OK, Capt. Obvious finally surfaced in Detroit. The city filed for bankruptcy this week. Kevyn Orr, the Emergency Manager appointed by the governor, threw in the towel, after failing to reach any agreement with the city’s multiple creditors.
First, two observations:
I do think that Orr will be successful in his restructuring, because the Federal Bankruptcy judge appointed to the case won’t suffer any legal shenanigans. We will see the circuit judge’s insipid ruling (that the city can’t file for bankruptcy) get tossed out, and that decision upheld expeditiously. Pensioners will see substantial haircuts in their current and future benefits, as they are not sustainable.
The holders of the city’s GO debt will take a bath, but instead of the 10% being offered, they’ll likely to end up with between 20-25% on the dollar, which was what they were hoping for all along. They know full well that there is no way they can ever get repaid in full. But you never accept the first offer.
However, here’s the first big problem. Once Detroit successfully establishes the precedent that it does NOT have to pay back its General Obligation ( full faith and credit ) debt, that also means that Detroit must now effectively run a balanced budget, on a cash-flow basis only, as it can’t ever borrow again.
Who pray tell, is going to lend the city money? Bondholders would demand rates that would make a loan shark blush. The state and the federal government won’t..other than possibly small amounts initially, because of the precedent it would set, and because Republicans won’t support it under any circumstances. So that means that Detroit will have to cut to the bone, and beyond.
But there’s an even bigger problem. In 15 months or so, when the Emergency Manager decree expires, governance reverts to the Mayor and City Council. Well, duh!!
(BTW, since they have zero powers now, why don’t we save several million bucks and furlough them, and most of their staffs, for the duration of the EM mandate?)
But seriously, look at local politics in Detroit. The city is overwhelmingly black, and local politics is 100% racial in nature. Does anyone doubt that the entire present city council will be re-elected next time out? Who’s going to run against them. A white person has no chance, zilch, nada..period.
OK, now, write in the names of conservative black politicians or community leaders in Detroit:
I’m still waiting….
And if one, or more, somehow do miraculously appear, they will be demagogued as “Uncle Toms,” if not far worse, and crushed in the election.
The same clowns will be back in charge. They’ll get re-elected the same old way..by promising the unions not to cut jobs..indeed to restore them, and to increase the old wages and benefits. What’s to prevent them from doing it? Absolutely nothing. After all, until this week, these were the same people who were telling us that everything was “A-OK!!”
However, this time they won’t be able to pay them, because the money won’t be there, because the city won’t be able to borrow. And that’s when it will all break down, again.
I don’t know what the answer is. Heck, I don’t think there is an answer. And that’s the problem.