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Detroit Bankruptcy Buying Votes Promising Benefits Funded Future Rev
1103 -
1103 - ..
1104 - Summary/Objective
1105 -
110501 - Follow up
110502 -
110503 -
110504 -
110506 - ..
1106 -
1107 -
1108 - Progress
1109 -
110901 - Several articles on Detroit bankruptcy and public policy buying votes
110902 - by promising benefits with deficits...
110903 -
110904 - 1. Reuters - Yahoo News
110906 - ..
110907 - Detroit and the importance of failure
110908 -
110909 - By James Saft
110910 - Date................................... July 23, 2013
110911 -
110912 - http://news.yahoo.com/detroit-importance-failure-james-saft-120440576.html
110913 -
110914 - 1. (Reuters) - Here is the real meaning of Detroit: human
110915 - institutions sometimes fail and we are far better off
110916 - acknowledging and accommodating this than fighting it.
110918 - ..
110919 - 2. Information from failure is a large part of the value created
110920 - by markets and by experimentation, and we ignore and suppress
110921 - that information, as we are now in the banking system and
110922 - elsewhere, only at great cost.
110924 - ..
110925 - 3. Detroit filed for what would be the largest municipal
110926 - bankruptcy in U.S. history on Friday, a move which will be
110927 - bitterly fought in the courts by its creditors and by municipal
110928 - workers who stand to lose promised retirement and health
110929 - benefits.
110931 - ..
110932 - 4. There is plenty of blame to be divided; politicians, company
110933 - management, unions, Wall Street and the voters of Detroit all
110934 - played their role. And while it is worth debating and
110935 - litigating who is at fault and who should suffer most, some
110936 - underlying facts have to be reckoned with. Detroit's
110937 - population and tax base have shrunk while its obligations to
110938 - the holders of its $9 billion in debts and a (contested)
110939 - additional $9 billion to municipal pensioners have not. That
110940 - leaves the city, with a high crime rate and a 58-minute
110941 - average response time for emergency calls to the police,
110942 - critically unable to provide even basic services.
110944 - ..
110945 - 5. If we were going to live in a world where all contracts were
110946 - always honored, no matter the cost, we'd still have debtors'
110947 - prisons. In Detroit's case, if we expect the people and
110948 - businesses which make up its current tax base to continue
110949 - paying out interest and benefits in exchange for very bad
110950 - services, we are going to have to be prepared to build a wall
110951 - to keep them in.
110953 - ..
110954 - 6. There are plenty of things, then, to bemoan about Detroit, but
110955 - its bankruptcy is not one of them. Bankruptcy is one of the
110956 - truly great institutions of the modern financial system. And
110957 - while a municipal bankruptcy, in which federal authority in
110958 - the form of the bankruptcy judge is limited by the division of
110959 - powers under the constitution, presents problems, it allows
110960 - for the great benefits of failure to be more fairly, if
110961 - imperfectly, apportioned. This isn't something to resist, it
110962 - is something to welcome.
110964 - ..
110965 - 7. First, it allows for the debts and obligations of the bankrupt
110966 - town to be whittled back to a reasonable proportion compared
110967 - to its revenues. That, by restoring some services, can help to
110968 - staunch the bleeding of people and businesses which otherwise
110969 - would flee.
110971 - ..
110972 - 8. LISTENING TO FAILURE
110974 - ..
110975 - Second, the bankruptcy, let's call it failure for short, sends
110976 - out really good and useful information, not just to creditors
110977 - and others who will lose out, but to everyone. In this case,
110978 - municipal bondholders, past, present and prospective, will
110979 - learn that lending money to a government, especially one with
110980 - a dwindling tax base, involves a goodly bit more risk than
110981 - perhaps they believed.
110983 - ..
110984 - 9. That will raise the cost of financing in these situations and
110985 - will encourage governments to get to grips with their woes
110986 - sooner, rather than simply floating another bond or engaging
110987 - in a speculative interest rate swap and hoping that the sweep
110988 - of history starts breaking their way again.
110990 - ..
110991 - 10. It is unclear what will happen to pensioners, who may be
110992 - protected under state law, but the result may well be a loss
110993 - of expected benefits. That is awful, and arguably unjust and
110994 - unfair, news for them, but is truly valuable information for
110995 - the millions of current and future pensioners in underfunded
110996 - or pay-as-you-go pension plans elsewhere.
110998 - ..
110999 - 11. Failure provides feedback and encourages experimentation, which
111000 - produces both more failure and also, sometimes, success.
111002 - ..
111003 - 12. What is happening in Detroit is quite a contrast with how the
111004 - U.S. approached the effective failure of some of its largest
111005 - financial institutions during the crisis. Rather than forcing
111006 - them into some form of bankruptcy, installing new management
111007 - and forcing creditors and investors to recognize losses, we
111008 - instead kept the industry on a variety of forms of life
111009 - support.
111011 - ..
111012 - 13. And while these banks may be solvent and profitable today,
111013 - crucial feedback has been missed, and investors have been
111014 - encouraged to invest not with their heads but based on faith in
111015 - the government's willingness to bail out banks and create easy
111016 - conditions for them, no matter the cost to the rest of the
111017 - economy.
111019 - ..
111020 - 14. That missed feedback is doubly dangerous.
111022 - ..
111023 - 15. We are rebuilding imbalances in the economy and seeing the
111024 - growth, once again, of things like advertisements for plastic
111025 - surgery loans for people with bad credit.
111027 - ..
111028 - 16. We are also, arguably, suffering a long-running economic
111029 - malaise precisely because we did not, as Detroit will now,
111030 - destroy unmanageable debts, learn from our mistakes and move
111031 - on.
111032 -
111033 - 17. (At the time of publication, Reuters columnist James Saft did
111034 - not own any direct investments in securities mentioned in this
111035 - article. He may be an owner indirectly as an investor in a
111036 - fund. For previous columns by James Saft, click on)
111037 -
111039 - ..
111040 - 2. New York Times
111041 -
111042 - Opinion Pages
111044 - ..
111045 - Getting Detroit Back on Its Feet
111046 -
111047 - By Editorial Board
111048 - Date..................................... July 22, 2013
111049 -
111050 - http://www.nytimes.com/2013/07/23/opinion/getting-detroit-back-on-its-feet.html?hp&_r=0
111051 -
111052 - 1. After suffering through decades of economic decline and
111053 - official mismanagement, the city of Detroit sought
111054 - bankruptcy protection last week, becoming the largest
111055 - American municipality to take that extreme step. The
111056 - city?s debts total a staggering $18 billion, far more than
111057 - it could ever afford to pay back given its shrinking
111058 - population and tax base.
111060 - ..
111061 - 2. There is no doubt that bankruptcy proceedings will be very
111062 - painful for Detroit?s population of 700,000. Bankruptcy
111063 - cases can drag on for years, and city services, which have
111064 - already been slashed, could deteriorate further.
111066 - ..
111067 - 3. But the bankruptcy case might also allow Detroit to be
111068 - relieved of paying back its bondholders and banks much of
111069 - estimated $9 billion they lent to Detroit on overly rosy
111070 - assumptions. This group will, of course, push the city and
111071 - state to also force concessions on city workers and
111072 - retirees, whose pension funds are underfinanced by about
111073 - $3.5 billion.
111075 - ..
111076 - 4. But city officials should resist the idea of cutting the
111077 - pension payments for the city?s public workers, which
111078 - averages $19,000 a year. Unlike the situation in other
111079 - troubled cities where government officials made lavish
111080 - pension promises and workers gamed the system to inflate
111081 - their benefits, Detroit?s are quite modest. Moreover, city
111082 - employees have already had their pay and benefits reduced
111083 - significantly in recent years. Slashing the meager fixed
111084 - incomes of retirees will also hurt the city?s weak economy
111085 - because they are more likely to spend most of the money
111086 - they receive in local businesses. Labor unions also argue
111087 - that Michigan?s Constitution protects their pensions from
111088 - cuts, which will set up a potentially long legal battle
111089 - that the city can ill afford.
111091 - ..
111092 - 5. There are many causes to Detroit?s financial problems.
111093 - Foreign competitors and global economic forces have
111094 - battered its industrial base, particularly the Big Three
111095 - automakers. Corrupt and inept government officials have
111096 - squandered its wealth. And a flight to the suburbs by
111097 - businesses and residents has sapped its resources and
111098 - spirit. In recent years, the city has tried to respond
111099 - these challenges by raising taxes and severely cutting
111100 - spending on vital services like police, fire and even
111101 - streetlights. But its efforts have not been sufficient to
111102 - pull it out of a downward spiral that in many ways
111103 - exacerbated its decline by, for instance, undermining
111104 - public safety.
111106 - ..
111107 - 6. Its federal bankruptcy filing, which has been challenged
111108 - in state courts by city pension funds, gives Detroit a
111109 - chance to hit reset and try to start over. The city is
111110 - seeking to have a big chunk of its liabilities, including
111111 - the pensions it owes to city employees and retirees,
111112 - written down significantly. An emergency manager appointed
111113 - by the State of Michigan, Kevyn Orr, also wants Detroit to
111114 - spend more money to clean up blighted neighborhoods and
111115 - bring down its high crime rate.
111117 - ..
111118 - 7. Even if the city is able to wipe out much of its debts in
111119 - bankruptcy court, officials in Detroit and at the
111120 - statehouse will have to develop a much more comprehensive
111121 - and far-reaching plan to deal with the city?s problems.
111122 - They will have to, for instance, say how they intend to
111123 - deal with neighborhoods filled with abandoned homes and
111124 - businesses. Detroit?s decline is not just bad for its
111125 - residents, it also hurts the surrounding suburbs. One way
111126 - state officials could aid Detroit is to urge the
111127 - consolidation of some public services that are currently
111128 - provided separately by Detroit and other cities in Wayne
111129 - County.
111131 - ..
111132 - 8. Detroit once served as the engine that powered Michigan
111133 - and a large chunk of the national economy. It may never
111134 - regain its lost stature, but it does not have to be a
111135 - symbol of failure.
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