Meredith Whitney Sees Plenty of Pain Ahead for Consumers

"We haven't really focused on the weakened state of municipalities and state budgets. So I think we're in for many, many job losses…"

By Maria Bartiromo

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In a little over a year, Oppenheimer (OPY) Managing Director Meredith Whitney has become one of the most influential voices on Wall Street. Her unvarnished views—especially about Citigroup (C)—have led to lots of ink and landed her on a list of the most important women in business. Earlier this week, Whitney wrote an unusual op-ed column in the Financial Times in which she said that as a citizen, she felt obliged "to offer solutions to this economic train wreck."

MARIA BARTIROMO

How much longer will this financial crisis last?

MEREDITH WHITNEY

If I had to be specific, I'd say another 18 months at least.

Why?

For 15 or 20 years cheap credit was extended to a lot of people who were not worthy. Now you've got to resize that business back to traditional, normalized credit. Home ownership rates that peaked at 69% probably have to drift back to 66% or 65%. Remember, they had been 64% prior to 1994 for as far back as the eye can see. There are a considerable number of Americans who were homeowners for a brief period of time who will not be homeowners anymore.

In your FT column, you said you were more bearish than you've been for the past year and a half. Please explain.

I think we're entering a new phase of this financial crisis. The first phase was characterized by the shutdown of the securitization market, which hurt investment banks and large, super-regional banks. The next phase is going to be the impact on the U.S. consumer. And that is more significant. Two-thirds of the economy is dependent on the consumer. And we haven't really focused on the weakened state of municipalities and state budgets. So I think we're in for many, many job losses and considerable consumer pain.

Before we get to the consumer, tell me a little more about states and municipalities being weakened.

For starters, state and local governments contribute 12% of GDP. So their importance can't be underestimated. The major expansion in their budgets came from taxes on property sales. Those sales taxes are down considerably. Thirty-one out of 50 states are underfunded for their 2009 budget. State budgets are required to be balanced, and typically when this has happened in the past, states and municipalities have responded by cutting workforces and spending. That's going to have ripple effects on the economy.