If we bailed out the banks, why not Detroit? (#OWS)
I wrote a post yesterday to discuss the fact that, as we’ve seen in Detroit and as we’ll soon see across the country, the math isn’t working out on pensions. One of my commenters responded, saying I was falling for a “very right wing attack on defined benefit pensions.”
I think it’s a mistake to think like that. If people on the left refuse to discuss reality, then who owns reality? And moreover, who will act and towards what end?
Here’s what I anticipate: just as “bankruptcy” in the realm of airlines has come to mean “a short period wherein we toss our promises to retired workers and then come back to life as a company”, I’m afraid that Detroit may signal the emergence of a new legal device for cities to do the same thing, especially the tossing out of promises to retired workers part. A kind of coordinated bankruptcy if you will.
It comes down to the following questions. For whom do laws work? Who can trust that, when they enter a legal obligation, it will be honored?
From Trayvon Martin to the people who have been illegally foreclosed on, we’ve seen the answer to that.
And then we might ask, for whom are laws written or exceptions made? And the answer to that might well be for banks, in times of crisis of their own doing, and so they can get their bonuses.
I’m not a huge fan of the original bailouts, because it ignored the social and legal contracts in the opposite way, that failures should fail and people who are criminals should go to jail. It didn’t seem fair then, and it still doesn’t now, as JP Morgan posts record $6.4 billion profits in the same quarter that it’s trying to settle a $500 million market manipulation charge.
It’s all very well to rest our arguments on the sanctity of the contract, but if you look around the edges you’ll see whose contracts get ripped up because of fraudulent accounting, and whose bonuses get bigger.
And it brings up the following question: if we bailed out the banks, why not the people of Detroit?
mathbabe 
* The ripple effect of not bailing out Detroit will be localized. The ripple effect of bailing out Detroit will be catastrophic, as the example will encourage continued irresponsible behavior by local governments nationwide.
* The banks, at least theoretically, paid back big parts of the bailout. Detroit will never be able to repay anything. Reform of the banks is still desperately needed: either bank break ups or larger margin requirements or separation of commercial vs investment etc… But there are no similar reforms that will help cities.
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Because the question asked in another way is; if we bailed out the rich why not the poor? And within the question you find the answer.
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The Right have taken over the public agenda by a long string of concerted and focused attacks, sophistically disguised as “common sense”, on social responsibility. (Hell, even the word “social” has become tainted by this effort.) With “charitable” (501[c][3]-certified, yet) organizations like ALEC leading the way for state legislatures and Wall Street clearing the path for big banks and big biz to bulldoze over the populace, we see more and more how moneyed interests rule our lives for their benefit, not ours. It’s precisely what Occupy was about. You can’t build a just society by beating down the already downtrodden and their kin.
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Do Two wrongs make a right? Bailing out with taxpayer money vs allowing the bankruptcy procedure is the root of most of the arbitrariness we now observe. I question the ‘bone fide’ nature of pension plan negotiated terms – where both parties negotiating are also public employees – and their fall-back is the public purse – ie not a company shutdown and loss of job. It is similar for banks with undifferentiated insurance rates from FDIC .. ergo the taxpayer. FDIC is not a bone fide negotiation for insurance vs a particular bank’s loan to deposit ratio. A contract may be signed but if the parties to it have the same or very similar interests and where any resulting contract dispute is taxpayer subsidized, then is it a ‘true’ contract – or simply and example of codified cronyism?
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Mike, a charming description of a walk down your garden path.
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Detroit Mayor Dave Bing said he isn’t asking for a federal bailout.
“I think it’s very difficult right now to ask directly for support,” Bing said on ABC’s “This Week.” Asked if the city would get a federal bailout, Bing said, “Not yet.”
“We’re not the only city that’s going to struggle through what we’re going through,” Bing said. “We may be one of the first. We are the largest, but we absolutely will not be the last. And so we have got to set a bench mark in terms of how to fix our cities and come back from this tragedy.”
–> http://www.bloomberg.com/news/2013-07-21/michigan-s-snyder-says-detroit-s-bondholders-part-of-bankruptcy.html
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The larger issue, is that at this point the economy is so large with so many large players with so many huge effects on what happens in the economy which might affect 100,000 or more “tax payers”. The end result, is that we actually need to force money to go away, by not making it a reward. Money is a reward because it is the most attractive bartering tool. It is flexible in it’s use, readily changed into other forms (investment or other international currencies) etc. When people used to barter and trade labor for goods or services for food (the town doctor treated the farmers who payed him in food, or the trappers who brought him pelts or meat etc.)
In this day and age, money has become an absolute necessity for life. People can’t actually live by bartering, because there are essentials in life that require money to acquire. It will take a while, but service oriented robotics could start to eliminate the need for money to eat and have a place to live. The expertise of such systems at solving problems would allow them to “manufacture” themselves when we need more, and to then provide services that would aid our societies with the services which are hugely time consuming and expensive now, because they require so many workers to spend so much time at remedial tasks.
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0. It’s true that “bailout” means “let politicians use public money to help well-connnected private interests”, but that is not a legitimate thing to do whether the private beneficiaries are bankers or union members (both of which are powerful well-connected interests).
1. Notionally, the bank bailout was about liquidity, not insolvency. Indeed, the banks eventually paid back the money they got. The real evil there was the public assumption of private risk, which is an enormous subsidy to the large banks.
2. Worse was the bailout of Fanny and Freddy, which reneged on the promise in the law creating the entities (that the government is not liable for their debts) and was practically a gift to the banks — it allowed them to act as if there was a public underwriting and then “TBTF” the public into paying.
3. In the bank picture there is FDIC which gives a good way to think about things: small depositors cannot be expected to do due dilligence and check the state of the bank, so they can be ignorant and the public will insure them. Large depositors and those who invest for profit are not insured against the risk of the bank failing, but can be reasonably expected to do due dilligence [personally I would not do any bailouts, but force the banks into much greater disclosure].
4. Even worse was the car-manufacturer bailout, which is the right analogy here. First, these companies were actually insolvent due to their own fault (they agreed to generous employee benefits and then couldn’t afford to pay them). Moreover, rather than letting the companies go through bankruptcy (which would have allowed them to reduce pensions and rewrite union contracts), the government created a fake banruptcy process in which the companies were allowed to not pay secured creditors but kept their pension obligations — only to unionized workers. So politically powerful workers (union members, political allied of the administration) got to keep their pensions, while non-union workers and other creditors (including secured ones!) lost their money.
5. Saving over-generous pensions of unionized government workers makes even less sense than for company workers. First, the people who negotiate the contracts had much less incentive to make sensible promises (because the owners are much less able to control the agents who negotiate). Second, the union is active on the voting side as well — that is they both negotiate with the city for contracts and are very active come election day in electing the people who will negotiate. Third, and most important the union (being a large organization) can be expected to do its due diligence and not ask for benefits the city won’t be able to pay. If anything, non-unionized workers (who cannot individually check the city finances) should keep their pensions before unionized workers (who knew the city couldn’t possibly afford the benefits when they negotiated collectively). I have no sympathy for workers claiming they had no idea the city couldn’t afford to pay them when they negotiate collectively, and therefore can easily afford the expertise to find this out.
6. Continuing the last point, Detroit (and many other cities and states) engaged in what is, essentially accounting fraud: its contributions to the pension fund were calculated assuming that the fund would achieve an incredible rate of return which was clearly unrealistic. The union could have negotiated for the pension fund to be funded based on realistic assumptions and chose not to. They cannot complain today that the fund is empty. As in the FDIC situation, union workers are like a large institutional investor — they easily have the werewithal to examine the city financial situation and project its ability to pay. They are not in any way like small household depositors which have no way of verifying the situation of a bank. If anyone deserves rescue, it’s only non-unionized workers which have no way of individually doing this kind of accounting.
7. Bailout here (i.e. a straight cash gift from the Federal taxpayers to unionized workers in Detroit) would encourage every city to make unreaonsable promises to its unionzied workers. After all, if times are good the workers will be paid, and if bad then someone else will pick up the tab.
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BTDT: The 2009 bailout of Detroit automakers, taking from the shareholders and bondholders and giving to the unions.
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There are huge negative externalities for subsidizing tobacco use and obesity. Michigan could increase their tobacco tax $2.00 per pack to $4.00 per pack and Detroit’s Wayne County an additional $1.00. Tax sugar added beverages by 2 cents per ounce throughout the state. Use the tax revenues to pay out the pension fund (much of the monies in the fund have gone towards health care costs for tobacco and obesity).
NYC’s tobacco taxes are $5.85 (NYS is $4.35). Chicago’s tax is nearly the same as NYC at $5.66 per pack and Chicago’s Cook county is nearly $5 at $4.98 per pack. Part of the reason Detroit is going bankrupt is that even now, they are not following other great cities like NYC and Chicago (and their surrounding areas) to be fiscally responsible.
Of course, you have the added benefit of better health for the citizens of Detroit and Michigan. Raising the cost of tobacco contributes over half the effect of helping people to quit tobacco. Higher prices keep teens from ever starting to smoke.
Now that Detroit is bankrupt is the perfect time to raise these taxes to the levels of NYC and Chicago and their surrounding areas.
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It obviously makes more macro-economic sense to bail out Detroit than the bankers which is why we won’t do it. Money given to the bankers just goes into the big gambling hall and gluts the savings surplus. It is effectively removed from the economy. Money given to Detroit and its pensioners will get spent almost as soon as it is received. Then that money will be spent again and again before it gets removed from the economy by the 0.1%.
Let’s face it, we could have let every bank in the country fail and rebooted the economy in 48 hours using the Federal Reserve and couple of Perl – god help our souls – macros. It took FDR maybe a week, but we’ve got computers nowadays, so we should be able to do it faster.
Besides, it’s not as if the banks do anything useful for the economy. Most businesses these days look for angel investors or sell discounted future merchandise to finance expansion. (I get a request to back new restaurants every few months to be paid back in food and the like.) If you want to publish or manufacture, go for Kickstarter or some other web site. An entire generation is growing up thinking of banks as quaint relics, like those carriages you can hire to take you around Central Park.
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Given various court rulings on sovereign immunity for state governments, essentially NO contract made with a state government means anything.
A state government (or the federal government) ALWAYS has the power to abrogate a contract with a piece of legislation. The only thing keeping them from doing so is the political fallout. A contract with a state government is not a legal document the same way a private contract is. A contract with a city government is somewhere in between; the city cannot unilaterally abrogate it, but the state always can on behalf of the city since the city government is considered an arm of the state government.
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This is old but I just got around to reading it. I’ll make this one point even though I doubt anyone will read it.
The US didn’t bail out all of the banks. They didn’t bail out Bear Sterns or Lehman Brothers. They only started bailing out the banks when, after Lehman Brothers went bankrupt, the economy started freezing up.
Same thing will happen with municipalities. Once they start threatening the whole economies the feds will step in
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As an aside, they didn’t bail out Bear, Stearns because Bear refused to pitch in during the Long Term Capital (what an oxymoronic name) crisis in 98-99. But they “forced” JP Morgan to buy them, and then held JP accountable for Bear’s fuck-ups. They let Lehman go under because the Goldman people in government hated their closest real competitor and everyone hated Dick Fuld. Whether the Fed steps in for bankrupt cities will depend on who’s in govt and who heads the Federal Reserve. Some of us still remember the NY Daily News headline: “Ford to City: Drop Dead.”
My two cents.
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