Next Financial Crisis: Municipal Bonds

The financial crisis has hit cities hard: foreclosures, housing abandonment and shrinking tax bases. Now there are fears that they will be unable to meet their financial obligations.

"Cities across America are facing dire financial distress. Meredith Whitney, a banking analyst turned independent adviser who correctly predicted the banking meltdown, has issued an Armageddon-like prediction of mass municipal defaults. Others - notably Newt Gingrich - have suggested that state governments as well as cities should be allowed to file for bankruptcy. Congress held a hearing to examine the idea.

Americans, still reeling from the devastating impact of the mortgage debacle, are fearful that the next economic disaster is only a matter of time. To anyone reading the headlines of budget deficits and staggering pension liabilities, it takes little imagination to conclude that the next big one will be government itself. If muni bonds were to default (causing investors permanent harm, as distinct from the temporary discomfort of price fluctuations), ordinary Americans would lose big."