“Reason has always existed, but not always in a reasonable form” – Karl Marx
Things are plowing ahead with the Detroit bankruptcy filing; which may well be a game-changer in the municipal bond market. Last week a federal judge sided with the city and suspended state level challenges to the bankruptcy – effectively noting that bankruptcy is a federal issue, not a state issue. In an interesting twist, this pits the Michigan governor (Republican Rick Snyder) against Michigan Attorney General (Republican Bill Schuette). Snyder is moving forward with salvaging what is left of Detroit, and Schuette has an obligation to defend the Michigan constitution, which disallows cuts to public worker pensions.
In another interesting twist, protesters outside the federal court hearing (opposed to the bankruptcy filing) chanted “cancel Detroit’s debt!” It turns out, in America we have a legal mechanism for the cancellation of debts that cannot be paid … it’s called BANKRUPTCY! One wonders if these protesters understand that. Rest assured, dear protesters – the debt will eventually be cancelled.
I suspect the protesters mean something different than “cancel” the debt though. After all, part of the debt is owed to public union pensions; they don’t want that debt cancelled. No, what they mean is “cancel the money the city owes to other folks so we can get our money out.” It doesn’t make for a very good slogan on a placard though.
Therein lies the problem with debt cancellation. Somebody, somewhere worked hard to produce goods and services to feed their families. If they had money left over, they may have invested it. Some of those people invested the money in municipal bonds, perhaps even Detroit. So what do we do with these poor working class blokes who are going to lose their investments?
Some will say they made a bad investment (which is undoubtedly true, given the current situation), and they will end up taking the loss because of it. To put it another way, these investors made a bad decision by believing “Detroit” when it said it would pay them back – especially in light of the extremely difficult long-term financial situation the city faced, with a declining population and loss of the industrial base. And what of the public workers? Did they not also make a bad investment by believing “Detroit” when it said it would fund unreasonable benefits for the rest of their lives? (especially in light of the extremely difficult long-term financial situation the city faced, with a declining population and loss of the industrial base.)
The promises-to-pay are not vapor. Somebody loaned Detroit money, real money that they worked hard for, and will lose it. Others loaned Detroit “work” with promises of future payment. So who is going to lose their “real money” in the fallout? Perhaps the taxpayers with a federal bailout? But that would be taking real money away from folks who never bought into the false promises of Detroit to bail out those who did.
Don’t get me wrong here, the concept of one who can pay picking up the bill for one who can’t has deep roots in Christianity. That is our understanding of the cross of Christ, the debt paid that was beyond our ability to pay, and our requisite to forgive others their debts to us because of the debt we have been forgiven. But this decision to pay for the other comes by choice. It is hardly a moral choice to force someone who owes nothing to pay for one who does. Just as it is hardly a moral choice to force someone who has taken no risk to bear the pain of default for one who has taken risk. (And we needn’t limit ourselves to municipal bankruptcy here – the whole Bush/Obama bailout of Wall Street and the major banks fits the same mold.)
So here we have Detroit, a microcosm of government promises everywhere. Too much has been promised to too many for too long and there isn’t enough (eventually) to pay for it all. What will we do? Everybody demands a solution in which they lose their piece of the pie last (or not at all). Their claims on the labor of others are no greater than the rest, but still they insist that they get paid first.
Of course, before we get there everyone will have the option of settling for less, just as Detroit creditors have. Some of them have taken a deal (reportedly 70 cents on the dollar), but others could not stomach losing a thing. The final deal will be for much less.