Opinion

The Great Debate

Why the federal government should help bail out Detroit

detroit101

Starting last month, and continuing through July, Detroit’s 170,000 creditors will vote on the terms of the “Grand Bargain” that will end the city’s bankruptcy.

Different groups are contributing to the deal: the state of Michigan, the city of Detroit, as well as philanthropic organizations including the Knight and Ford foundations. They’ll either contribute money or reduce salaries of city employees, in order to restore Detroit’s solvency and ability to pay its retirees.

So far, absent in the bargain is support from the federal government. On April 24 Treasury Secretary Jack Lew visited Detroit, raising hopes that a $100 million bailout from the government would materialize. The money would come under the category of “blight eradication,” a pre-existing federal program designated for urban renewal. The federal government is careful to avoid setting a precedent of bailing out state or municipal pensions because it doesn’t want to take on a massive liability and, in doing so, encourage local governments to make more unsustainable promises.

This is a mistake. The federal government should use Detroit as an opportunity to take a more active role in state and municipal pensions. Unless the American economy experiences unprecedented growth, future federal bailouts of state and municipal retirement benefits are inevitable. The more likely scenario of low or normal growth will make these retirement benefits a burden to all taxpayers, regardless of where they live. At some point the federal government will inevitably be stuck with the tab, either from increased political pressure or from states gaming existing federal programs.

detroit555The sooner the federal government acts, the lower the cost to taxpayers because the financial hole will only get bigger. In both the mortgage and European debt crises, the world saw how much damage an unacknowledged, but expected government guarantee can cause. Debts became unmanageable and creditors looked to the central government for bailouts. The lack of clarity caused uncertainty and wreaked havoc on financial markets. Rather than staying on the sidelines or engaging in backdoor bailouts, this time the federal government should take a more active role in shoring up state pension finances.

Europe’s Lehman moment

By Jeffry A. Frieden
The opinions expressed are his own.

Europe is in the midst of its variant of the great debt crisis that hit the United States in 2008. Fears abound that if things go wrong, the continent will face its own “Lehman moment” – a recurrence of the sheer panic that hit American and world markets after the collapse of Lehman Brothers in October 2008. How did Europe arrive at this dire strait? What are its options? What is likely to happen?

Europe is retracing steps Americans took a couple of years ago. Between 2001 and 2007 the United States went on a consumption spree, and financed it by borrowing trillions of dollars from abroad. Some of the money went to cover a Federal fiscal deficit that developed after the Bush tax cuts of 2001 and 2003; much of it went to fund a boom in the country’s housing market. Eventually the boom became a bubble and the bubble burst; when it did, it brought down the nation’s major financial institutions – and very nearly the rest of the world economy. The United States is now left to pick up the pieces in the aftermath of its own debt crisis.

Europe’s debtors went through much the same kind of borrowing cycle. For a decade, a group of countries on the edge of the Euro zone borrowed massively from Northern European banks and investors. In Spain, Portugal, and Ireland, most of the borrowed money flooded into the overheated housing market. “At the height of the building boom,” Menzie Chinn and I write in our new book, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery:

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

Europe’s speculator full Employment Act

Far from setting a trap for the “wolfpack,” Europe’s $1 trillion bailout package amounts to a full employment act for speculators, or should that be the reality-based community, for the foreseeable future.

Hoping to tame markets it accused of “wolfpack behavior,” the European Union on Monday unveiled a 750 billion euro package intended to avert a rolling sovereign debt crisis that has engulfed Greece and threatens to spread widely among the weaker euro zone countries.

The package can’t be blamed for being too simple: it contains loans from the International Monetary Fund, an EU emergency fund and euro zone governments, as well as an interesting undertaking by the European Central Bank to buy bonds in order to restore liquidity to supposedly poorly functioning parts of the bond market. In a move straight out of a Russian fairy tale, Spain and Italy, to name just two, are pledging money towards a package that may well be used to bail themselves out. Maybe they should have put up even more money.

Fed’s wondrous printing press profits

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– James Saft is a Reuters columnist. The opinions expressed are is own. –

Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.

Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.

from Rolfe Winkler:

Bailout “profit” is taxpayers’ loss

Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.

That's a nice chunk of change, but taxpayers shouldn't be fooled into thinking this -- or any other bailout -- is a good deal.

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

from Commentaries:

Time to get tough with AIG

It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.

Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.

And in the short term, Benmosche's vacation strategy appears to be paying dividends.

from Ask...:

Bailout bonuses: Does the public have a right to know?

Is it anybody's business how much money you make?

When it comes to Wall Street and the meltdown that whacked financial markets and emptied investors' pockets, the normal rules of etiquette don't seem to apply.

Wall Street salaries seem to be everybody's business lately. Nevertheless, the Obama administration's pay czar may try to keep a large portion of the compensation plans he is reviewing under wraps.

It's Kenneth Feinberg's job to review salaries at the biggest corporate recipients of government bailout funds.

How the bailout feeds bloated banker pay

jamessaft1– James Saft is a Reuters columnist. The opinions expressed are his own –

Rising pay in the finance sector in the wake of the global financial crisis is no surprise and is driven partly by the government’s bailout itself and the underwriting of banks that are too big to fail.

News that some financial firms benefitting from government largesse actually increased the share of revenue they pay their employees sparked a lot of outrage but more heat than light.

from Rolfe Winkler:

Buffett’s Betrayal

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I'd sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style -- diligent security analysis, finding competent management, patience -- was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company's annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.

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