Detroit Really Is Too Big to Fail

Does anyone seriously doubt that, if Detroit were a "too big to fail" bank, it would have been bailed out long ago? Or that its pensioners, rather than facing the threat of cruel cuts as part of Michigan Governor Rick Snyder's scheme to steer the city into brutal bankruptcy proceedings, would instead have pocketed hefty bonuses?

To ask the question is to answer it.

If the 2008 bailout of the biggest players in the financial sector--and policy-making over the ensuing years--tells us anything, it is that Congress and the Federal Reserve take care of Wall Street.

America's great cities? Not so much.

The political dynamic in Washington has been tough on America's cities for a long time. And it is worse now, as austerity advocates seek to shred a safety net that is vital for urban America. But there are some in DC who recognize that the federal government has both a responsibility and an opportunity--as Pennsylvania Congressman Chaka Fattah, a leader of the Congressional Urban Caucus, suggested Friday-- "to analyze Detroit's fiscal situation and intervene on the city's behalf."

This does not mean that a bailout on par with what the bankers got is in the offering for struggling cities and counties across the country. Not on John Boehner's watch.

Yet, Washington cannot avoid this issue and expect the United States to return to robust economic health. The link between the economic viability of American cities and the economic viability of America is too great for that.

To this end, President Obama and serious members of Congress must speak up about the vital importance of federal interventions not merely on behalf of cities but also on behalf of the people who live in major municipalities that cannot be allowed to fail. Cities and counties provide front-line services to tens of millions of America's most-vulnerable citizens, and municipal employees and retirees use the checks they have earned providing those services to keep local economies functioning. Austerity cuts, whether they are imposed by appointed officials with no other options or bankruptcy courts, do real damage far beyond the cities where they are imposed.

The urgency of Detroit's circumstance has highlighted the need for what one Congressman calls a "rethink" of Washington's approach to cities that--for all their troubles--remain essential engines of the American economy. This rethink must, necessarily, recognize that the era in which Washington can neglect American cities and expect the American economy to survive unscathed is finished.

The headlines from Detroit tell us as much.

But it's not just the Motor City.

Detroit is in the news because of Snyder's move. But Detroit is not alone--not in a country where more than 80 percent of Americans now live in urban areas, and where communities from California to Alabama are wrestling with bankruptcy processes.

Michigan Governor Snyder has targeted Michigan cities outside Detroit for state-imposed austerity, using an "emergency manager" law that he reworked and reinstated even after Michigan voters scrapped a similar measure in a 2012 statewide referendum vote. Beyond Michigan, in states across the country, major cities teeter on the brink of insolvency.

No one suggests that officials in Detroit or Saginaw or Flint--or the other struggling American cities--did everything right.

But only the most deliberately disengaged commentator would imagine Washington to be blame-free in all this. America's urban communities--and many not-so-urban communities--have for decades been battered by free-trade policies that foster deindustrialization, by tax policies that encourage offshoring, by all the missteps and misdeeds of Congress and successive presidents.

Washington did plenty to create the crisis. Yet, as Michigan Congressman Dan Kildee notes, "For too long lawmakers and regulators have stood aside as cities grapple with budget deficits, unfunded pensions and crumbling infrastructure."

Kildee, a Democrat who served as Genesee County (Flint) Treasurer and CEO of the Genesee Land Bank before his election to Congress, is urging Federal Reserve chairman Ben Bernanke to work with Congress to address what the congressman warns--correctly--is "the systemic failure of U.S. cities."

"I would ask if you would think about how you would advise Congress or how the Fed itself might pursue policy that would have the effect of potentially avoiding--but certainly mitigating--the economic effect of municipal financial failure," Kildee told Bernanke at a House Financial Services Committee last week.

Since his election to Congress in 2012, Kildee has been warning Washington that the crisis faced by cities extends far beyond the headline-grabbing troubles faced by Detroit.

"In my work across the country, this is something much bigger than a failure of management, but a structural failure," the congressman argues. "Cities failing will be a national problem, one way or another, and I suggest perhaps at a different juncture we might pursue some thought about how the federal government might intervene."

The "rethink" that Kildee proposes is rooted in an understanding that failing cities undermine the states in which they are located--and the nation as a whole. And, he argues, there are ways to intervene.

"Our system of municipal finance is broken. States and the federal government need to rethink the way they support cities and metropolitan areas," explains Kildee. "For example, community development block grant programs, which Republicans in Congress have proposed cutting by over 40 percent, is the wrong approach that would be damaging the vitality of many U.S. cities, in some cases even exacerbating their decline. It's time that we start thinking about the long-term sustainability and funding mechanism for cities and suburban areas that are the powerhouse engines of our economy."

Kildee's not alone in stepping up. He's one of the newest members of Congress, but in the struggle to aid Detroit, he's joined by one of the senior members: Congressman John Conyers, who has represented the Detroit area since the mid-1960s.

Conyers warned long ago that free-trade policies would devastate American cities, and he's been a steady advocate for investment in urban America. But now, he says, Congress needs to recognize and respond to the risks that arise when municipalities are in crisis.

While Kildee is prodding Bernanke to engage, Conyers wants the House Judiciary Committee to examine "the increasing use of Chapter 9 bankruptcy by municipalities and other jurisdictions facing financial distress and the ramifications such bankruptcy filings are having on impacted jurisdictions and the nation as a whole."

In particular, Conyers is interested in examining the role that financial distress and bankruptcy pressures play in assaulting pension rights and in hastening the privatization of essential public services. As Conyers notes, the pressure to privatize is often at odds with the public interest in transparency and the long-term stability of communities.

There are already plenty of politicians stepping up to say what Washington can't do in response not just to Detroit's needs but also to those of hundreds of cities and counties nationwide. But that's austerity talking, not common sense. Common sense says that the federal government, which has played a part in undermining the economic prospects of American cities, needs to start playing a useful role.

No matter what that role is, there will be those who call it a "bailout." In reality, it's a smart investment not just in cities but also in the American people. After all, as Congressman Kildee reminds us, "While you can dissolve a corporation through bankruptcy, you cannot simply 'dissolve' a place where hundreds of thousands of people live, work and raise their families."

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