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Thursday, August 1, 2013

The Big Picture: What is the Detroit thing really about?

There are many facets and variables to the Detroit bankruptcy filing a few weeks ago. You hear lots of reasons why it happened. 

"Contrary to what some commentators have been arguing, however, Detroit’s troubles can’t be traced simply to bloated payrolls and intransigent public-sector unions: decades of deindustrialization are the main culprit. The population peaked in 1950, at 1.85 million. Since then, as the auto industry declined, and almost all the city’s white residents moved to the suburbs, the population has dropped by about sixty per cent. The city’s payroll has fallen even faster. In 1951, Detroit employed nearly thirty thousand people. Today, it employs about ten thousand five hundred people, and their salaries and their benefits are hardly extravagant.

Like many other cities, Detroit is also facing sharply rising costs for providing its employees with health care, which it has been funding by issuing more debt. The city’s outstanding liabilities currently amount to eighteen billion dollars. ... But shouldn’t one of America’s iconic cities be rebuilt, rather than picked apart? If so, it is going to require the leadership, and the financial support, of the federal government.
 Still, the Administration can do more than just shrug and say, as it did last week, that “this is an issue that has to be resolved between Michigan and Detroit and the creditors.” That stance amounts to ceding the initiative to Governor Snyder and his conservative supporters, some of whom see the bankruptcy as a template for showdowns with public-sector unions across the country."

 I read that in a blog or article last week. I don't remember where, so I can't credit it. But it isn't my words.

It brings up many points. But it negates the central one. The big picture issue that rises above all of it and is much bigger than Detroit.

No matter what the reason, here is what we know for sure. 

1) The city is bankrupt and can't pay its bills nor pay back its debt on its own. It has no hope to do that any time in the near future. Nobody disputes that. It needs help right now to stay afloat and if it is to pay back the bonds and pensions and debts, it will need assistance to do that.

2) A big part of why they are in this hole, irrespective of anything else, is that they made pension promises to workers that they could never hope to keep. These were made by elected officials, however crooked they may have been. Therefore, they were sanctioned by the voters who put them in office.

3) By filing for bankruptcy, if they were to succeed in being able to do that, they are setting a very bad precedent.  It amounts to them not having to meet the obligations they promised to uphold. In essence, they are allowed to break legal promises they made that were bargained for under fair circumstances. These are contractual obligations. If contracts are not binding, and are now worthless, why bother having them?

Yes, right now they can't pay. And have no hope in paying. In the big picture though,  they have to pay. There is no other way. Why do I say that?

The American way, of incurring debt, declaring bankruptcy and walking away has got to stop. It is so bad, that it is already built into the system and you and I, the people that pay our bills, and borrow responsibly, pay for the people who don't pay and just walk away. Does that sound like a good thing to do? No, it does not. I shouldn't have to pay more to cover those who don't live up to their end. That goes against the basic principles we learned as children. If you borrow money from someone, you have to pay it back. Others don't pay it back for you, and if they do, then you owe them the money. You don't get out of paying back what you owe.

This Detroit thing is really about keeping promises, making ones you can keep and being accountable for your mistakes.

Governments have been promising pensions and benefits they cannot hope to pay out for many years now. Detroit doesn't have a monopoly on that. They are just the first to completely default and try to renege on them. The point is that they never should have promised them in the first place. But, they have. So, in spite of that, they should have to pay. A deal is a deal. Going forward, there can and will be a new deal. But the old deal is still a deal. And if that means that any of us who didn't make them stop doing that when we should have to pay up for that, then so be it. In essence, that means the federal government will have to cover the debt. And that means every U.S. citizen will have to pay for this. And certainly this will not be the last time a city goes down this road. Many cities are on the brink of it now. A very slight recession will push most of them over the edge. Many are at the edge of the cliff now as it is.

It is all about keeping that promise that was made, even though it never should have been made. That is the price you should pay for doing that sort of thing. It is the lesson you should learn and the disincentive not to do it anymore. If you can just walk away from it without paying, there is no incentive to stop that sort of behavior.

"My word is my bond" 

You have heard that phrase your whole life. It should still mean something. It is the foundation of our society. When bonds aren't bonds anymore, then what good is anybodies word? 

If I bought City of Detroit Bonds, am I now to expect that they are not guaranteed? Or worth what I paid for them? What about Federal bonds? What about bank deposits? Are they next? If that is the case, then every city that has bonds that are funded by mutual funds all over the world will not be able to borrow money. And if they were still able, they are going to face a large increase in the interest rate, to account for the default factor. Because a bond is a bond. You are not allowed to default on it. That is how it works. Or should work.

Lately, we want to walk away from all sorts of mistakes that those before us created. And even many of our own. Society and life doesn't and can't work that way. 

It never used to work that way. Bankruptcy has become a much too easy way to ditch your obligations. It has to stop. It has to stop right now. In a society where you don't have to pay for your mistakes, everything is worth nothing. There is no concept of value. When that happens, the whole system collapses. Just as it will now. But, with a government that is printing money, while at the same time 20 trillion dollars in debt, it is a case of monkey-see monkey-do. 

At the end of the day, this Detroit thing is really about our society becoming accountable again. On a government level, business level, banking level and personal level. If Detroit, and other cities to follow, are allowed to shirk their obligation to financial promises they made, then the whole ballgame is over.

 In the big picture, that is what is at stake here. If Detroit gets to walk away from its debt, then the whole system will collapse. At times like these, it is up to the head leader, in this case the President, to make sure it doesn't. Hopefully, he understands and accepts that challenge.

So far, he doesn't seem to. He views it as someone else's problem. Just as everyone who files for bankruptcy does.

If the President lets this go the way it is heading, then he is morally bankrupt. He could easily put a stop to this, if he wanted to.

Does he want to? That is the question. 

What I know for sure is that Detroit's problem is everybody's problem. Yours, mine and anyone who lives in this society. This is a watershed moment in our history. We are going to decide if a bond is still a bond. 

That is what this is really about.


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