And … There Goes Detroit

“By my rambling digressions I perceive myself to be growing old” – Benjamin Franklin

It was of course just a matter of time: Detroit has filed for bankruptcy. I say it was a matter of time because, as the old adage goes (hat-tip, Mish): “that which cannot be paid back, will not – by definition.” After decades of over-promising benefits, agreeing to far-too-generous compensation packages for city employees, and (perhaps most importantly) a dramatically deteriorating economic base, Detroit simply could not go on forever.

An unnamed city official (at least unnamed in the article I  linked) has made mention of the need for a federal bailout:

A city official notably said the federal government should bail out Detroit, though the president has made no indication that’s a possibility.

Honestly, this is the right question to ask. In October of 2008 Lehman Brothers CEO Richard Fuld asked “where was our bailout?” Not long before, Bearn Stearns had received a “bailout” (actually it was an agreement to scavenge what was left), but the government showed Lehman some “tough love” and refused to intervene. What followed was a cascading collapse of the housing bubble, subprime mortgage debt, and the mortgage-backed-security market … or as we like to call it, “the Great Recession”.

Fuld had a point. Why did the rules change all of a sudden? The answer was simple: we never thought we’d have to do this more than once, and we are not prepared too.

Of course the government did eventually bailout the rest of the banks with the $800,000,000,000 “Tarnished Asset Revitalization Program” – TARP. That was apparently just a down payment on this moral hazard run amok, and Ben Bernanke would eventually begin printing $40,000,000,000 a month to buy up the bad assets (read “assets that would show the banks to be capital-impaired if they had to mark their assets to market value in their accounting schemes” … thanks Dodd-Frank).

So Detroit officials ask the simple question: If the U.S. is willing to give away $800,000,000,000 plus $40,000,000,000 a month to the banking cabal, to stave off “collapse” – why not a mere $20,000,000,000 to erase Detroit’s debt?

The answers are, I think, rather simple. Ben Bernanke probably won’t do it, because he can’t even pretend the $20,000,000,000 in Detroit bonds have any value – everybody knows they won’t be paid back. Further, Detroit is not a bona fide member of the banking cabal, and therefore not on the list of people we help with printed money.

As for congress, again, I wouldn’t hold my breath. While the article references “the president” I think we should remember that it is Congress who holds the purse strings. Five years ago maybe, with massive Democratic majorities in both houses, but now? If anyone out there thinks the Republican congress is about to step in and rescue what can only be viewed as the natural conclusion to liberal policies, then I suggest they think again. (That said, if there is a congressional bailout, it will be the clearest symbol yet that both parties favor big-government, the-people-are-sheep, policies; and dare not risk a glaring failure of said policies.)

Apparently the folks who stand the most to lose from this bankruptcy are suing to stop it (bondholders and public employee pensioners). They can sue all they want. It’s not as though Detroit is declaring bankruptcy because it’s a “mean” city who wants to welsh on its promises. No, there just isn’t enough money to keep going. The city is already being reclaimed by the scrappers and the elements. It is already in full collapse as the citizens are refusing to pay taxes (because they don’t get services). Sue all you want – there just isn’t any money to be had. That’s what bankruptcy is.

So, some people (a lot of people) who have been promised a lot of benefits will go without. Bondholders will get only a fraction of what they originally were promised. The same is true of pensioners. (If you are living, or planning to live, on a pension promised by a company/entity on shaking financial footing – you might want to start making plans.)

The rest of us will hopefully learn (and apply) a valuable lesson. Systems like Detroit cannot go on forever. Systems where too many promises are made and laid on the backs of “the people” cannot go on forever. Eventually, as long as they are still free, the people will find a way to extricate themselves from the burden. In the case of Detroit they simply left and stopped paying egregious taxes.

So, with Detroit down, who’s next?

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