent article from CNBC did manage to cut through the chatter with a title declaring Housing Market Slips Into Depression Territory.  The article itself was perhaps not wholly accurate as it described the economy as revving back to life with “signs of hiring on the horizon.” That remains to be seen. I suppose it depends on the distance of that horizon, but I don’t expect to see any bold improvement for a while without the development of some amazing new energy technology or such to drive it. Nonetheless, it was refreshing to have the press acknowledge the severity of the situation we are steeped in.

According to the CNBC article, home values have now seen a worse decline than they did during the Great Depression, having hit a 26% reduction nationwide with home prices still falling. While it wasn’t addressed in the article, the housing market and the investments attached to it are what led us into this downturn, and falling prices continue to put downward pressure on the greater economy. The fact that housing is now worse off than it was during the Great Depression suggests our economic engine may not be revving back to life with quite the verve the press would have us believe.

I suppose it is wise for the press to be careful. If you subscribe to the school of behavioral economics you understand the influence emotion and attitude have on the market, and it can be argued that this is just cause for prudence in reporting. However, there are multiple and very reputable economists, investors, analysts and scholars alike who are calling the situation we’re in a depression.

Nobel Prize recipient and Professor of Economics at Princeton University, Paul Krugman, warned in a New York Times article published last July, “We are now, I fear, in the early stages of a third depression.” Though he has since come to believe the severity of the downturn was tamed to some degree by fiscal stimulus, he again referred to the economy just yesterday on his Conscience of a Liberal blog as being in a depression.

Last month 87-year-old promoter, trader and investment letter author Harry Schultz warned in his final issue of the International Harry Schultz Letter “Roughly speaking, the mess we are in is the worst since the 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that.” He should know, having grown up during the Great Depression.

Former US Budget Director for the Reagan administration David Stockman issued an alarming warning recently, advising “Get some gold, beans, water, anything that Bernanke can’t destroy. Ron Paul is right. We’re entering a global monetary conflagration. If a sell-off of U.S. bonds starts, it will be an Armageddon.”

Telegraph columnist Ambrose Evans-Pritchard stated last year “The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.” This statement was issued when we all still thought we were dealing with a mere 700 billion dollar stimulus package, before the new Dodd-Frank reform  law exposed the trillions in stimulus the Fed had secretly poured into the global economy.

Kevin Giddis, Managing Director of Fixed Income at Morgan Keegan revealed last May “There is big money making big bets that at a minimum we’ll have a [second] recession if not a depression that could last for years.” Always follow the insiders to see where the real action is taking place.

Trends forecaster Gerald Celente warns we will see an unprecedented collapse of the US economy by 2012. “We’re going into the Greatest Depression, and it’s going to be ugly.” Celente believes we’d already be in the throws of such a depression if it hadn’t been for those trillions the Fed covertly doled out to prop up the world, but calls the stimulus effort unsustainable and believes a crash is imminent.

"The Soup Kitchen," Norman Wilfred Lewis, ca. 1937

These are just a few examples of the voices we generally aren’t hearing on the radio and television. The list goes on and on across the political spectrum, and alarms have been sounding for years now. Economist Dean Baker of the Center for Economic and Policy Research in Washington DC issued warnings as early as 2002 that an emerging housing bubble would threaten the development of a downturn rivaling the Great Depression. Yet we still hear little discussion about the possibility of economic depression. So the question arises, what is a depression anyway? Would we even recognize one if we were sipping it from our soup bowls?

Ray Dalio is one of the world’s leading hedge fund managers with clients including world governments, central banks, pension funds and endowments. In 2010 he was the most profitable hedge fund manager of the year. He defines economic depression as a specific process which is fundamentally different from the process describing recession. He prefers to avoid the term “depression” because people tend to characterize it by the bread lines, shanty towns and other stereotypical images they associate with the Great Depression of the 1930’s. Instead he prefers to use a term he coined himself, calling it the “D-Process.”

In an interview with Barron’s two years ago he described how economic depression differs from recession.

“Most people,” says Dalio, “think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.”

In an article about his company Bridgewater, in Fortune magazine a month later, Dalio warned the US was entering into an economic depression.

“In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve’s benchmark rate is now hovering just above zero. To Dalio, therefore, it’s clear that a D-process is under way,” the article states.

Dalio’s definition of the depression process definitely characterizes today’s economy accurately, while the definition he gives for recession does not. Many today are unwilling to refer to our economy as being in a depression because it doesn’t exactly resemble what we saw in the Great Depression. Where are the breadlines? Where are the disenfranchised masses poking about for spare dimes? Well, every depression is going to look different depending on the various forces in place at its inception. Today, for example, we have all the social programs set in place after the Great Depression to help us avoid events we saw in the past. Today’s bread lines have manifested as a massive increase in the use of food stamps. Today’s dimes for the disenfranchised are delivered as checks via the unemployment insurance program.

Dalio also makes the distinction that while recessions are relatively common, depressions are not. We tend not to understand the phenomenon well because of this. We also tend to become overly confident as the event of depression slips into the realm of history that it will never happen again, and we lose our ability to recognize it when it does. The fact is, no one saw the Great Depression for what it was until years after it was over. Hindsight is 20/20, as they say.

Whether or not you want to call today’s economic situation a depression, we can certainly agree it is at the very least depressing. While the elite discuss the technical aspects in ivory conference rooms the people on main street continue to suffer with diminishing wages and unemployment that won’t budge, with increasing foreclosures, with lost benefits, lost prospects and debt they are unable to service. No one  knows exactly what lies in store for us ahead, but some of those discussing economic depression have issued some pretty alarming warnings. I suppose I’d rather be safe than sorry.

I return to a quote from the unorthodox economist Robert Prechter of Elliot Wave International who, suspecting we are headed for a depression worse than any we’ve known before, has issued the following advice:  “Winter is coming. Buy a coat. Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

New York Times
The Conscience of a Liberal
The Demand-Side Temptation
Paul Krugman
January 25, 2011
http://krugman.blogs.nytimes.com

CNBC
Housing Market Slips Into Depression Territory
Cindy Perman
January 11, 2011
http://www.cnbc.com

Market Watch
Harry Schultz’s Last Testament
Peter Brimelow
January 10, 2011
http://www.marketwatch.com

Business Insider
23 Doomsayers Who Say We’re Heading Toward Depression In 2011
Michael Snyder
June 29, 2010
http://www.businessinsider.com

Fortune
The World’s Biggest Hedge Fund
Brian O’Keefe
March 19, 2009
http://money.cnn.com

Barron’s
Recession? No, It’s a D-process, and It Will Be Long
Sandra Ward
February 9, 2009
http://online.barrons.com

Crystal Visions 2011

Happy New Year!  Well, the holiday shopping season turned out to be stronger than last year’s and perhaps the best for retailers since 2007.  And yes, Virginia, Santa Clause is now on Facebook.  Internet shopping was the strongest ever, rising 12% from last year, so perhaps that explains all those empty parking spaces and short checkout lines at the malls.  Now, as we put our decorations back into their boxes and our wrappings into the recycling bin, we begin to wonder what is next.

This is the time of year I like to gaze deep into the crystal ball in hopes of catching a glimpse of what might lie ahead.  The time line regarding how things will play out is not always clear, but the crystal ball will undoubtedly reveal something of where forces brewing today will lead us tomorrow.  Sometimes things take longer to transpire than anyone might have initially imagined, and often events unfold differently than expected, but we can at least gain clarity regarding the seeds of the issues scattered about us today that may eventually take root and bloom.  So, without further adieu… let us dim the lights and join hands around the table, and allow the vision to reveal itself.

Crystal ball says…

Housing market will continue to crumble.  The continued crash will threaten the stability of the overall economy perhaps causing another dip into recession, though this may take a while – maybe into the following year.  Housing bubbles pop in Australia, Canada and possibly China.

US municipal bond market thrown into crisis by states unable to service debt.  Cities and counties face financial peril.

Europe thrown into further crisis as Spain’s debt problems drag down EU system.  Euro is threatened, may face collapse.  Debt problems in Italy come to a head.

Speculation in commodities continues, but bubble pops before too long.

US banks face continued closures as housing tanks and problems in MERS/foreclosure fiasco are exposed.

Unemployment remains high.

Lending standards continue to tighten, availability of credit continues to shrink.

Further Quantitative Easing… more about covert monetizing and lending, less about public heroics and bailout plans.

War fatigue… people question the value and sustainability of war in Afghanistan.  Non-interventionist sentiment grows amongst public and youth, as war presses on.

Public pension crisis gains more publicity.  Increasing pressure on unions to restructure benefit plans to match those of private sector.

Rising poverty leads to rise of political awareness and unrest.  Protest.  Rise of public interest in economics and policy.

Issues of liberty surface as public is squeezed by government looking to make up for deficits.  Anti-terror security efforts continue to encroach upon privacy.  Libertarianism sees growing popularity.

Counterculture movement amongst young adults.  Internet connects global movement.  Rise in grass roots political activity, arts and innovative small entrepreneurship.

Green, cyber and bioengineering technologies see development.

Loss of faith in government and present leadership.  Obama criticized as political leader yet appreciated as motivational speaker.

Evolution of the spiritual.  Includes focus on ethics, atheism, new exploration, as well as the return to and reinterpretation of the classics.

Fashion forward… archetypes of warrior, explorer, shaman, monk and intellectual.  Hard modern lines begin to soften.  Irony refined.  Earnestness emerges.  Twitter poets.  Dada.  Naturalistic and unusual dominate idealistic and artificial (boob jobs reversed, crooked teeth are cool).  Hair in bangs and layers.  Troubadours.  Textures.  Earth, stone, metal and faux fur.  Post-punk preppy.  The ant and the grasshopper.  Causes and comeuppance.  Micro farming.  Neo-Romantic sentiment.  Nostalgia.  People return to the cinema, and live entertainment thrives with development in alternative venues.  Cozy.  Hand crafted.  Recycled.  Frugal.  Less is more.

Chicago Sun Times
Holiday Retail Sales Could Exceed Record
AP
Dec 28, 2010
http://www.suntimes.com/business/3043522-417/season-holiday-stores-sales-shopping.html

Mashable/Business
2010 Online Holiday Shopping Season Was Biggest Ever
Jennifer Van Grove
January 5, 2011
http://mashable.com/2011/01/05/online-holiday-shopping-season/

Five Quarters of Growth

Is anyone doing any holiday shopping yet?  I can’t believe how empty the parking lots have been across the suburbs of Los Angeles lately.  Perhaps we’ve all taken to the computer this year, finally.  The deals and selection are certainly superior, and it sure beats driving through traffic and rain.  But if empty parking lots are any indication of what holiday sales are doing, we’re sure to see some anemic numbers coming down the pipeline for the retail sector this Christmas shopping season.

I just heard on Marketplace yesterday that the economy has actually recovered more than anyone realizes.  Apparently it has actually grown over the last five quarters and retail sales numbers are up to pre-recession levels.  Wow, if that is indeed the case I have to ask where is this growth coming from and is it sustainable?  I ask only because there has been no marked improvement in the job market, while the middle class continues to slowly slip further toward oblivion.  So what’s been funding this new growth and manufacturing?  Is it all  the effect of stimulus money?  Are the super rich going for broke with their holiday shopping this year?  Consumer confidence is important in getting folks out  and spending – and apparently confidence has grown as well – but I wonder how it can sustain the economy if people aren’t actually earning any more so they can act upon that confidence with integrity.  Perhaps the weaker dollar since QE2 has increased sales and demand for American products abroad enough to compensate for our lack of purchasing power at home.  I did read that sales are up on exports recently, but we’re talking about five quarters of growth here.

Christmas is coming, the geese are getting fat
Pleased to put five quarters in the old man’s hat
If you haven’t got five quarters a credit line will do
If you haven’t got a credit line then God bless you!

Back at the ranch, people are letting their home loans default and waiting to see what happens.  They are paying no mortgage and no rent, and they are finding they’re able to stay put in their homes for months and even years for free without consequence.  Newly established laws that allow for banks to be fined for failure to keep foreclosed properties up to snuff mean banks are just as happy to let defaulting borrowers keep their names on the paperwork as long as possible.  Not to mention banks avoid any write downs those properties would require if they were to be officially reclaimed, which would blow their mark-to-make-believe accounting and force their failing hands at the ponzi poker table.  Not to mention, also, banks are facing an unprecedented tsunami sized wave of foreclosures hitting their books, which they are entirely ill equipped and understaffed to handle processing and getting to market.  Not to mention, in addition to that, there is nobody willing to buy most of the defaulting property even if it does get to market without improved job stability and major further reductions in price, especially with interest rates on the rise in the wake of the Fed’s latest economic injection.  Not to mention, furthermore, pressure to slow the foreclosure process is mounting due to moratoriums being considered and in some cases implemented by the banking industry in response to the recent controversy over fraudulent and illegal practices concerning existing foreclosures.  In other words, there is not much incentive for banks to push foreclosures through right now, so they just let people stay put.

On the other side of the equation strategic default is on the rise, where people who actually can afford to pay their mortgages are deciding not to for the financial advantage.  In most cases these homeowners are underwater, where they owe more money on their property than it is worth because of deflating prices in the housing market.  Interestingly, according to a new white paper coming out of the Philadelphia Federal Reserve, most homeowners deciding to default in this way are doing so on their primary mortgages while opting to keep payments current on their second liens.  Rather than paying the first mortgage in order to reduce house payments and avoid foreclosure, a far larger percentage are opting to let their first mortgages go while keeping their second liens current in order to keep their Home Equity Lines Of Credit (HELOCs) available.  On top of this, for some unknown reason banks are not punishing people who default on their first mortgages by limiting their access to home equity credit.  People are basically being allowed to keep access to lines of credit that are based on imaginary wealth, and they are doing just that in order to use that credit to buy more stuff.  This wealth is imaginary first because the equity collateral supporting these home lines of credit is either nonexistent or diminishing while credit limits remain unaffected, and secondly because the risk attached to the defaulting of these borrowers is not reflected in the availability of credit (in fact, in 3 to 6% of cases HELOC limits have actually been raised despite default).  These lines of credit represent claims to wealth that cannot be accounted for.  Eventually someone in the chain of consumption will be left with no chair when the music stops playing.  Someone will take the loss.  If history is any indication of what lies ahead, it will most likely be the US taxpayer who’s left with any unpaid bills… that is to say, the people of the middle class.  So the insanity of housing bubble finance lives on.

I would venture to say consumption continues to find considerable funding from deterred housing costs.  Essentially, millions of people are living for free and using those diverted dollars as disposable income.  Many are funding their spending with HELOCs that have no viable collateral behind them.  This boosts consumer spending and gives the appearance of growth, but it is definitely not a sustainable recovery.  The denial is astounding here.  Denial is a symptom of any addiction, and we are addicted to consuming.  Our capitalist culture relies upon it.  You can call it “retail therapy,” or an American “birthright,” or you can just “shop till you drop.”  We in the U.S. are chasing the dragon of accumulating bigger, better, faster and more.  We were saving our pennies for a while there, but we have begun to show some slack in that effort.  We are back to spending and running up credit when there has been no increase in real wealth to base it on.  For some of us without income it is a survival strategy.  Many of us are still jonesing to keep up with the Jones’s and we just can’t seem to put the brakes on it.  I do think there is a long term shift in consumption underway, but this sort of large scale social change ebbs and flows in waves of contraction and not without a good deal of resistance.  However, spending what we do not have is a game that cannot continue for long at this point.  It’s tough to do without, but the well is running dry and when it does there will simply be no water left to drink.  Denial allows us to postpone facing the truth of our circumstances, but fundamentally it does nothing to change them.

So, I’m pretty excited cause I’m fortunate enough to have had the means to do a little Christmas shopping this year and it was a lot of fun.  I’m pretty much done actually, and just in time to enjoy having the kids home from school.  It involved no credit card debt I couldn’t pay off in full when the bill arrived, and no home equity line of nothin’ (I’m a renter!).  With the deflationary trend in toys, clothes, personal and household items going on these days there’s no reason that with a little effort you can’t buy fabulous quality and name brand gifts for a fraction of their original value.  I managed to score some amazing discounts this year- and I’ve got two young children and no babysitter, so shopping doesn’t come easily nor does the time needed to do it.  Now I can focus on the reason for the season – the Winter Solstice!  Oh, and the Jesus story is lovely as well – the pure potential of that darling little baby ringing in the new.  That little family had nothing but love and some borrowed hay to sleep on.  No credit cards.  No Home Equity Line of Credit.  Not even a hotel room.  ‘Tis the season less is more.

American Public Media
Marketplace (Audio)
December 17, 2010
http://marketplace.publicradio.org

CNBC
Discover Profit Beats Forecast; Credit Card Use Up
Maria Aspan
December 16, 2010
http://www.cnbc.com

Housing Wire
Strategic Defaulters Opt to Continue Paying on Second Liens
KERRY CURRY
Dec 14, 2010
http://www.housingwire.com

The State of The States

Meredith Whitney is concerned about the state of the states.   She’s the financial analyst who rose to fame from obscurity after accurately predicting the meltdown of the banking industry three years ago.  After two years of exhaustive research her New York based company, Meredith Whitney Advisory Group, recently released a report entitled A Tragedy of the Commons which assesses and rates the state of finances amongst the individual U.S. states.  She sees the situation with the states today as parallel to that the banks were in before the crisis, and she’s warning of another massive taxpayer funded bailout to come.  Based on the information uncovered during the investigation Whitney is now warning of systemic problems that may lead to crisis in the municipal bond market and the risk of state default.  The states are highly leveraged to the housing market due to their dependence on tax revenue, and just as Whitney predicted months ago it is now evident the housing market is indeed heading into a double dip.  This implies, of course, that tax revenues will continue to shrink and place additional stress on the balance sheets of state budgets.

Basically, states are currently spending 27% more than they are earning in taxes.  Municipal debt has doubled since 2000.  State spending from 2000 to 2008 grew 60% while revenue grew 45%.  For the fiscal year of 2011, the gap in state budgets stands at $121 billion and the total could exceed $200B without Federal help.  States constitutionally have to maintain balanced budgets.  They have used off-balance-sheet leverage and compensation schemes that borrow from the future, mostly in terms of raiding pensions, to create the illusion of balanced budgets.  Whitney calls it “generational robbery.”  Balanced budgets and abundant services get politicians reelected, and so that became the priority during the housing boom years when property values and high salaries were generating exponentially growing revenues.  Hiring for state jobs and increased spending on local programs makes for powerful well-liked politicians… at least in the short run while the going remains good.  Time has now run out on the sort of ponzi-structured approach it took to maintain the expenditures of such a plan.

It should be noted that not all the states are fairing badly according to Whitney’s report.  Texas, Virginia, Washington and North Carolina are holding their own quite nicely.  The states with the worst ratings are California, New Jersey, Illinois, Ohio, Michigan, Georgia, New York and Florida.  California is by far the most precariously perched, by virtue of its sheer magnitude.  It represents the world’s eighth largest economy if it is measured as a country, and it is highly exposed to the housing market with very few resources left to pull funding from.  Some states like Florida are in worse shape in terms of foreclosure problems, but Florida has the option to implement an income tax to help counter any further losses in property tax revenue.  California has already played all its cards and is in a very tenuous position.  It already has an income tax.  Its sales tax is one of the highest in the country.  The legislature already took a twenty percent pay cut some time ago.  The option to legalize, industrialize and tax its largest cash crop- marijuana- failed at the polls.  There may not be a lot of options left besides making further cuts to government spending, privatizing services and restructuring pension funds.  Raising taxes is a limited option in a state with a 12.4% unemployment rate, twice that number in underemployed, and a tanking housing market.  Additionally and of major importance, California has already completely raided its pension system funds.  Whitney predicts California and likely the other worst rated states in the report will soon be facing the risk of default.

Can a state default?  Will California face bankruptcy?  Legally, no.  In California bondholders are constitutionally guaranteed payment.  Only public schools have greater priority in their claim to state treasury funds.  Public pension funds are also guaranteed.  States cannot default on their debt technically, but effectively that is in fact the risk we are facing because there is just no money there.  Legally, US taxpayers are required to make up for any shortfall in pension funds.  Legally, everyone’s going to be required to pay higher taxes to compensate for budgetary shortfalls amongst the failing states.  That is what we’re up against.  This will not be an easy solution to implement, however.  It may not even be viable.  Citizens in fiscally conservative states like Texas who’s austerity and responsible spending got them through the crisis relatively unscathed are probably not going to be too happy about paying higher taxes to cover the tab for what they view as irresponsible spending sprees in California and the like.  That would be a difficult move politically.

Beyond taxing the people, the government will look at the possibility of cutting spending.  This will come down to cutting back and eliminating services.  The main problem with this is that it will destroy jobs and lead to higher unemployment, which would be very dangerous to the health of the greater economy.  The country is already seeing the worst unemployment situation since The Great Depression.  California is currently at a 12.4% unemployment rate.  What will happen if that rises?  There is no easy solution here.  Also, implementing cuts to government services and jobs will be strongly resisted by unions and labor advocate groups.  Again, this may not be politically viable.

States are protected by a Federal safety net, so the real pressure will fall on local towns.  Risk is not with the state debt service.  It is with the local municipal debt service and cities.  Expect to see damage there.  A third of local municipal funding comes from the states.  When a state gets into trouble it will protect itself and neglect the municipalities.  Support of the municipalities will be compromised.  The northern California city Vallejo actually declared bankruptcy two years ago when the cost of police and firefighters soared while the housing slump cut into tax revenue.  Cities in California, New Jersey and other hard hit states have dismantled whole police departments in favor of contracting out to neighboring cities at less of an expense.  These are the kinds of situations we can expect to see more of as well as a possible crisis in the municipal bonds market and further stress in regional banking.

In an op-ed piece published in the Wall Street Journal in early November, following the release of her latest report, Meredith Whitney revealed she had uncovered information showing the bailouts of states have actually already begun.  The first attempt at creating a solution to the problem was to sidestep altogether the issues of raising taxes and cutting spending, and avoid at all costs calling the effort a bailout.

“Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds,” she wrote.  “Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds.  Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels.  California is not alone.  Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.”

But of course!  Lure rich investors with subsidized profits!  Clever, clever.  Most subversive.  So, Wall Street secretly saves the day.  Those guys are like heroes.  You know, now that’s why they get paid the big bucks.  Uh, for now that is… can’t get into it right here, but Ms. Whitney also predicts a huge number of layoffs in the financial sector next year.  Hush, hush…  (Of course, the bill on those interest subsidies lands on the tax payer, as usual, so go ahead and give yourself a pat on the back and a big fat holiday bonus too!)

The Build America Bonds are not enough, though.  The government is just kicking the can down the road and buying time on making the hard decisions necessary to turn this thing around.  Meredith Whitney finds the level of complacency around the issue alarming.

“Most assume,” she continues, “that the federal government will simply come to the rescue of the states, without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we’ve seen thus far, would amount to constantly putting out recurring fires.”

Whitney suggests states need to take responsibility now and come up with the hard solutions.  As a resident of California I can say I am skeptical at best that this will be the plan of action in the hardest hit of states, if past experience is any indication of what’s likely to come.  The budget continues to be based on outdated revenue statistics and balanced by sucking imaginary revenue from the future.  Of course this is not sustainable, but I imagine the California can will be kicked till it hits some sort of rock or a hard place.  Perhaps the other states in trouble will take a more reasonable approach.

Meredith Whitney Interview on State Finances (Video)
September 30, 2010
http://www.bloomberg.com/video

The Wall Street Journal
State Bailouts?  They’ve Already Begun.
Meredith Whitney
November 3, 2010
http://online.wsj.com

CNBC
States Are Poised to Be Next Credit Crisis for US: Whitney
Jeff Cox
September 28, 2010
http://www.cnbc.com

Los Angeles Times
Maywood to lay off all city employees, dismantle Police Department
Ruben Vives
June 22, 2010
http://latimesblogs.latimes.com

Bloomberg
Vallejo, California, Plan to File For Bankruptcy
Michael B. Marois
May 7, 2008
http://www.bloomberg.com