Why Detroit — Like New York — Shouldn’t Be Allowed To Go Bankrupt
It isn’t often I find myself agreeing with those at the Peter G. Peterson Institute, a Concord Coalition-esque outfit that preaches the virtue of lower federal spending.
Writing in the Daily Beast, the Institute’s Steven R. Weisman is a wee bit worried that bankrupting Detroit could trigger a global economic meltdown. Of course the Institute was founded by a billion dollar endowment from Peterson himself, who made his money when his Blackstone Private Equity Group went public. Evidently sending the stock market spiraling into the shitter could cause the kind of personal belt tightening they willingly impose on others but aren’t too interested in sucking up themselves.
Anyway, Weisman recounts the tale of Gerald Ford and the imminent New York City bankruptcy of 1975. When the City implored the federal government to help them out, Ford’s response was reminiscent of the neo-Hooverian cold shoulder being turned by culture warriors Richard Shelby and Bob Corker toward Detroit.
His speech denying federal loans that would keep the city from defaulting on its debt triggered the famous New York Daily News headline, Ford to City: Drop Dead.
But Ford’s tune changed dramatically after a trip to Europe, just as New York was preparing to file bankruptcy:
Shortly after giving his speech, just before Thanksgiving, President Ford traveled to Rambouillet, an 18th century chateau outside Paris for the world’s first economic summit, summoned by President Valery Giscard d’Estaing to deal with the worldwide downturn. Arthur Burns, chairman of the Federal Reserve, attending the Rambouillet summit with Ford, asked both Giscard and Chancellor Helmut Schmidt of Germany what they thought if the city that served as the capital of global finance went bankrupt.
"The answer was loud and clear," recalls Felix G. Rohatyn, the investment banker who helped engineer the New York City rescue, and who later served as an ambassador to France under President Clinton. "The European leaders felt that a bankruptcy of New York City was unthinkable."
Rohatyn, who heard about this conversation from key participants on both sides of the Atlantic, says that Giscard and Schmidt told Burns that a New York City bankruptcy would be seen as a bankruptcy of America itself, causing a run on the dollar and extreme difficulties for leading American financial institutions.
Soon after Rambouillet, the Ford administration softened its opposition to helping New York City.
As Weisman points out, there were many inside Ford’s inner circle — like Paul Volker — who were arguing that New York, like the Detroit automakers now, had done much to get their financial house in order once they saw trouble on the horizon.
And he believes that we simply can’t predict what will happen if the automakers are allowed to fall into bankruptcy:
Even today you can argue that what New York City went through was a virtual bankruptcy and a "cram down" of sacrifices. The "moratorium" on the debt principal was the equivalent of the default everyone tried to avoid.
But what was avoided was something unknown. I wouldn’t argue today that banks around the world would be threatened by a bankruptcy of the American auto industry. Indeed, some European leaders are warning that a federal rescue of Detroit would be seen as "protectionist," necessitating retaliatory trade steps in Europe. There is another crucial difference between a city and car companies. While going through a painful contraction, New York City got away with delivering fewer services to its customers. The auto industry would have to make cars that Americans still wanted to buy.
But who can be sure that if the Big Three automakers go down, it won’t be like Lehman Brothers earlier this year, with surprising impacts around the world and at home? Would a default of the auto companies lead to collapses of countless suppliers and businesses around the country, or to Michigan and other states, or to financial institutions connected to them?
In his 1980 book on the city’s fiscal crisis, "The Cost of Good Intentions," the author Charles R. Morris—who more recently warned of a global meltdown because of subprime mortgages—was fascinated by the subject of why everyone in the middle of the crisis had difficulty understanding what was happening around them. "Maybe we were dumb," Beame’s deputy mayor, James Cavanagh, famously stated after the city’s brush with financial ruin, "but nobody else seems to have understood what was happening either."
Then as now, an aphorism from Felix Rohatyn would seem to apply. Never place a bet that you can’t afford to lose.
I realize the Democrats are at a disadvantage in this case — they want to save the auto industry, yet time limitations mean they must appease a President and at least four Republican Senators who will not be returning to office next year (Sununu, Smith, Dole and Stevens — Coleman is still TBD).
But before they give in to the demands of Shelby, Corker and other red state senators who foolishly think they will gain something if they force Detroit into bankruptcy as the price of a bridge loan, I hope that Democratic leadership makes them filibuster. Then we can all watch as the stock market careens in the wake of their fiscal stupidity and insufferable bloviating, and see where the true suicidal wankery lies.