Meredith Whitney: Lack of Local Investing Creating ‘Ghost Towns’

Tuesday, 19 Jun 2012 01:41 PM

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Businesses in big-spending, tax-heavy states like California are investing elsewhere and are creating ghost towns back home in the process, says Meredith Whitney, founder of Meredith Whitney Advisory Group.

Business friendly states like Texas are seeing investments show up from other states, while in California, firms and even wealthier households can easily move.

The result, Whitney says, is that cities in California are quickly becoming ghost towns marked by falling housing prices and a fleeing tax base.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

"You have more businesses investing outside of California — California home-based businesses investing outside of California in other states like Texas, Oklahoma, Indiana — more business development in those states," Whitney tells Bloomberg Television.

"Rich people, by the way, have the greatest mobility, so you leave effectively, these ghost towns, with high structural unemployment and a very low tax base," Whitney adds.

Local governments then raise taxes on the struggling citizens that remain to make up for the revenue shortfall, and the problem gets even worse.

"These towns keep having to raise taxes and you get the flight of the deep tax base anyway, Whitney says.

"What really matters is the real divide between the "haves" and "have nots" in this country."

Whitney grabbed headlines in late 2010 when she predicted a wave of defaults at the municipal level.

Still, whether defaults technically occur or not, the end result is, large swathes of the country are poised to go broke while more business-friendly states open their doors with lower taxes and relaxed labor laws.

"In these towns where businesses are leaving and where taxes are going up, home values are going down and continue to go down."

Small towns aren't the only ones in trouble.

Stockton, Calif., a city of 292,000 people, is teetering closer to defaulting on some of its debt obligations, Moody's Investors Service concludes.

The city is in talks with creditors to work out a way narrow budget gaps before the July 1 start of its next fiscal year.

"A default is likely primarily because the city says that it will run out of cash on July 1 and that a bankruptcy filing will take place if negotiations with creditors fail to provide material concessions," says Moody's Vice President and Senior Analyst Gregory Lipitz in a report.

"While Stockton has several classes of bonds, the city's pension and lease obligations have the greatest risk of default and loss while its water and sewer and special tax bonds are more insulated from default risk."

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video



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