Tuesday, December 21, 2010

What Me Worry

There are two ways to look at California. You can look at it, as the state's Treasurer does in this piece, strictly in terms of on-balance sheet revenues and expenditures. If you look at it that way, expenditures aren't really growing, revenue has collapsed, a revived economy will (some day) bring everything back into rough alignment, so relax and buy some more bonds.

Another way to look at California is in terms of its total obligations. Those would include unfunded pension and retiree health benefits, the financial collapse of its major cities, the financial collapse of hundreds of its smaller municipalities, the likely downturn in property tax receipts as people's homes are re-assessed to fit the new reality. Add these items to the balance sheet and things look a bit less relaxing. Maybe you want to buy Wyoming state bonds instead.

What's weird about The Reckoning at every level of American governance is that, in almost every case, we don't know what we owe. As Meredith Whitney pointed out in that "Sixty Minutes" interview, in many cases the states and municipalities only provide financial data thorugh June of 2008. Things have changed since then, to say the least.

It would be helpful to have a full accounting of what it's going to cost to bring California fiscal "situation" back into some kind of alignment. It would be helpful to have a full and accurate accounting of what it will cost to bring New York State back into some kind of alignment. Repeat for every state. Repeat for every major city. Repeat for all municipalities in trouble.

You can't have a reckoning without a full accounting. The problem with the accounting of people like California State Treasurer Bill Lockyer is that everyone knows it's not the whole story. It's not even close to the whole story. So no one is reassured. And the weight of authority (which comes from speaking the truth) is diminished.

Which in turn erodes confidence. Which in turn makes it more likely that, at some point, something will snap and all the micro-cracks will become an earthquake. And another financial panic will be upon us.