Detroit is facing a messy bankruptcy process. The city filed for bankruptcy yesterday, a move that was widely expected after the state chose a bankruptcy lawyer as the city’s emergency manager. That emergency manager promised an orderly bankruptcy process in a late statement yesterday, but today we got a hint of the chaos to come when a judge ordered the bankruptcy withdrawn. That order did not come from the bankruptcy court and probably will not stand, but there are questions all around about who is really in charge. Michigan’s governor, whose anti-city program is the cornerstone of his administration, will try to tell you he is the one who pulls the strings in Detroit’s decline, but in truth, there is not much even he can do to control the sequence of events beyond this point.
There are no models to follow that can tell you where Detroit goes from here. How many cities have ever, in the history of civilization, faced a net loss of one million residents? This decline in Detroit’s fortunes occurred over decades, and in theory was gradual enough that it could have been managed. It reflects a failing in Western culture that there was nothing anyone could do. We so expect growth that decline looks like a mistake, and we waste time looking for a turnaround when what is really needed is to put things back in balance so that we can carry on on a smaller scale.
This is the problem still in Detroit, so much so that the current bankruptcy plans will not solve anything. Unlike a commercial bankruptcy, though, a city cannot liquidate — for the sake of its residents, it must keep operating no matter what. As it stumbles forward, Detroit will not be able to meet more than a token amount of its backward-looking obligations, and I am afraid this will come as a shock to many. Detroit’s obligations, estimated at roughly $20 billion, will go unmet as the city’s problems continue while its resources fade. My fear is that the bankruptcy plan is based on the assumption of a turnaround. If implemented as is, it could leave Detroit impoverished for two generations or drive it into an early repeat bankruptcy. A proper bankruptcy solution is one that eventually allows Detroit to replace its burned-out street lights. It remains to be seen whether that can happen.
Every municipal bankruptcy affects banks directly and indirectly, but at this point I would not dare to guess which banks will take a hit and which will find a way to get a piece of the action. I do feel safe in saying that Washington will go out of its way to avoid getting involved.
There are surely lessons the banking sector can take from Detroit. Banking as a whole is declining at a similar pace and too many in banking are making the same mistake of looking for the early turnaround, rather than looking for the balance that will allow them to weather the next crisis.
One credit union failed this week, Taupa Lithuanian Credit Union closed by state officials in Ohio. The NCUA will be contacting members, around 1,000, about their accounts. Credit unions this year have been failing at the rate of about one every three weeks.