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.

Jane Hamsher blogs at firedoglake.com

Comments

[joebiz]

We should all get a free GM car out of this mess or at least auto service for one year, free. If we wanted these Big 3 to survive, we would have bought some of their awful, recall prone cars.

[Kevin Casey]

Hence your insular reliance on anecdotal evidence.

[sposton]

I think their kind understands the good old fashioned threats. Tell them to seek help from Daimler-Benz or make any help contingent upon them slashing their wages and benefits when the next hurricane or some other disaster strikes.

[Oldchef]

While these Republican senators bloviate about the expense of pensions and medical insurance for retirees of the auto industry, could we find out what the government (you and me) are paying for retired senators and congressmen? They get a very nice retirement package after serving for much less than the 20 or 30 years required for other retirees. Someone here wondered if they would give up half or even a smaller portion of their retirement for the public good. I bet not.

[Nonamnesiac]

Why not make the Republicans filibuster, force a vote, keep them in session and refuse to vote on releasing any more of the financial institution bailout until a bailout is passed that doesn't require the workers to give up pensions and healthcare? I don't understand why the Democrats are not forcing the Republicans to filibuster to the end. It's a sellout of the whole movement for fair wages and benefits to simply drop the Bill because the Republicans won't agree.

[glitzqueen]

Old Hangdog Harry puts me into a cold rage., By giving the thugs pass after pass and moaning that he can't do anything about it, he's as guilty as they are. Republicans should have been forced to filibuster every worthwhile bill they've shot down in the past two years, thus showing their true colors even to the somnolent. His new low was praising Corker last night for offering legislation that would've thrown autoworkers under the wheels. "Heroic efforts," my ass.

As others have pointed out here, opposition to aid for GM and Chrysler is just more of the usual Republican plunder: a last-ditch assault on the UAW, coupled with further tribute for the foreign occupiers they're paying to run auto factories in their union-bashing states. Funny how Harry never even bothered saying so -- or pointing out that the Wall Street elite who got us into this mess with their derivative scams weren't ordered to accept lower pay and benefits, or even to use their extravagant public largesse for the good of the public.

We have GOT to wake up and realize that ALL working people are victims of the transnational grillionaires. By drawing false distinctions between "middle" and 'working" classes and buying into anti-union rhetoric, we ignorantly facilitate our own ruin.

[Shawn828]

You are so on the money with your comment. I've been screaming at the screen all afternoon about what they aren't saying. My senators are both Repugs, so no help from their ( GA) offices. Hard to contact the other senators as they only want to here from their constituents.

How about pointing out that Shelby and company gave these competitors land and tax breaks worth the value of the facilities, so of course their costs are lower.

[JenniferGSd]

Take the money from Exxon Mobile to fund the auto makers. They already took it from us when they overcharged us and it will help them as well. They can't want Detroit to go belly up. They need gas guzzlers.

[William1950]

loan the money to the auto industry... we can not afford not to. If the republicans are so interested in the uaw concessions let them (the republicans) put their money where their mouth is and give up half of their retirement.

[buzzygirl]

The country is falling apart at the seams. I just hope that these politicians are not playing games. They need to think about the lives that will be impacted if these companies fold. By the same token, banks, and companies should be made to change they way they do business regularly.

If not, we are doomed to facing the same problems down the road.

[brodon]

Detroit is a toilet that needs to get flushed.

They brought this on themselves.

[mcartri]

Grab some tp, brodon. You're going down with them. Come back on Huffington Post in a few months and tell us how it went.

[Kevin Casey]

Amazing, how someone with internet access can be so uninformed.

[OneLessReason]

HA!!!! the dems holding their own ground!!! please !! They will do absolutely what the Republicans tell them like the last 2 years...

[TrooAmerican]

Unfortunately, You're right.

The dems are just a bunch of nice, caring, idealistic, fairminded public servants, and the Repubs are Type A antagonistic, nasty aggressive dictatorial personalities. One would think True Christians would support the party thats NOT trying to help Millionaires easily become billionaires at the expense of all the people Churches and ministries are overLoaded in trying to help.

I agree with Jane. the Dems need to get some spine and Fight.
Its one thing to Tout "Bipartisan" intentions, but its another to let the Minority kick your tail.
thats why i like Reid and Pelosi, they take very little crap from the GOP.

[mcartri]

Reid & Pelosi are owned by corporate America. They & the other Dems are NOT spineless. They simply reflect what Nader said years ago about the so called two-party system: "One party-Two suits". Money has corrupted our Democracy beyond repair. We truly have the best government money can buy.

[BillMelater]

I really love that video of the '65 Chevys.

[DougNTexas]

I am a yellow dog Democrat from Texas. But the top dogs in the Congress on the Democrat side always cave in. They should have not caved on the Patriot Act as a good first. They should have filibustered the NAFTA and like bills. Our Dem leaders are not of the kind we had 40 years ago in Congress.

[fairandjust]

I expect to see the News Headlines be "Bush Destroys Another US City - Detroit"

"Republicans Increase Unemployment Rate to 50%"

"Bush Allows Shameless Shelby to Kill Off Auto Workers"

"Republicans Decide to Crash US and Global Economy"

[greenriverkate]

I couldn't agree more.

[marijam]

Yes, they should be forced to filibuster and go down in history for the anti-American economic traitors they are. Let the history books write the story of the foolish Senators who would rather let an entire industry die, and therefore the last vestiges of a once-great industrial nation go down the toilet, in order to try to gain leverage over the competitions' unions, since they just happen to have foreign automakers in their states. This is exactly what is wrong with America, our Senators would rather help any other country, rather than our own.

[kstuff]

At least Detroiters still have their moral values...including providing fair wages and helping the little guy.

[KillTheMessenger]

Huh? You mean there are no uninsured people in Detroit?

Wow... does make you want to move there, doesn't it?

[Kram]

Not uninsured auto workers. That's the issue here. Could you republican's possibly be anymore disconnected from reality?