The next big financial crisis to hit the U.S. may come as a result of overstretched state budgets, according to a new report from influential financial analyst Meredith Whitney.
Whitney, who just a few years ago correctly predicted the nation’s big banking crisis, makes the case in her 600-page report, “The Tragedy of the Commons,” that many of America’s largest states are suffering from crippling debt brought on by the use of budget gimmickry and unsound accounting practices. The accumulation of so much state debt, in a relatively short period of time, could cause some localities to default on their bonds and further complicate the nation’s already slow recovery.
Perhaps even more concerning, however, is Whitney’s prediction that the looming crisis may require a federal bailout, which would make for “an incredibly divisive issue.”
For the few states that earned high marks in Whitney’s report, namely Texas and Virginia, a federal bailout would mean that states who have exercised spending restraint and sound judgment could be on the hook for other states reckless spending habits-an act that promises to reward failure at the expense of success.
– James Quintero