Detroit Mayor Bing: We Won’t be the Last to Go Bankrupt

This weekend’s big news was the Detroit bankruptcy filing. The city’s mayor, Dave Bing, had some harsh words on ABC’s “This Week” TV program:

“We may be one of the first. We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms (of) how to fix our cities.”

When Bing said this, he was answering a question about the potential for a federal government bailout. He didn’t directly ask for one — but he didn’t rule it out, either. He is also correct that Detroit isn’t the only troubled U.S. city.

Is it even possible to “fix our cities,” as Mayor Bing wants? When I think about larger forces, I’m not so sure.

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Population trends create cities — and destroy them, too. The planet has plenty of open space. Cities grow only because they give people reasons to live and work in relatively small areas.

Like many other cities, Detroit owes its founding to geography. The French did not have cars in mind when they built a fort there in 1701. Their concern was the river connecting Lake Erie and Lake Huron.

Thanks to the Great Lakes and proximity to the Canadian border, Detroit was already on the map when Henry Ford opened his first factory. The growing automotive industry put the city on overdrive. According to U.S. Census data, between 1900 and 1950 Detroit’s population grew from around a quarter-million people to almost 2 million.

That, as we now know, was Detroit’s peak. By 2010, the census could find only about 700,000 residents.

Outside the city itself, the Detroit metropolitan area is doing well. So are other parts of Michigan and the Midwest. So what happened? As in other large cities, people who could afford it moved to suburbs that are more comfortable.

Cities and suburbs co-existed well for several decades. Commercial and industrial activity provided plenty of tax revenue. Cities borrowed money via municipal bond issues. Unionized city workers negotiated generous pension benefits.

These long-term commitments all presumed future tax revenue was somehow guaranteed. It wasn’t.

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Companies can’t move big, expensive factories overnight — but they build new ones wherever the economics make the most sense. Large U.S. cities are no longer in that category. The automotive industry gradually moved itself out of Detroit.

That left the city with an expensive infrastructure it can’t afford to maintain. A crumbling city with declining tax revenue simply can’t pay the kind of debt it assumed. Nor can it keep the promises it made to retirees.

Detroit might not be in this mess if people hadn’t moved away — but they did move away. Their reasons probably made sense at the time. They nevertheless left Detroit in its current predicament.

Mayor Bing was exactly right: Detroit is one of the first cities to go down this path, but it won’t be the last.

Who will be next? Here are some top candidates.

  • Midwest: Cleveland and Cincinnati
  • South: St. Louis, New Orleans, Birmingham
  • Northeast: Pittsburgh, Buffalo, Newark

All these cities were once among the nation’s largest — and all have lost a third or more of their peak populations.

In percentage terms, St. Louis looks even-worse than Detroit. The city’s population is down 63% from the 1950 peak!

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Where will it end? I don’t know — but I can’t imagine a scenario in which the federal government is willing and able to bail out every city that can’t pay its debt. Someone will get whacked. The victims will be a combination of taxpayers, muni bond-holders and retirees.

The fights will be ugly. The battle of Detroit is already hot: The city’s pension plans say the state constitution guarantees their benefits. This, they argue, should prevent the mayor and governor from filing for bankruptcy. A state judge agreed.

I’ll let the courts decide who is right. From what I can see, telling Detroit not to go bankrupt is like telling Niagara Falls to reverse course. I don’t see any other way.

Do you?

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Some other news I saw today  …

  • Japanese Prime Minister Shinzo Abe gained some breathing room for “Abenomics.” An election this weekend solidified his coalition’s control of the Japanese parliament.
  • Posting the year’s biggest gain for the yellow metal, gold rose above $1,300 today. This trims the recent losses, but is now the time to get bullish again? Our analysts here are dubious.
  • James DiGeorgia thinks this looks like more of an oversold rally. He thinks we will see more weakness before gold rallies to new highs.
  • Looks like Goldman Sachs (GS) was caught with its hands in the cookie jar. A New York Times story says the bank used its control over aluminum warehouses to drive metal prices higher. Other banks may have employed similar schemes.
  • Until 2003, bank trading in physical commodities was sharply restricted. They wasted no time taking advantage when the Federal Reserve changed course that year.
  • Existing home sales fell unexpectedly in June, according to a National Association of Realtors report released today. The latest data show nationwide home purchases running at a 5.08 million annual rate.
  • More than 150 members of the S&P 500 report quarterly earnings this week. Reports have generally been good — which is partly why the stock market is holding its gains.
  • Tomorrow we’ll hear from AT&T (T), Domino’s Pizza (DPZ), Freeport McMoran (FCX) and Lockheed Martin (LMT), among many others.

Good luck and happy investing,

Brad Hoppman

Publisher

Uncommon Wisdom Daily

Your thoughts on “Detroit Mayor Bing: We Won’t be the Last to Go Bankrupt”

  1. For God’s sake, just close the city down. Permanently. How many DECADES of heavy drugs, violent crimes, abandon buildings, poverty, criminal government,
    closed businesses, gangs, death, destruction, corruption, $19 billion in debt, incompetence, fear and filth… what exactly does it take? Maybe 10 MORE years? Maybe 20 more?
    Are you waiting for things to get “bad”????

    Sheezesss. Close it. Today. Now.

    Stop continuing to pump huge amounts of time, money and resources into a pointless cause. It STILL isn’t clear to anyone? How obvious can it get?
    It can’t be saved. And it’s not worth saving, anyway.

    Leave it as America’s Largest Ghost Town. (It’s almost entirely abandoned already.)

    It’s only “value” will be as a permanent reminder for the rest of the country: This could happen to YOUR city, too.

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