Detroit Bailout, Where Does it End?


With Detroit, Michigan declaring a bankruptcy worth nearly $20 billion, much concern has been on the larger implications of the city’s collapse, the impact on citizens, etc.

On Sunday, CBS “Face the Nation” host Bob Schieffer presented another important question to Michigan Governor Rick Snyder. From the Real Clear Politics transcript:

Mayor David Bing said this morning on ABC, I think, that no decision has yet been made on asking for a federal bailout. Do you think there is a federal bailout in Detroit’s future?

Governor Snyder said he does not think a federal bailout of the city is the proper course of action. Over at the far-left magazine The Nation, however, John Nichols argues recent bailout history shows a bailout would be forthcoming if Detroit was a bank:

Does anyone seriously doubt that, if Detroit was a “too-big-to-fail” bank, it would have been bailed out long ago?…

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.

Nichols’ piece as a whole is full of big government propaganda and policy proposals that would be harmful to Detroit, the state of Michigan, and America as a whole. He asks an important question though, and the answer is exactly why the 2008 bailout was wrong: it set a dangerous precedent for institutional failure in America.

It wasn’t just Wall Street that got bailed out in 2008. From Schieffer:

But, you know, the federal government bailed out General Motors. It bailed out Chrysler. That worked out pretty well.

Really? The big banks didn’t fail, and now control more of the nation’s financial sector than pre-bailout. Tens of billions went into the auto industry, and according to Heritage Foundation labor expert James Sherk. It will cost taxpayers between $17 and $20 billion because the federal government gave preferential treatment to the United Auto Workers.

Furthermore, neither of these bailouts took place because of unexpected policy results. Tariffs protected the auto industries from certain kinds of competition for decades, and expensive deals with unions systematically bled companies dry. In the financial industry, artificially low interest rates and government efforts to make housing “affordable” created a massive bubble over time. Bailouts simply broadcasted that if you were big enough to hurt the wider economy and had the right connections, Congress would help you out.

The same pattern holds true of Detroit. Schieffer mentioned that Detroit used to have over 2 million residents, and is down to 700,000. Poverty is pandemic, as is a lack of education. Reversals from the long-standing policies that created these circumstances will not take place quickly, and a bailout will do nothing to change those policies.

But Nichols’ question does have merit: If Congress doesn’t bail out Detroit, won’t it be hypocritical? It will help out banks and the auto industry, but not a city?

This is why the 2008 bailouts should never have been instituted; nearly five years later, they are being used to conceal years of bad decisions in America’s most financially disastrous city.