Meredith Whitney, who was early and right about the cratering of our banking system, says the appalling fiscal condition of many states is a systemic risk to the entire country, with California being in the most calamitous shape. She says California has the biggest budget deficit, has increased spending "dramatically", and has public pension systems that are deeply in the red. Plus, since she expects a double dip in housing, California revenues will drop even more.

Though it now appears that a budget will finally pass this Thursday, a long overdue and much-needed prospect, this will do nothing to stave off the crisis, and if they fund it by borrowing against the future, will only make things worse.

The similarity between the states and the banks is clear: off balance sheet coverage, over-leveraging, borrowing against future dollars to pay bills now, accounting deceptions, and the like. Debt for states has grown 60% since 2000 while revenues have risen only 45%. She calls this "generational robbery," with politicians getting elected by promising jobs and local funding now as they borrow against the future to pay for it.

As for the best state, it's Texas. It's a low-spending, anti-big-government state with low taxes. Their public pensions are fully funded, "housing is not an issue", and their unemployment rate is 8.5%, which while still high is nowhere near California's catastrophic 12.4%.

In the battle between conservative and liberal ideologies in terms of government spending, it's clear the conservative states are currently in much better financial condition. And I say that as one whose politics are to the left of liberal. Big spending is great only if you can afford it. Texas may provide far fewer services for their residents than does California, but they are also solvent. California is not (By the way, a state cannot file for bankruptcy.  There's no provision for it doing so in the law. Apparently no one thought such an outcome was even possible, which gives some indication of how extreme our problems are now).

She sees local municipal debt as prone to default and points out that state and federal governments are faced with an apparently insoluble dilemma. If they cut spending, it will increase unemployment. If the feds bail out the states, it will further weaken the US balance sheet. Plus, a bailout would certainly create a firestorm of protest.

     "Imagine you're a conservative fiscally sound Nebraskan and now you have to bailout California or you're a fiscally conservative Texan and now you have to bail out Michigan... If you hate bankers you're going to hate politicians."

If you thought the Tea Party was angry now, imagine their rage if Obama decides to pay off the budget deficits of California, New York, New Jersey, Illinois, and Michigan. But even if he did, that leaves the huge gaping hole of unfunded public pension deficits. California's pension deficit alone may be as high as $500 billion and the state can be forced to make up any shortfall.

Virtually no politicians at the national or state levels are talking about this impending crisis. Here in California, the legislature has been locked into predictable and tedious ideological positions for months while the budget was delayed. Then, when the inevitable financial catastrophe happens, and it will, they and national politicians will squeal - just like they did with the banking meltdown, "Who could have seen this coming? We are shocked, just shocked".

It's really quite pathetic. We have a dearth of genuine leaders in this country and we need some badly. We need leaders and politicians who will talk straight about the financial crisis and not do-nothing ideologues who fiddle and evade as Rome burns. Time is not on our side.