RoadWarriorFromLP

I'm not really speculating. For one, Detroit is contending that the pensions are unsecured creditors.

For another, this very process is currently underway with the Stockton, California bankruptcy, and that case is proceeding without the pensions being carved out from the case.

The bondholders will fight for this based upon the priority issue, claiming that they're being treated unfairly as a class if the pensions are allowed to stand at the head of the queue.

Unlike a Chapter 11, the courts don't have much say in a Chapter 9 so over the details of the plan, aside from determining whether there are elements of bad faith that allow the court to reject the plan. (They can't force assets to be sold to pay creditors, for example.) The pensions are going to have a hard time fighting this, but even a priority wage claim would put the pensions behind the secureds.

Michael

But Detroit is ignoring state law.
But California doesn't have such a state law.
That is likely true but there is such a thing as due diligence. If investors performed due diligence to determine that such a state law was on the books, they may have accessed the risk as higher then they may have originally thought. Banks used that defense successfully that investors must perform due diligence and therefore banks are not responsible for investor losses.
Although Congress took care to draft the legislation so as not to interfere with the sovereign powers of the states guaranteed by the Tenth Amendment to the Constitution, the Supreme Court held the 1934 Act unconstitutional as an improper interference with the sovereignty of the states. Congress enacted a revised Municipal Bankruptcy Act in 1937.

http://www.uscourts.gov/FederalCourt.../Chapter9.aspx

So even though congress was careful not to interfere with the sovereign powers of the states, a more watered down version had to be passed.

In my personal opinion, pensions will likely have to take a haircut for Detroit to be on the road to recovery but it sounds like there will be long court battles before that will be resolved.

MostlyYank

Agreed about consolidation. The city workers might be OK, it is Detroit

My home city has been through this before, and although smaller had/has very similar problems to MoTown.

The root of the problem is the Machine. Dem, Rep, doesn't matter. All they know is growing their empire secures their power and ability to milk more and more money. Shrinking (which is solely needed) is completely foreign to them.

Smash the machine. Although without the kind of obvious corruption shown here lately (half our 'leaders' are now rotting in jail where they belong) it's very very difficult, because through patronage and quid pro quo their tentacles are long and many.

Have no doubt though, Detroit will rise again. Might take a while though!

Pete

MostlyYank

This was very good:

http://www.france24.com/en/20130723-...-auto-industry

Pete

Hiro11

This is nothing new and a long, slow downward spiral. Detroit has been a hole since at least the early seventies. The WSJ lays the blame for Detroit's woes squarely on the shoulders of Coleman Young, the mayor 1974-1994. Give it a read, it's a compelling argument. Basically, disasterous social and economic policies resulted in a self-sustaining rapid depopulation of the city. This destroyed the city's tax base without cutting its obligations.

Subsequent administrations have been ineffective in fixing the city's crime, social and economic problems. Some of them have also indulged in some of the most blatant nepotism, patronage and outright corruption in the country (see Kwame Kilpatrick).

People forget that Detroit was the Silicon Valley of the 40s and 50s. It's amazing to see how hard it has fallen.

MostlyYank

Ach, need to be a subscriber

Cleveland once rivaled 5th Ave as a home and shopping destination. My dad said that all changed when the city passed the 'Rockefeller Tax', a tax on rich people.

Pete

Michael

Isn't that always the excuse that the rich use. Currently the rich blame Obama for having poor policies that is not business friendly and is taxing the job creators even though stocks have risen dramatically, the rich are wealthier then ever, and the US is one of the few developed countries that has had continuous job creation, increased gdp, lowering unemployment, and decreasing government deficits.

For some reason it seems the rich would rather have austerity programs like Europe with declining gdp, increasing unemployment, double and triple dip recessions, poor stock market performance, and increasing government deficits. Then to satisfy their egos, they could blame Obama for the mess he created. But in reality, if there wasn't so much headwinds from European policies, the US would be significantly further down the road to full recovery.

Economics is a lot more complex than the right, the rich, and the unions wants us to believe. The rich wants us to believe that all the problems in Detroit were caused by powerful unions and regulations but fail to mention poor management even though Germany has much more powerful unions and stricter regulations than Detroit but the car industry in Germany has thrived.

MostlyYank

It might be an excuse but move out they did, and with them the rug under Cleveland's golden age.

Detroit used to be a beautiful, wealthy city. Now it isn't. I'm not rich, but I'd much rather live in a wealthy society than a poor one.

Pete

Michael

How well did Hoover's policies work of keeping taxes low and running the unemployment rate to 25% and still rising when he left office with massive people in food lines? I suspect that if there would have been quick action, the damage to the economy could have been limited but that is not a right wing ideological belief.

Since the 1970's, Detroit's auto manufacturer's management made one mistake after another. Now that they've hit bottom, maybe now with the assistance of the government (bad policy as far as the right is concerned even though Germany and Japan does it) management may have learned their lesson and maybe in the future, the golden age of Detroit will return.

Clinton raised taxes and the economy boomed and the prosperity was shared. Bush Jr. lowered taxes and the rich got richer and the poor got poorer. So there is no one right answer to any problem.

MostlyYank

I have no problem with the rich paying their fair share btw. 'Fair' is a tough one though.

Hoover had exactly nothing to do with the depression. As a matter of fact he pulled his money out of the market almost a year before the crash and told anyone who would listen to do the same. The government lacked the power to do practically any regulation at the time.

The recent derivative based crash does trace back to Pres Clinton who refused to regulate them based on the advice given by his treasury staff (btw, the same folks Bush Jr and now Obama use). That doesn't absolve Bush Jr, he'd didn't do anything either. I really don't blame them as no one wants to stop the gravy train, but it would've been very statesman like if they did.

To get an idea how bad both the corporate and factory floor attitude was in the auto industry I suggest 'The Decline and Fall of the American Automobile Industry' by Brock Yates.

The government is very involved in the auto industry, at least GM. Ford did it on their own.

Pete

Michael

Although Hoover may have had very little to do with the depression, he attempted little to try to limit the damage. He just kept letting the banks fail, allowing massive foreclosures, allowing massive companies to fail, and assumed that laissez fair capitalism will correct the problem. He may not have had the laws on the books but he didn't even attempt to pass new laws to try to halt the decline. A declining economy feeds on itself and unless an attempt is made to halt the decline, it won't stop until a floor is reached which could be 25% or more unemployment. Once such a devastating event occurs, then recovery becomes very difficult since businesses and consumers lack confidence.

FDR also made a mistake by listening to his treasury secretary during his second term and cut back government spending over the worry about the increasing national debt. This caused the unemployment rate to increase from 14% to 19% and caused another recession.
I agree that Clinton was swayed by Greenspan and Rubin but today nobody listens to what either has to say. Clinton, unlike Bush Jr., admits his mistakes.

MostlyYank

Quick swivel Michael, and great conversation

Many, of the programs FDR used were actually started by the vacuumed one. The big difference was, Hoover refused to give Federal money directly to individuals, only to the States. Until FDR managed to replace a few Justices the SC largely agreed with Hoover. The Depression was ended by the war.

The school of Greenspan and Rubin still rules the roost, albeit morphed slightly. The same guys fronting for the same people under our Regime of Change Perhaps Clinton should call him and mention it.

To bring it back to the OP, when are the Feds going to be forced into bankruptcy? If unfunded obligations and overextended credit are behind Detroit there's a much much bigger player here. There's a chilling thought.

Pete

Michael

Currently I'm not too concerned about the US national debt. The CBO projects that this fiscal year ending in September, the budget deficit will be 4.1% of gdp and by 2115 it will be at 2.1% of gdp. At 2.1%, the national debt as percentage of gdp can shrink rapidly (3% real gdp growth plus 2% inflation = 5% which is significantly more than 2.1%). This is far lower than the budget deficits in most European countries. Also even though the national debt is over $16 trillion ($10.5 trillion left over from Bush), this does not compare apples to apples when comparing national debts. The US has a public debt of about $11 trillion or about 75% of gdp which is lower than the national debt since government trust funds are financing the national debt. Most other developed countries do not have trust funds and everything is paid out of the general fund so their national debt is equal to their public debt which in most cases is higher than the gdp percentage of the US public debt. Also the US is the major reserve currency and the Euro isn't going to replace it (imagine what the world would be like if the Euro was the major reserve currency with all their problems).

In fact I would be be in favor of a big stimulus bang of about $1 trillion in infrastructure projects. With lower unemployment, government revenues increase and benefits decrease decreasing government spending and the US infrastructure is falling apart and will eventually need to be rebuilt. If it is done now, interest rates are low so it won't cost the government as much as doing it later. If the infrastructure falls apart, companies may as well move to third world countries since that is one of the primary reasons they remain in developed countries.

Long term there is more of an issue primarily because of Medicare. The right wants seniors to pay significantly more and shop around for their health coverage and the left wants to apply pressure on health care providers, insurance companies, and pharmaceutical companies. The left also wants to limit terminal end of life treatment (about 25% of the Medicare budget) and also go to a single payer system for health care reform to reduce overhead costs to about 5% (about the same as Medicare) instead of typically 20% or more by private companies. Who will win that battle we don't know but one or the other has to occur or taxes has to be increased to bring the long term budget under control.

Michael

And the bankers have no shame. They fought every change and still want to do business as usual. Even with the new rules, bankers seem to some how get away with it since there is never any personal penalties but only bigger bonuses. If Jamie Dimon didn't know what was going on in London, I'll eat my hat. They may be able to pretend that there are massive renegade traders but a CEO would have to be crazy to trust a manager with billion of dollars with no oversight (about $100 billion including a 90% plus margin for the London whale). And then pretend that it was a hedge and not speculation (which is forbidden when using the banks money) is insulting my intelligence.

Hiro11

This is already happening. The US auto makers are at least three years into a (partially government funded) rebound. Their fortunes have largely been revived. Ford has been making record profits and breaking sales records for a while. GM has regained the global sales crown it lost and is growing quickly overseas. Both of their stocks are doing very nicely. Some of this is just economic cycle, but I also believe that US manufacturers are genuinely making better cars these days. Also, clearly the UAW needs to share some of the blame for the problems.

This is making some major causality assumptions.