“60 Minutes” recently did a piece on the financial situation of state and local governments. What we could be looking at is another financial meltdown in the U.S., caused by municipal government bond defaults. What this story suggests is that when this happens (Meredith Whitney, a financial analyst who was interviewed for this piece, said we will see 50-100+ significant municipal bond defaults in the next 12 months), it will have been caused by benefit and pension obligations that states are now legally bound to honor for state and municipal employee unions. The financial losses for bondholders will be in the hundreds of billions of dollars, unless they are bailed out by the federal government (states don’t have the reserves to cover these losses, for the most part), and it’s looking like the federal government is not going to come to the rescue this time. It’s got its own financial problems. This will not only have implications for local services that are currently offered, it will also negatively affect the financial markets. It sounds like the financial sector (big banks) will be one of the sectors hit again, since they are significant holders of municipal bonds. This is advanced warning so that we can prepare for another financial collapse. I suggest we take heed.
Another financial crisis looms