From 2002 to 2008, the individual states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23% of state pension money had been invested in the stock market; by 2008 the number had risen to 60%. To top it off, these pension funds were pretty much all assuming they could earn 8% on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you are looking at multi-trillion-dollar holes that can be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.
The problems you see in the news today about Bank of America and Morgan Stanley are only the tip of the iceberg.
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