Saturday, July 20, 2013

Detroit Has Filed for Chapter 9 Bankruptcy Protection

In the 60s, 70s, and even the start of the 80s Detroit used to be an awesome city.

Today Detroit is spent and aimless and it has just filed for bankruptcy protection. It was an expected act given the value of the promises made during the past several decades. It promised good pensions to its former employees and those promises were built on assumptions that were known to be unsupported by economic reality.

There are many individuals who will be directly and negatively affected by Detroit's bankruptcy but the good thing is that it will forever change the psyche of how cities across our nation function. Cities all over this great country cannot continue to make promises that depend on totally uncertain future economic growth rates, tax base, and population increases. Rating agencies need to be stingier with their highest bond ratings and need to be able to take into account economic uncertainties that can arise over decades.

If cities and municipalities cost of borrowing were to truly reflect the economic uncertainties I think that the existing and current budgets would be much more constraining and we will eliminate potential catastrophic bankruptcies.

Detroit is guilty of overspending but this would (could) not have happened had the municipal bonds issued decades and years ago had been priced correctly. Bond rating agencies are almost equally guilty in Detroit's ultimate fate. There are no perfect markets but for short periods of time. Promises made decades ago are toast and pure rubbish. Markets need to realize this fact and tell all cities that make free promises that there is no free lunch.

Poor and destructive planning by public officials and greedy private credit rating agencies have colluded to create a monster called 'free market' credit instruments. Bond buyers were fooled to think that municipal bankruptcies are impossible while the cities' credit ratings were overstated.

We really need to have the government take a hard look at credit rating agencies practices.

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