This morning's Wall Street Journal included an op ed column by Andrew Biggs of the American Enterprise Institute, in which Mr. Biggs reveals that the accounting method by which municipal governments estimate their pension liabilities almost always comes out to a lower figure than the methodology used by corporations. This suggests that our state and local governments are in much worse shape than is currently believed.

As longtime readers know, I believe that accounting doesn't change the outcome -- only the time at which the outcome is revealed.

Last week, I offered that the municipal market was the third derivative of our crisis. And after reading Mr. Biggs's op ed, I was reminded again how the assets of both the banks and the auto companies were overstated -- and liabilities understated -- going into the crisis.

Looking back, whether measured by mark-to-market or accrual accounting, it's hard to imagine that anyone believed the value of financial assets on banks' balance sheets. But they did -- just as the market believed that SIV and securitized assets were really "off-balance sheet."

Similarly, the market accepted tens of billions in deferred tax assets and goodwill on the GM's (GM) balance sheet as having real value -- only to see it all erased with the wave of an accountant's pencil. At the same time, joint venture liabilities and other "contingent" obligations suddenly appeared on the other side of the balance sheet.

Talk about a toxic blow to capital!

Now with tax revenues plummeting, it feels to me like we are about to see the same kind of blow dealt to municipal balance sheets. And if Mr. Biggs's column is any indication of what's ahead, the impact will once again be profound.

I expect, though, that many investors will still find themselves shaking their heads and wondering why they accepted state and local balance sheet figures on blind faith -- notwithstanding the fact that they've already been burned twice.

Maybe "In God We Trust" was meant to be taken as a warning.