Detroit And Wall Street: The Moral Conflict Between Pensioners and Bankers

08/15/2013 10:07 pm ET | Updated Oct 16, 2013

As the dust settles after the initial Detroit bankruptcy filing, all sorts of unanswered questions and economic choices are getting clearer.

There's plenty to speculate on for lawyers: Can Michigan authorize a bankruptcy filing that violates its state Constitution? What role can be carved for the City's elected officials, who have been eliminated from formal participation by the Governor and Legislature? How much emphasis should the Court place on bankruptcy's social and economic consequences to the citizenry?

There's equally fertile ground for the political class. Can a Republican Governor drive the bankruptcy process in ways that yield a workable municipal government, without sending state cash into the mix? Can Detroit produce local political leadership that can function honestly and effectively? What will Obama do as it becomes clear that Detroit is the first among bunches of insolvent municipalities?

For the rest of us there remains the big issues that could affect everyone, whether or not they live in an impoverished municipality. If Detroit is really just the first of many, can we fix the condition of localities without major revenue increases and a new economic model?

There will be intense social and economic debates. But the bankruptcy filing has given rise to a moral question that we won't be able to avoid: Is there a moral distinction between the obligation to pay pensioners the pensions they contracted for and earned and the obligation to pay creditors the money they lent to the City?

On the one hand, both lenders and pensioners received a promise by Detroit that it would pay them what it owed. There is real moral value in protecting folks who relied on a promise. But on this front it's hard to find a moral distinction between pensioners and lenders. They stand on equal footing.

On the other hand, the consequences of non-payment seem to be quite different. The average pension payment is in the $20,000 range, and many pensioners don't receive Social Security. A reduction in pension payments to such folks is likely to have a real effect on the quality of their daily lives. It is not irresponsible to raise questions of health, safety and even survival for these people.

Reduction in payments to lenders is more likely to have consequences that are measured by diminished profit and income for folks who do not rely on them for survival. This is a real hardship and some of Detroit's creditors are pension funds and individuals who are by no means wealthy. But there is in fact a measurable distinction between the economic security of pensioners who live hand-to-mouth and bondholders, and that distinction has, in my view, a real and unavoidable moral consequence that we will, sooner or later, recognize.

There's also a moral component to the issue of who helped create the problem. An individual pensioner had almost nothing to do with the economic collapse of Detroit. Lenders, especially those who knew or should have known about the City's inability to meet its' obligations, may have a greater moral responsibility for the collapse.

These factors persuade me that low and moderate income pensioners have a higher moral claim to protection in the Detroit bankruptcy than do bondholders. Whether the bankruptcy judge has the authority or inclination to factor it into the final plan remains to be seen.

It's important to keep practical, legal and policy questions separate from the moral questions. It very well may be that requiring greater sacrifice from bondholders than from pensioners will reduce Detroit's' access to capital markets, and/or raise interest rate for municipal borrowing everywhere. It may be that because there are relatively fewer pensioners than bondholders the aggregate pain may be reduced if pensioners bear a greater burden. These are worthy considerations, but they're practical, not ethical problems.

This is a crucial debate and it needs to be brought out into the open. We're in the midst of a wave of demands that we consider the moral consequences of government action. Fair enough. We hear much of the moral component of debates about abortion or laws restricting the rights of gay Americans. That's as it should be.

But when we're figuring out how to distribute economic pain we can, should, must take a moment and apply our moral sensibility, our ideals of responsibility, equity and consequence to our actions. I welcome other moral conclusions. But Left and Right, lawyer or journalist, citizen or observer, ought all to demand an explicit moral argument about what we do about Detroit.