Detroit Bankruptcy Starts Nationwide Public Banking Debate.

Detroit skyline as seen from Windsor, Ontario
Detroit skyline as seen from Windsor, Ontario (Photo credit: Wikipedia)

Posted December 13, 2013

by Jerry Alatalo

By now most Americans are aware of the City of Detroit‘s being judged “eligible” for bankruptcy. There are a number of factors which played a part resulting in this current state of affairs. Most would acknowledge that de-industrialization, where corporations have closed down manufacturing plants and moved those operations to nations where drastically less expensive labor was available – to do the work previously done by Americans – began, decades ago, the downward spiral of harmful economic conditions for governments at all levels.

Many have asserted that Detroit’s financial condition has also been the result of other factors, such as years of mismanagement, an unfortunate assessment given the conditions in Detroit which have been out of the control of the city’s elected representatives. Detroit is known as the “Motor City” and in years past enjoyed a booming economy and thousands of good jobs in the automotive sector. Unfortunately for Americans, with Detroit’s people being especially hard hit, the beginning of outsourcing of jobs was a continuing trend which closed plants across the nation.

Outsourcing affected not only those in the automobile sector, but corporations in virtually every industry moved jobs out of the USA to lower labor cost, absence of regulations nations – resulting in lower standards of living for millions of Americans and their families. So, millions of jobs were off-shored to foreign nations, with the added downward pressure on wages from the remaining corporations who, caught up in the vicious cycle of outsourcing to remain competitive on labor costs, would get wage concessions from Americans who risked loss of their jobs to men and women from low-cost labor nations.

With the loss of millions of American jobs, city, county, state, and the federal government realized sharp decreases in revenues from taxes and consumer spending. Add the September 11, 2001 event, the 2008 world economic crisis, and the situation became compounded through people’s fears resulting in decreased spending, leading to further job losses and more fear, less spending, less taxes, etc.

Detroit’s situation mirrors city, county, and state economic-financial difficulties across America – and the world. Detroit has suffered a tremendous decrease in revenues, the main issue being that the city ran out of cash – cities are cash in / cash out operations. The figure of $18 billion is one which is somewhat irrational because it includes Detroit’s obligations many years into the future. Governor Rick Snyder did not need to take the option of bankruptcy for Detroit. The city’s most important number is its $200 million current shortfall, which is manageable without bankruptcy.

Consider that the State of Michigan and Rick Snyder withheld from the city some $67 million in revenue sharing funds shortly before bankruptcy was filed for. There has been a marketing campaign to pump up the dollar amounts regarding Detroit’s obligations. Some consider the $18 billion amount as a fantasy, marketing ploy to push Detroit into bankruptcy. In 2005-6 Detroit arranged loans of $1.6 billion to bolster pension funds, of which one half or $800 million involved complicated Wall Street derivatives. In the contracts involving the derivatives, there was a clause which stated that if the city’s credit rating became downgraded, the entire 20-year interest amount was payable today.

This is analogous to you signing a $200 thousand dollar mortgage with a clause that says if your credit rating drops you must pay the $300 thousand (mortgage interest only – not the principal) in compound interest you would eventually pay the lender after 30 years – now. I do not know to what extent this derivatives deal by the city – considered an unbelievable action because of this immediate payment clause – figures in the city of Detroit’s eventual bankruptcy. It is interesting to note, however, that, with current bankruptcy laws, of the claimants in the bankruptcy of Detroit, banks will receive their “pound of flesh” in full before those junior claimants such as the city’s pension funds – threatening drastic cuts for pensioners.

There are some who think that Detroit’s bankruptcy was politically motivated, the result of laws which allowed Governor Rick Snyder to appoint an “emergency manager” in any city or county in Michigan which he has determined unable to take care of their government’s financial affairs. The elected officials in Detroit would not have taken the action of declaring bankruptcy, it was a decision made by unelected people. This raises some serious questions regarding democracy and constitutionality.

If the State of Michigan had a public bank like the Bank of North Dakota the city of Detroit would not have needed to go to Wall Street (WS) for funds, it could have obtained the loans through credit from the Bank of Michigan public bank, with terms much less expensive as well as much less risky than the WS transactions the city made. Besides starting a nationwide debate on protection of pension funds for current and retired public employees, the city of Detroit’s bankruptcy will also start a nationwide debate on potential solutions to be gained through establishment of public banks in every state of the union.

Most importantly, Detroit’s bankruptcy will start a nationwide debate on the establishment of a public “Bank of the United States”, replacing the privately owned Federal Reserve System.


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