A Potential Problem Few Are Talking About

November 11. 2010

Are you prepared for this kind of scenario?

According to a research report by Meredith Whitney1, the government, media and investors are all but ignoring the financial crisis currently being faced by the States. State deficits amounted to $200 billion in 2009 and another $200 billion in deficits are expected in 2010. Plus, estimates are that pension funds could be $1 trillion under funded.

The Federal government is currently subsidizing States (through direct money transfers, etc.) to the tune of 22% of their budgets. At the same time, local governments have become dependent on State funding (which appears to be in trouble.) Also, many of the Federal subsidy programs will run out in June 2011.

Why no concern? Everyone expects the Federal government to bail them out. Times are changing. Here is Meredith Whitney’s view:

“I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a Federal response.”

This would have a very big impact on the market. By the way, Harrisburg, PA has just hired a law firm to examine the possibility of filing bankruptcy.


1 Meredith Whitney Advisory Services,