Last week, the mayor of Detroit, America?s 18th largest city and the home of the flagship of Main Street America, the US auto industry, filed for bankruptcy with debts hitting $18-20bn. On the same week, the behemoths of Wall Street, Goldman Sachs, JP Morgan etc announced profits nearly back to their pre-crisis levels. Those two bits of news just about sum up the winners and losers out of this crisis.
The aim of government policy nearly everywhere has been the restoration of the profitability of the capitalist sector, particularly its large companies, at the expense of the wages and conditions of working people, including their public services, pensions and welfare benefits. In the financial crash, governments and the central banks reacted quickly with huge bailouts for greedy, corrupt and failing banks and in the case of the US launched the use of public money in billions to save the auto giants Ford and GM from bankruptcy. The debts incurred from these bailouts and loss of public revenues from the ensuing Great Recession drove up the budget deficits and debt levels of the public sector, particularly the poorer and weaker cities and states in the US.
And Detroit is poor; it has a higher unemployment rate and high inequality of income and wealth, a falling population and declining industries (see http://blogs.ft.com/ftdata/2013/07/19/detroit-a-dying-doughnut/). The bankruptcy filing follows decades of decline that have seen the automotive capital?s population fall from 2m in the 1950s to a little less than 700,000 currently ? leading to a 40% drop in tax revenues since 2000. America?s auto industry has suffered from foreign competition, poor technological development and bad planning decisions. Ford, Chrysler and GM lose market share to the likes of BMW, Nissan, Toyota and even Fiat. But what brought Ford and GM to their knees was no so much their poor vehicles sales but the huge losses they stood to suffer from their financial arms. Increasingly, these companies got more revenue from selling credit and warranties and even mortgages through their ?banking arms? than through making and selling cars. When the financial crash came, that went down.
Defaulting on its debts would mean that Detroit cannot meet its obligations to its employees on wages and pensions and it cannot pay back the bonds held by pensions funds and Wall Street. The city?s total debt is at least $18bn and could be as much as $20bn ? $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar. The city?s unsecured debt includes $2bn of general obligation bonds and other financings, $3.5bn in pension liabilities that are underfunded and about $5.7bn in health and other benefits owed to workers. Unsecured creditors say their worst case recovery would likely involve getting back 75 to 80 cents on the dollar.
Wall Street wants its claims met first. Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority. This circle will not easily be squared. The city has had to borrow money to meet its already reduced operating budget and has cut services to the point where only a third of its ambulances are in service and only 40 per cent of its street lights work. It now takes an hour for the police to respond to emergency calls.
Bankruptcy is the classic capitalist way of resolving the crisis: through the destruction of the value held by the current owners of the city?s debt and by reducing the incomes of the people working for the city. After that, new capital can flourish on the ashes of the old. The vultures are already picking at the pieces of Detroit real estate. Rock Ventures has spent more than $1bn buying property in downtown Detroit. These purchases are funded by hedge funds and by the very banks back in Wall Street that stand to lose some of the value of the Detroit bonds they hold. Cheap real estate at bargain basement prices will compensate as poor people sell up and the better off leave the inner city.
Most of the city looks abandoned and broken down. But companies such as Quicken Loan, the mortgage originator, have moved into these cheaper areas and are buying up property by the street. Chrysler recently opened its first new Detroit-based corporate office in decades. Whole Foods, the upmarket food chain, has also opened its first outlet in Motown. And in September the city will break ground on its first urban tramline since the 1930s.Meanwhile back in Wall Street, all is bright and light. Pre-crisis levels of profits are back. The major banks made a combined $17.6bn in second-quarter net income, the best since the same period six years ago.
Of course, these are not the same banks that entered the crisis. There has been a monumental restructuring and industry-wide profits are still down significantly. Even if the headline numbers for the survivors look attractive, they are still far from pre-crisis levels of profitability. The average return on equity at the five big Wall Street institutions is 8.9%, less than half the returns reached in 2006 and 2007. But it is getting better, at the expense of the likes of the people of Detroit
Michael Roberts The article has originally been published on the author's blog 'The Next Recession'.