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Friday, January 21, 2011

The next financial catastrophe

Be wary of municipal bonds. This could easily be the next financial crisis. States all across the country have been overspending, short changing their pension obligations, and borrowing more money than they can repay. Rather than raising taxes and owning up to the obligations made in prior years, states are looking for a way to seek bankruptcy protection. See the article in the NYT today.

Even some of the most conservative states are in terrible shape. Many people consider Texas as the epitome of fiscal conservatism, but it turns out they are no better off than California, NY, Illinois, or New Jersey, according to Paul Krugman.

It also brings up a question of states rights. If the States declare bankruptcy and accept a federal bailout ala General Motors, does this  mean they forfeit their rights on certain issues? This is a very messy situation that could soon get messier.


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