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Was Meredith Whitney Right All Along? Jefferson County, Ala. Files Largest Muni Bankruptcy

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In another sign of America's fiscal mess, Jefferson County, Alabama filed the largest municipal bankruptcy in U.S. history on Wednesday. The most-populous county - home of Birmingham - defaulted on more than $3 billion of debt related to a sewer system project after negotiations with creditors broke down.

The biggest loser - besides the locals - is JPMorgan Chase, the largest Jefferson County creditor who may lose hundreds of millions. It's not the first time the largest U.S. bank by assets, has had problems with this deal. In 2009, JPMorgan paid a $722 million settlement with the SEC over corruption charges related to the project.

Jefferson County won't be the last municipal bankruptcy says Jeffrey Bell, a former campaign adviser to President Ronald Reagan and currently policy director at the American Principles Project. "It was easy to borrow the money, it was too easy but now it's becoming impossible," Bell tells Aaron Task in the accompanying clip.

"Impossible," Bell says, because like Greece and Italy, too many American towns "have an overload of debt in the system."

Too much debt caused by extraordinary low interest rates and lenders all too willing to give out money.

Is Meredith Whitney right?

Jefferson County is the largest default but not the first this year. Pennsylvania's capital of Harrisburg recently filed for bankruptcy after costs for an incinerator project ballooned. Before that, the tiny town Central Falls, Rhode Island couldn't meet its obligations.

Banking analyst Meredith Whitney, who correctly predicted the U.S. banking crisis, has said over the last year that increasingly cash-strapped municipalities will default on billions of debt. While we're yet to see any sweeping defaults, these cases do highlight the risks in what's generally seen as the safest of debt markets. (See: Muni Bonds: The Next Crisis?)

Even if defaults don't accelerate, cost cutting will continue to be a theme across the country. Earlier in the week we highlighted how some American towns are dealing with budget woes by cutting civil services. (See: Budget Crisis Has State and Local Govts. Cutting to the Bone) In one town in Michigan they're not only turning out the lights, they're tearing out most of their lamp posts. It's all a desperate effort to avoid paying their bills and avoid a default.

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