12/04/2013 09:15 pm ET | Updated Feb 03, 2014

Detroit's Bankruptcy: Bondholders, Pensioners and Art Lovers in the Same Boat

Most of the discussion about the consequences of Detroit's bankruptcy has focused on pensioners, and rightly so. Of all the victims of this disaster, they are the most vulnerable and least deserving of harm. They did their jobs, live modestly and need the money, and they had a solemn promise of protection. It's an awful outcome, to be sure.

But there's real suffering in the wind for others, and this may have national consequences. The odd couple in opposition to the bankruptcy petition was the public sector unions working with Wall Street bondholders. Wall Street lent Detroit lots of money, at least $2 billion of which is unsecured and subject to the same slash-and-burn bankruptcy workout that will hit pensioners.

That infuriates the right, who predict the drying up of municipal credit and/or much higher interest rates. While some of that may happen, the real consequence may be that banks will be much more careful about to whom they lend money, and that's a good thing. Municipal and state governments who borrow to pay operating expenses are making a profound mistake that invariably comes back to haunt them. Too often, the solution when a crisis hits has been the creation of "control boards." These are much-beloved by Wall Street, for a simple reason: They invariably solve the problem by raising taxes and cutting services, while bondholders get back 100 percent of their investment.

Bankruptcy will cause real suffering to pensioners. But bondholders are going to take a real hit. Now the pain will be shared, and that's a better outcome than just dumping on pensioners and public employees.

As the municipal financial crisis spreads, the Detroit model will make it harder to continue to protect the one creditor with political clout: the banks. I mean no hostility to banks per se. It's a bad thing when anyone loses an investment or promised payments. But for too long Wall Street has occupied a place of privilege in the midst of economic suffering. That's ending, for good legal and political reasons.

In New York, which I know something about, numerous cities, counties and school districts are careening toward bankruptcy. Governor Cuomo's solution has been to lend them more money, postponing the inevitable and making it worse when it comes. No one wants to take ownership of a systematic breakdown in the way we run cities. The president is no better. Congress is worse.

So unless we start a national conversation about how we make our cities livable and what sort of financial model can replace the old industrial property taxpayer system, we're going to get more Detroits. Wall Street should wake up and smell the coffee. If Wall Street doesn't continue its odd-couple relationship with labor, things will get worse and worse. But put those two together and maybe something will change.

To give you an idea of how widespread the suffering is likely to be, there's a real move to make Detroit's considerable municipal art collection an asset to be sold off to pay creditors. It's been the most powerful symbol of the breakdown in social and cultural norms that invariably accompanies not paying your debts. And if everything a city owns is fungible and sellable, what will we do with parks and libraries that might attract buyers?

Pensioners, Wall Street and art lovers. That's a coalition that could get Washington and state capitals to honestly and openly confront looming municipal bankruptcies.