Meredith Whitney Offers Barrage of Numbers, Errors: Books
We’re all moving to North Dakota.
Or South Dakota. Or somewhere out there in the middle of the country.
This is the thesis of Meredith Whitney’s “Fate of the States: The New Geography of American Prosperity.” The country’s “central corridor,” largely untouched by the housing bust, is going to drive the economy for decades to come.
The “smart money,” she writes, “is flocking to states with lower tax burdens and less strained budgets.”
Fleeing the coasts is not a new idea. I trace its modern incarnation to Rich Karlgaard’s 2004 “Life 2.0,” in which the Forbes publisher asserted that people were leaving the crowded, overpriced coastal states to seek “larger lives in smaller places.”
Now Whitney, with a barrage of numbers, percentages, gross generalization, bald assertion and outright error, joins the ranks of the demographic determinists. Perhaps the favorite word of these proponents of the decline and fall of New York and California is “already.” Whitney doesn’t disappoint: “The United States is already in the process of rebalancing itself demographically based upon opportunity and standard of living.” This is already happening, she writes. In other words: I’m right!
Not so fast. The idea, based purely on dollars and cents, sounds reasonable. Yet the evidence is thin. And using the last five years as predictor of the next 30 is questionable. There are lots of reasons people move. Tax policy is low on the list. And some states possess advantages others just can’t overcome.
What Whitney, a banking analyst who in 2007 made her name with the call that Citigroup was going to suspend its dividend, is doing here is defending her December 2010 appearance on “60 Minutes.”
At the time, Whitney had spent two and a half years on an otherwise unremarkable piece of research, a punctuation mark to the hysteria about public finances common during the latter stages of the financial crisis.
To correspondent Steve Kroft, Whitney predicted that the unhysterical experts were wrong, and that the municipal market would see “50 to 100” significant defaults.
‘Hundreds of Billions’
Nobody had a problem with that figure. The average since 1980, according to Distressed Debt Securities Newsletter data, is 111 defaults per year totaling an average of $3 billion.
Asked to put a dollar amount to the prediction, Whitney blurted out, “hundreds of billions” of dollars. Instead of challenging this absurd figure, Kroft just gave one of his crinkly-eyed, sorrowful shakes of the head, pitying all those bondholders.
Investors panicked and pulled $26 billion out of muni mutual funds over the next few months, according to Lipper US Fund Flows data. Whitney got a ton of attention, and not coincidentally a book contract.
Connect the Dots
Whether we will all move to Kansas is debatable. What isn’t are the factual errors on display here.
Experts, Whitney writes, are “quick to point out that states have never defaulted.” Who are these experts? The ones I know acknowledge that Arkansas was the last state to default, in 1933.
Cities “just assumed that their states would be there to bail them out.” On the contrary, most local officials know that recourse to the states is limited and punitive.
“Jefferson County’s finances were sunk by a water-and-sewer project that, thanks to graft and engineering blunders, never actually got built despite the county’s borrowing and spending billions.” Never got built? That isn’t true.
Orange County, California, bondholders “would not have been repaid had it not been for a bailout by the state of California.”
Bailout? State lawmakers allowed the county to divert tax revenue from certain county agencies to back a bond issue used to repay obligations. No one considered this a bailout.
In the introduction to “Fate of the States,” Whitney writes, “My brain instinctively works to connect the dots in life, turning mosaics of information into narrative tales of how things came to be and what I think will happen as a result.”
That way madness lies. There are 89,004 local governmental entities in the U.S. Take four or five or a dozen headlines and “connect the dots,” and you no doubt have a trend, maybe even a book. What you don’t have is an accurate picture of municipal finance.
“Fate of the States” is published by Portfolio/Penguin (260 pages, $27.95). To buy this book in North America, click here.
(Joe Mysak is editor of the Bloomberg Brief: Municipal Market. The opinions expressed are his own.)