A new plan for Detroit's emergence from bankruptcy was released today. The details will require more information and more thought before they can be pronounced good or bad. Should the city's art collection be saved? Should sewers be leased? When can cops be put back on the street?
While those things are yet to be seen, the fundamental economic choices were made clear today. There's universal pain to be sure. But Wall Street takes the much bigger hit. Pensioners, not so much.
Percentages aren't fully clear but it seems like pensions will be reduced by 20 to 30 percent. Bondholders (a good portion of them) will see reductions up to 80 percent.
Put aside legalities, there are social and ethical reasons for this. Most of the pensioners get very little to begin with and most need the money to survive day to day. Food and shelter and medicine kind of things. Wall Street can absorb the loss with less suffering.
That's mostly true, but keep in mind that bondholders are people too. Some of what Detroit owes would go to real people, not just hedge funds and bankers. And keep in mind that the shrewder operatives on Wall Street have, at least recently, insulated themselves from these kind of losses. And keep in mind that the health of the municipal bond market has consequences for each of us, no matter where we live.
But the big picture outcome is worse for Wall Street than for pensioners, and it's perfectly legal. That is frightening a lot of Wall Street folks, and waking up a lot of folks on the left and in labor.
Progressives were understandably upset about Detroit's bankruptcy. It was muscled by Michigan's right-wing Governor Snyder and even the lesser cuts to pensioners are hurtful. There's the obvious ongoing damage to existing wages and benefits for city workers.
But the cold reality is that these outcomes were inevitable given Detroit's catastrophic economic mess, and catastrophic political leadership. The mismanagement of the pension system and the willful refusal of state and federal leaders to hold it accountable has left a toll of misery. Up to now everybody took hardline positions hoping the workout would come from the other guys hide. No more.
Yet...from the perspective of the left, the pain is being parceled out in a roughly fair manner. And from the perspective of Wall Street, there's big trouble ahead. Detroit is the model for what will be a series of municipal financial collapses some of which we know about some of which we don't. In my home state of New York, big cities like Syracuse, Yonkers, Buffalo and Albany are teetering on insolvency. The wealthiest county in the nation, Nassau County has a control board running its finances because it is profoundly broke. Small school districts and villages are on a "watch list." And we're not alone.
So Wall Street now faces a model for municipal work-outs that take a much greater chunk out of its hide than of the pensioners and unions. It's no cause for celebration. But it could have been a lot worse and a lot of municipalities which would never have gone near a bankruptcy will probably rethink their positions. Maybe organized labor will start to construct approaches to municipal insolvency other than a grim determination to ignore reality. Maybe Wall Street will rethink irresponsible lending practices. Maybe the rating agencies will start to tell the truth. Or maybe the bankruptcy courts will do what the political process couldn't, reorganize our state and local finances.