Thursday, July 18, 2013

News: Municipal Bond Failure Detroit Style

News Break: The Dominoes Start To Fall.
Photo of abandoned Detroit home
Once the engine of democracy; Detroit is broke today
For those who didn't notice the headline, Detroit has announced that it will file for bankruptcy. I had written about the impact these defaults will have on bonds and subsequently on your taxes.
The fight over the few assets left in Detroit's balance sheet will probably get nasty. Unions, municipal employees, pension funds, bureaucrats, and little-ol grandmas who lent the city money will duke it out in front of a national audience.
If things get too rough, other cities facing the same problems may opt for increasing taxes; an option that Detroit didn't have since tax payers had long left the city, leaving behind only those who live from the state.
Screenshot Image of CNBC's The Kudlow Report Discussion on Detroit's Bankruptcy on 07-18-2013
Launch CNBC's The Kudlow Report
on Detroit's Bankruptcy
Then there is the chance that Obama may be tempted to use your money to rescue Detroit and any other city in trouble elsewhere. Just remember from my previous post that, whether through inflation or taxation, you always pay the bill when the President gives so called free money.
Let's see what comes out of this circus while keeping an eye on our wallets.

1 comment:

  1. I see a lot of comments online that argue that either the governor of the state or Wall Street are responsible for creating Detroit's problems. I wonder if anyone understands that the Bankruptcy is due to insolvency to a long running budget deficit.
    Do people know that "budget deficit" means that more money went out than came in?
    Think of any person you know who spends too much compared to what they make. You already know that they will eventually go broke.
    Then consider their ability to borrow to pay for daily expenditures. For people, borrowing usually happens through credit cards. For a city like Detroit, borrowing comes in the form of bonds. When someone spends too much, credit cards allow them to delay the day of final failure. Bonds do the same for cities.
    In any case, the final day will always come no matter what. To Detroit, that day was Friday. They could no longer borrow any more.
    Based on this scenario, who is to blame?
    The nice-old-grandma’s who lent the city money by purchasing bonds with their retirement savings? Not really.
    How about wall street? Well, they certainly did not create the spending. If anything, they gave Detroit lower interests than should had been the case based on the uncontrolled spending.
    Then, how about the Governor? Only if he demanded the over spending or stole tax money; but neither is the case.
    How about the casinos? No. Instead, casinos actually paid money that helped Detroit compensate for some of the tax income short fall. Keep in mind that outside of taxes, cities do not usually have ways to get income.
    If you want to know who is at fault, there are only two places to look. Who spent too much money and who did not pay enough taxes?
    At less that you think that "budget deficit" means that the city had too much more income than it spent, any other comments about what created the problem are simply out of place.

    Who spent too much money and who did not pay enough taxes?
    This question should be pretty easy to answer.