If Detroit's Not Too Big To Fail... Neither Are Other Big American Cities

The American ^ | 05/23/2014 | By Alex J. Pollock

[SeekAndFind]

With the instructive Detroit precedent, shrunken populations, and underfunded municipal pensions common, we can conclude that no city, not even Chicago, should be thought of as too big to fail.

About the bonds of Detroit, Barron’s said: “A lot of investors bought this debt because they assumed that the state of Michigan wouldn’t let its largest city default.”¹ In other words, they assumed Detroit was “too big to fail.” Nonetheless, Detroit did default and became the largest municipal bankruptcy in history. This bankruptcy, with unfunded municipal employee pensions among the competing creditors, is a hugely important precedent. Is any city too big to fail?

Essential to understanding the record bankruptcy of “Detroit” is that it applies only to a small part of metropolitan Detroit. The bankrupt City of Detroit has only 17 percent of the population of the metropolitan area.  Of the two Detroits, Smaller Detroit is broke, but Bigger Detroit, which is five times as big, isn’t.

Of course, Smaller Detroit used to be a lot bigger. “Coming out of World War II,” the Detroit Free Press reflected, “American industry was triumphant, and few centers of industry were riding higher than Detroit … Detroit exercised an outsized influence on the state’s politics and economy.”² What is now Smaller Detroit, once a boom town, had its population peak in 1950 at 1.85 million. (On a personal note, in 1950 I was in the second grade in the Detroit public schools.) Since then, the city has lost 61 percent of its population, which at 714,000 is less than it was in 1920.

At its peak, the City of Detroit’s population represented 71 percent of the metropolitan area, now it is 17 percent; it was 29 percent of the State of Michigan, now it is 7 percent. Detroit is the largest city as a proportion of the state to go bankrupt. Its shrinkage made it politically easier to let it fail, as well as economically more likely that it would.

These striking trends are shown in the following 100-year population graph.

Source: U.S. Census data.

This basic demographic pattern is shared by many old manufacturing cities in the northeast United States. These include St. Louis, Cleveland, Buffalo, Pittsburgh, Cincinnati, Baltimore, Chicago, Philadelphia, Boston, and Milwaukee  --  listed in the order of percent population loss since their peak, which like Detroit was in 1950 for all of them except Milwaukee (which was in 1960). All have lost a large proportion of their population, ranging from 63 percent to 20 percent; all are significantly smaller than the rest of their respective metropolitan populations; and all have become much smaller proportions of their respective states.

The following table summarizes these changes.

Source: U.S. Census data.

Are any of these too big to fail? Is Smaller Detroit a leading indicator for others? All our old cities show the same pattern of absolute and relative population loss, but on the positive side, the credit quality of the others has held up much better than Detroit’s, as judged by bond ratings of their general obligation debt. Detroit is in default, but none of the others is currently rated below single-A. Population loss has not been destiny in this respect, at least so far. Nonetheless, with the instructive Detroit precedent, with shrunken populations, and with underfunded municipal pensions common, we can conclude that nobody, not even the much bigger City of Chicago, should be thought of as too big to fail.

The bond ratings of the City of Detroit by Standard & Poor’s and Moody’s were below-investment grade or “junk” BB/Ba-3 ratings by 2009. That year, the city’s chief financial officer met with Wall Street analysts to discuss its mounting financial problems. “What happens if Detroit goes bankrupt?” he was asked. His reply: “We don’t. The state will step in and ensure that they right the ship and that the bonds are paid.”³ It didn’t. The bonds weren’t. Instead the state sensibly insisted that the city declare municipal bankruptcy and give the creditors some serious haircuts. Michigan’s largest city was decisively not too big to fail. Which is as it should be. Should investors assume that any city is too big to fail? Nope.

Alex J. Pollock is a resident fellow at the American Enterprise Institute. President and CEO of the Federal Home Loan Bank of Chicago 1991-2004, he grew up in the City of Detroit.

 

[Cringing Negativism Network]

America itself runs a massive trade deficit with China.

440 billion imports to America from China.

122 billion exports to China from America.

(last year)

This is not limited to cities. America itself needs to bring back jobs.

Jobs.

[Buckeye McFrog]

Chicago will get a bailout.

They have too much pull, and know where all of the bodies are buried.

[dfwgator]

New York City’s bailout is inevitable with that commie in charge.

[cripplecreek]

Detroit is a tiny little smudge of red ink compared to the oceans of red ink other cities want to unleash on us.

Exclusive: Too big-to-fail pension insurer agrees to liquidation trust in ResCap NY bankruptcy

[Ohioan]

The demographics, discussed, are not primarily related to loss of jobs; rather they reflect the inevitable consequence of the social chaos spawned by Leftist social engineering.

Let me make one other point. New York City now has a Mayor who is clearly to the Left of most of the politicians who (via Federal, State & Local wars on reality) brought about the demographic changes, recorded above. Any predictions on what is going to follow?

William Flax

[Ohioan]

Was typing my #6, while you were posting.

[Cringing Negativism Network]

Detroit’s collapse has been about a massive loss of jobs.

What will happen if we continue to send American jobs to other countries, is we will see Detroit expand and eventually take over the country.

America needs to bring back jobs.

When one city (such as Detroit) lost jobs to say, Texas this is overall a very good change.

When one American city loses jobs to Malaysia, or to China, the jobs vanish.

America needs jobs.

We really need to stop importing everything.

[blueunicorn6]

The generous people of Michigan, through their state legislators, are getting ready to give the retired city employees of Detroit $194,000,000 to thank them for voting Democrat.

Bankruptcy is only a word if you can get everyone else to pay for your wasteful, foolish spending.

Sue the Democrat Party. They caused this and they have lots of money.

[Ohioan]

Detroit's social disintegration started while the auto industry was still relatively healthy. By 1962, the first time I drove around in Detroit, there were already large areas of the City, just outside the very core, which looked like bombed out war zones. Still in the 1960s, it had a Police Department, which was corrupted by faux "liberal" social theories; and the affluent citizens were on the way out in large numbers.

William Flax

[csmusaret]

Can’t we just pay Canada to take it?

[Cringing Negativism Network]

That may be, there are always cities growing and other cities shrinking.

What I am referring to, are much bigger however.

America itself is shrinking now.

We need to bring back jobs to America.

[Little Ray]

Absolutely. Detroit isn’t special.
Let ‘em all go.

[cripplecreek]

Since Obama became president we’ve dumped billions into Chicago through various means.

In 2009 Obama appointed Chicago crony Cameron Davis to position of Great Lakes czar and gave him $20 billion to work with. It doesn’t appear that Davis has done anything since aside from act as a special advisor to the EPA.

I used to think of conservatives as far better informed than liberals but these days I doubt it. We’re standing on the railroad tracks watching the squeaky handcart of Detroit rolling down the track and don’t notice the locomotive bearing down on us from behind.

[bandleader]

That’s RIGHT!I was against George bush’s”Bail-Outs”,and I’m STILL Against”Bail-Outs”!Let them file for Chapter 7(or 11)and get their ACT TOGETHER!!!!!!!!!!!!!!!!!!!!!!!!!!!

[caver]

The big difference with Detroit is that it almost 90% black. It would be racist not to bail them out.

[Ohioan]

Nations have survived hard times; but not social chaos. (Not that the loss of jobs is not related to the social chaos, which obviously raises the cost of producing--and thus hiring--in the United States.)

The loss of a common identity; of social cohesion; magnifies all other problems; makes it infinitely more difficult to even ameliorate other problems.

Detroit went down further than more Conservative cities, precisely because of its being the victim of egalitarian/collectivist values (i.e., the philosophic underpinning of Communist values).

This was all predictable--completely predictable. To understand the general effect of the earlier agitation, to which I refer, see The Greatest Mischief Ever Wrought.

Or, to approach the questions from a positive direction; that is, to understand why America prospered so greatly before the Leftist policies (social engineering, etc.) brought about the present problems, consider America-- Grounded On Experience & Reason.

William Flax

[MeganC]

Add Sacramento to the list. Sacramento’s corrupt city council and its corrupt mayor Kevin Johnson just voted to give $350 million to a bunch of billionires so those bilionaires can make millions off of a new sports arena. The losing Sacramento Kings will move to an arena that will be built in downtown Sacramento.

That means when 18,000 fans flush a toilet all of their sewage will go into a downtown sewage system that’s built of brick and is all over a century old. A corrupt Democrat in the State Senate, Darrell Steinberg, passed a law that exempts the arena from environmental laws that would otherwise require the city of Sacramento to spend $1.5 billion to maybe as much as $2 billion to improve sewage, surface streets, and nearby freeway access.

And the lawsuits have already been filed to make the city comply with existing environmental laws.

If the city is forced to comply with those laws after the arena construction starts then look for Sacrameto to file bankruptcy, too.

[Vaduz]

Bail outs keeps socialism alive and well it’s why the democrats love it.

[Mariner]

"etroit's social disintegration started while the auto industry was still relatively healthy. By 1962, the first time I drove around in Detroit, there were already large areas of the City, just outside the very core, which looked like bombed out war zones. "

The efficacy of a City is often determined on whether or not the law is enforced, and whether law-abiding citizens want to live there.

Liberals don't seem to understand that.