Do Detroit Candidates Have A Clue What 'Debt' and 'Credit' Mean?

September 24, 2013, 9:00 AM by  Doron Levin

The Free Press’s impressive, well-rendered analysis of Detroit’s financial implosion highlighted several shortcomings of city officials from the mayor on down. Chief among them, in my opinion, was a blind eye to the sanctity of credit and debt.

Modern political and financial systems have made lending and borrowing easy – maybe too easy.  Banks, cities and individuals can “create” pieces of paper that function as money. Just as the Federal Reserve creates greenbacks to facilitate commerce, a city can create a “pension obligation certificate,” a promise to pay in the future. It's credit by another name.

Just as paper money can be worthless if created in a misguided or fraudulent manner, so can any piece of paper that promises a future payment. The housing meltdown of 2008 and 2009 occurred due to the ease of borrowing. The rapid creation of mortgage-backed securities and credit default swaps by investment banks was too loosely regulated.

Eventually, the housing bubble burst, as do all bubbles. Now you know why your house is probably worth less today and why it’s so hard to get a mortgage. We always slam the barn door hard after the horse has run away.

Cities depend on credit, as do most companies, families and individuals. Few have the cash on hand to install lighting, fix sewer systems or build schools. That’s why it’s critical to maintain a spotless record of debt repayment and – just as critical – to realize when to decide on priorities rather than borrow to cover a deficit. 

I guess I’ve missed the discussion by city’s political candidates’ of the city’s financial collapse, followed by their promise to prevent its reoccurrence. I would argue it’s essential for them actually to utter the words. Mike Duggan and Benny Napoleon, as well as the city council candidates, each ought to promise to guard with their honor the principle that Detroit will never again spend what it doesn’t have, will never again borrow excessively and always will safeguard the financial resources provided by taxpayers.

Yes, yes, I know: other states and municipalities are in the same spot. Their ills are likewise due to excessive borrowing, to overgenerous pay and pensions for public employees and to erosion of the tax base due to the real estate crisis. But Detroit is the biggest and most egregious example of utter fiscal irresponsibility we’ve seen so far. That other states and cities are in the same boat is no justification – and as the Free Press correctly pointed out, many responsible actions might have been taken, if only officials were acting in the interest of long-term financial stability.

The United States faces many of the same issues of credit worthiness and fiscal responsibility as states and municipalities, which is why it’s fortunate that at least some voices in Washington are insisting on a resolution to years of overspending and overborrowing. If you think that Social Security recipients never will be in the same pickle as Detroit pensioners, think again.

Bankruptcy is irreversible and often takes place precipitously – even though there is plenty of warning. How many times, over how many years, did financial analysts warn General Motors? Like Humpty Dumpty after the fall, the pieces can't be put together again. A bankrupt’s credibility must be rebuilt from scratch.

Watch and listen to Detroit’s bankruptcy proceedings carefully as pensioners of the city, workers who toiled and saved for a lifetime, plead to be spared the judge’s ax. None of their anguish was inevitable. Their plight should not be allowed to happen again in our lifetimes.

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Potd_img_5609_592 A little Mickey Mouse sits on top on a vacant building on Kercheval.

By: Michael Lucido