“First boom, then bust, then more bad luck. That’s how analyst Meredith Whitney views those states that experienced the meteoric rise, then fall of their housing markets in the last decade, spending the extra tax revenue during the boom times but not cutting back after the bust. She calls it “the negative feedback loop from hell” in her new book, Fate of the States: The New Geography of American Prosperity.”
The failure of state and local governments (and people generally) to adjust their spending and approach after the 2008 credit and property bubble burst is typical in history. It usually takes a few cycles of repeated boom and bust before behavior finally undergoes a secular shift away from trying to grab a quick buck towards a focus on prudent long term cash flow management and investment.
This reminds us of the next jolt of reality that the coming bear market in stocks will inflict on today’s speculators and investors alike as they are forced to see that buying and holding over-priced assets is still a full circle back to financial pain (ala 2000-2003 and 2007-2009). Maybe this time, poor financial habits will finally die and behavior will switch back from reckless deployment to prudent management once more. One can hope. We know that every other secular period of over-leverage and speculation in history has ultimately died this way. Died hard for those slow to learn– but died nonetheless.