Will Bankrupt Cities be the 2011 Story to Displace Housing Decline?

I’m starting to see a few reports on this and the implications could be significant. States like California have been in big financial trouble for quite some time. However, some towns and cities are under massive financial strain as well.

Research analyst Meredith Whitney—who correctly predicted the credit crunch—was on 60 Minutes in December with a warning that between 50 and 100 American cities could go bankrupt in 2011, which would cost hundreds of billions of dollars. This would include billions in municipal bond defaults.

Apparently, there is no federal response plan in place if such a disaster happened (picture thousands on unemployment no longer receiving checks; government workers, with paychecks that can’t be cashed, walking away from their jobs—including positions like public school teachers, 9-1-1 operators, police, fire, city sanitation workers, etc.).

Whitney began warning about such issues as far back as September 2010, when she told Bloomberg Television in an interview that the federal government will face pressure to bail out failing states within the next 12 months.

Not a pretty picture. Sort of makes the issue of declining home values and rising foreclosures look minor, in comparison. Whitney, herself, said, “…next to housing this is the single most important issue in the U.S. and certainly the biggest threat to the U.S. economy.”