“We are one nation. We are one people. We will rise and we will fall together. Anyone who doesn’t believe it should come here to Detroit. It’s like the commercial says: This is a city that’s been to heck and back. And while there are still a lot of challenges here, I see a city that’s coming back.”—President Obama, Sept. 5, 2011
Government Motors II
I cannot imagine anyone being stupid enough to purchase a Detroit municipal bond at any time in the last 10 years.
Detroit muni bonds are not just junk bonds, they are sewer bonds. Just flush them down the toilet.
Tell that to the holders of GM bonds (mostly retirees )
Unionized retirees vs. investors? Obama in the White House? No doubt who is going to win.
And the other democrat controlled city (Chicago) is on the check off list.
City by city and them state by state.
Bond holders will be screwed...that’s the trend.
What these political hacks don’t seem to realize is that people who buy bonds expect to be paid back. They also don’t seem to realize that these investors are not stupid.
Investors that are burned once are unlikely to be burned twice. Investors are also the type of people that will learn from other’s mistakes. If you burn a group of investors other investors will learn of it and will not invest in your bonds in the future.
Here is a little known secret municipalities as a rule borrow a lot of money using the munny bond market. Water treatment and waste water treatment plants can’t be built without selling bonds.
If Detroit bond holders are burned every city in the country will have to pay much higher interest rates to induce investors to buy their bonds because investors will now consider these bonds as far more risky than they had previously. This means every municipal project will be much more expensive than it would otherwise have been. All to protect Detroit employee pensions. Fed bailout or not the rest of the country will pay for Detroit’s mismanagement.
Lets see if union and non-union pensioers are treated equally.
There will be a trustee and a plan that will determine creditor classes. Orr will probably be replaced.
Gee- I seem to remember that Obama treated SECURED BOND HOLDERS in the Gm travesty of a ‘bankruptcy’ with total disdain & they got stiffed.
So did the vendors on accounts payable.
Only the unions won with the ‘bankruptcy’ Obama engineered for GM.
There wasn’t one single part of the GM ‘bankruptcy’ that followed any accounting rules I ever learned.
Obama is getting back what he handed out to others, IMO.
Whenever Detroit falls off another cliff I feel compelled to repeat this excellent article originally posted in 2009.
http://www.mackinac.org/article.aspx?ID=10743
Posted: July 6, 2009
Detroit: The Triumph of Progressive Public Policy
By Jarrett Skorup
Imagine a city where all the major economic planks of the statist or “progressive” platform have been enacted:
•A “living wage” ordinance, far above the federal minimum wage, for all public employees and private contractors.
•A school system that spends significantly more per pupil than the national average.
•A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members.
•A powerful government employee union that does the same for its members.
•A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.
Would this be a shining city on a hill, exciting the admiration of all? We don’t have to guess, because there is such a city right here in our state: Detroit
Detroit has been dubbed “the most liberal city in America” and each of these “progressive” policies is alive and well there. How have they worked out?
In 1950, Detroit was the wealthiest city in America on a per capita income basis. Today, the Census Bureau reports that it is the nation’s 2nd poorest major city, just “edging out” Cleveland.
Could it be pure coincidence that the decline occurred over the same period in which union power, the city government bureaucracy, taxes and business regulations all multiplied? While correlation is not causation, it is striking that the decline in per capita income is exactly what classical economists predict would occur when wage controls are imposed and taxes are increased.
Specifically, “price theory” predicts that artificially high business costs caused by excessive regulation and above-market labor compensation rates imposed by so-called “living wages” will lead to an increase in unemployment. Detroit’s minimum wage is a whopping $7.40 an hour, more than $2 above the federal minimum wage when it was enacted; and pressure groups are pushing for more. Additionally, any company contracting with the city must pay its employees $8.23 an hour if they offer benefits or $10.28 an hour if they do not offer benefits.
Such high wage mandates are especially hard on individuals with a poor education and low skills. If struggling and heavily taxed businesses cannot pay such high wages, then they are more selective about the few workers they do hire or go out of business altogether. Those who have promulgated these polices may be well intentioned, but mainstream economists have warned for decades that such policies were very likely to bring about the abject poverty and unemployment that characterize Detroit today. The city has the highest unemployment rate among all large U.S. cities. (On a side note, Michigan is home to eight of the 20 cities overall with the highest unemployment and has the highest state unemployment in the country.)
A similar pattern has played out in public education. It is now conventional wisdom among the political class that higher pay for teachers and increased spending per student lead to improvements in teacher quality and student performance. Again, correlation is not causation, but Detroit Public Schools strongly suggests that this theory must be rejected. It has chronically underperformed state averages, yet reforms are vehemently opposed by the system’s powerful school employee union.
At the same time that union, the Detroit Federation of Teachers, has won rich salary and benefits packages for its members. Median compensation for a DPS teacher is $76,000 and Detroit spends the third highest amount of money per student among 76 large cities nationwide. Statewide, Detroit’s spending per pupil is in the 91st percentile and DPS teachers are paid at the 96th percentile. For all that, by almost any measure Detroit schools have for decades failed their students: test scores, safety, drop out rates, etc. For example, Detroit’s public school students perform at the 3rd percentile in the state - that is, they are in the lowest 3 percent, and the district is in its second state takeover in a decade.
In the private sector such failure would result in mass firings for unsatisfactory performance. No doubt such a response would be condemned by the progressives who support the school employee unions that have made similar actions impossible in their institutions, and have opposed major transformation at every turn.
For example, in 2003 philanthropist Bob Thompson offered $200 million to build 15 charter public schools in the city in which he would guarantee a 90 percent graduation rate. In response, the DFT balked because charter schools are not unionized. The outcome was that the union jobs trumped better outcomes for children.
People vote with their feet, and all the above suggests why, over the past decade, DPS has lost about 10,000 students each year to charter, independent and suburban schools.
Of course it would be unfair to place all the blame for the city’s decline on public employee unions. Detroit is home to the Big Three, whose contracts with their own powerful unions provided the model for those public employee arrangements. The UAW successfully extracted wages and benefits estimated at $71 per hour before the recent shake-ups began.
This is about $25 more per hour than the amount foreign-owned U.S. auto manufacturing plants pay their non-unionized American workers. Due to this disparity, Japanese car companies earn some $1,000 to $2,000 more on each car sold than their American counterparts. The outcome has been a relentless loss of market share that, among other things, has devastated the economic engine that once powered Motor City prosperity.
In addition to being a model of progressive economic, labor and education policy, Detroit is also a case study in welfare statism. Tom Bray, former editorial page editor for The Detroit News, has made the following observation:
“Detroit, remember, was going to be the ‘Model City’ of Lyndon Johnson’s Great Society, the shining example of what the ‘fairness’ of the welfare state can produce. Billions of dollars later, Detroit instead has become the model of everything that can go wrong when you hook people on the idea of something for nothing - a once-middle class city of nearly 2 million that is now a poverty-stricken city of less than 900,000.”
Progressives will complain that this portrait oversimplifies the factors involved in a great city’s decline. Perhaps it does, but with this question in mind: At what point does the weight of evidence and logic make it impossible to avoid concluding that in the case of Detroit, correlation is causation?