The Debt Crisis Spreads To Cities And States

The housing crisis that was created by the federal government encouraging banks to make risky loans may have been the immediate trigger to the economic problems we have, but the roots of the issue go much deeper. The fact of the matter is that we’ve spent much more money than we have in this country, we’ve done it across every level of our society, and we’ve done it for so long that we’ve completely lost perspective.

Most of us have focused on the mess that the federal government has been making of the budget in D.C. Unfortunately, many of our city and state governments have been every bit as irresponsible as the Feds:

More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.

“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told the CBS 60 Minutes programme on Sunday night.

“There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults — more. This will amount to hundreds of billions of dollars’ worth of defaults.”

New Jersey governor Chris Christie summarised the problem succinctly: “We spent too much on everything. We spent money we didn’t have. We borrowed money just crazily. The credit card’s maxed out, and it’s over. We now have to get to the business of climbing out of the hole. We’ve been digging it for a decade or more. We’ve got to climb now, and a climb is harder.”

American cities and states have debts in total of as much as $2tn. In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (:£1.1tn) this year.

…US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, apocalyptically titled The Day of Reckoning.

Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population. The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.

The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments. The University of Illinois alone is owed $400m, the CBS programme said. The state has a 21% chances of default, more than any other, according to CMA Datavision, a derivatives information provider.

California has raised state university tuition fees by 32%. Arizona has sold its state capitol and supreme court buildings to investors, and leases them back.

We’ve spent way too much in this country, for way too long, and there’s a reckoning coming. The pain involved is going to be tremendous — and that’s exactly how it should be. We don’t want the Federal Government to be an enabler and show up with our tax dollars to make sure that these disasters don’t hurt too many people. That’s not just because the federal government’s broke and has its own spending problems; it’s because at some point, there needs to be some consequences for this kind of behavior. We have a lot of people in this country who believe that we can spend a practically limitless amount of money on any “good idea” they can think of and that somehow, some way, it’ll all just “work out.” The sooner people learn that’s not how the real world works, the better off the people footing the bills in this country will be.

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