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Detroit's Bankruptcy Filing: Not With a Bang, But With a Thud

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When Judge Steven Rhodes, a federal bankruptcy judge, ruled in December that municipal pensions protected by the state constitution are vulnerable under federal bankruptcy law, there was the usual media scrum, and a Detroit Police bomb squad even convened outside the courtroom (note that the city still has a bomb squad). But Rhodes' gavel fell with more of a thud than an explosion. Despite what the decision may portend for more than 20,000 retirees in Southeast Michigan and for pensioners around this country's desperate cities, it still felt anti-climactic, since no one was surprised. Emergency Manager Kevyn Orr has broad powers, and little about life in 21st-century America prepares anyone to expect a judge to stand up for public pensions.

Much hope now rests on the as-yet-unspecified foundation rescue announced yesterday, but it appears that the best-case scenario there is a softening -- not a reversal -- of pension cuts for Detroit's retirees. The coalition of philanthropists have so far offered $330 million, according to news reports, intended to salvage both the DIA and some portion of pension shortfalls. And basic public obligations have become charity cases.

The response from Detroit's opinion makers has been fairly uniform. Many are generally regretful about pension cuts, but resigned to their inevitability; others hope that the Republican-led state will cover pension shortfalls; and still others remain confident in the legality of emergency management but are reticent, if not silent, on the question of its justice. On this latter question, a water department retiree quoted in the Free Press was acute in her analysis: "These people, the karma is going to get them," said 69-year-old Darwina Wallace, who lives on her $2,600 monthly pension and is not an expert in the bond market. "They don't seem to care about people."

But who are "they"? Orr? Governor Rick Snyder? The chief executives of UBS, Bank of America and Barclays? Much of the resignation that greeted Rhodes' ruling comes not just from its seeming inevitability, but from the impenetrable complexity of the financial instruments that have brought Detroit and cities like it to heel. Financial derivatives, swaps, the municipal bond market, pension liabilities, secured and unsecured creditors -- it is the very incoherence and opacity of this financial web that bludgeons opposition. And so what will you do about it? The liberal nostrum usually delivered to radical types at times like these -- just vote the guy out if you don't like him! -- won't work here either. If you don't understand how derivatives work in the bond market -- like most everyone not directly involved in it, I don't -- it's easy to shuffle off demoralized, or defer to self-appointed experts in the media, or to trust government-appointed experts like Orr, whose last job, let's recall, was with a law firm, Jones Day, that has represented some of Detroit's biggest Wall Street creditors, who are after all experts too.

And so, thus perplexed by experts, we hope for the best from philanthropists and take comfort in old moralisms. One hears a lot of talk about Detroit and "irresponsibility"--of unions and local politicians , and (less often) of the city's Wall Street creditors and their gambles on city debt. The Free Press correctly noted that city workers' pensions are meager, but we also read that "generations of leaders, both city and union, signed off on contracts that promised benefits that were impossible to maintain." Would they have been impossible to maintain in the absence of the 2008 financial crisis? Or with a fraction of the federal funding to cities that has vanished over the last two decades? And isn't there a fundamental difference between the "promises" owed to the librarians, fire fighters and water inspectors, who worked for them, and those owed to bankers, who didn't? And shouldn't this difference matter more than it apparently does in court?

Given how the news tends to reproduce the conventional wisdom of a time and place, perhaps a turn to literature is in order. As Orr's tenure as emergency manager began last March, I was teaching my Wayne State English students a little-known Upton Sinclair novel, The Flivver King, commissioned by the UAW in 1932 as part of its organizing drive at Ford. Sinclair wrote of a laid-off worker who witnesses a demonstration of the unemployed during the Depression:

He listened to several speakers, telling not merely about the inside of the plant, which was familiar to him, but many things about Henry Ford's activities in politics, and his refusal to make any contribution to the support of his unemployed workers; about the near bankruptcy of the city of Detroit, and how the bankers, before they would lend another dollar, had forced the city government to turn off hundreds of its employees; they had refused to let the city undertake any new public works and had required the welfare department to cut fifteen thousand destitute families off the relief rolls. Maybe the fathers of some of these families were in this crowd; men shouted that they were.

It was the seventh of March, 1932, and a biting wind was blowing.

Orr has assured us that he will make every effort to be "humane" in cutting pensions. That wind is still blowing.