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Drowning in Debt: Are States Dangerously Close to the "Crisis Phase"?
A Potential Comparison to the Sub-prime Mortgage Meltdown

By Bob Stokes
Tue, 07 Dec 2010 15:30:00 ET
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What could be as bad as the sub-prime mortgage meltdown? After all, that crisis supposedly triggered what nearly became a global financial Armageddon in 2007-2008. Well, here's one "as bad as" candidate recently in the news:
"...the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
"Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones..."
New York Times (12/5)
Stories about state and city debt have dribbled out here and there, but you don't see them leading the evening newscasts or headlining front pages often.
Nonetheless, the above-quoted New York Times article features credible voices on the subject.
Financier Felix Rohatyn played a major role in the debt restructuring that helped New York City avoid bankruptcy in the 1970s. He says the wolf is at the door for many local and state governments, and warns that "the imbalances are so large in some places that the federal government will probably have to step in at some point...'I don’t like to play the scared rabbit, but I just don’t see where the end of this is.'"
Few individuals are in a better position to know the financial condition of states than Scott Pattison, director of the National Association of State Budget Officers. He says the financial condition of states next year may turn out to be “the worst year of this four- or five-year downturn period.”
Bank analyst Meredith Whitney came to the fore with her warning about the fragile stability of banks -- before the 2007 financial crisis began. The same Times article reports that Whitney sees a parallel between the pre-crisis banks dilemma and state and local governments now.
The Elliott Wave Financial Forecast has kept subscribers well apprised of this developing story. Here's an excerpt from the July 2010 issue:
"According to the Center on Budget and Policy Priorities, state budget deficits will balloon to nearly $112 billion in the next year. The projected deficit undoubtedly understates the predicament, as it assumes a continued economic recovery. As the economy turns south again, state and local governments will contribute powerfully to the slide. With $787 billion in federal government stimulus spending winding down, unemployment waxing and depressed residential real estate values being joined by commercial real estate declines, the tax take by state and local municipalities will shrink like never before."
The question is: Will the financial problems of state and local governments soon reach critical mass where we "suddenly" have another potential financial Armageddon on our hands -- similar to the sub-prime mortgage debacle?
If so, does Uncle Sam have the wherewithal to come to the rescue again? After all, 46 states have budget shortfalls, according to the Center for Budget and Policy Priorities.
Is it conceivable that one or more states or cities will default on their debt? Keep in mind, practically no one thought our largest financial institutions were vulnerable either.
The recently-published December issue of The Elliott Wave Financial Forecast tells you what "will take almost everyone by surprise, even though the buildup has been long and deep."

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