Politics & Government
12:42 pm
Mon August 12, 2013

Economist says banks should be at the back of the line in Detroit bankruptcy

Nobel Prize winning economist Joseph Stiglitz wrote about Detroit's bankruptcy filing in yesterday's New York Times.

In his opinion piece, The Wrong Lessons from Detroit's Bankruptcy, Stiglitz writes that it is "extremely important" to understand what happened in Detroit.

Detroit’s travails arise in part from a distinctive aspect of America’s divided economy and society ... our country is becoming vastly more economically segregated, which can be even more pernicious than being racially segregated. Detroit is the example par excellence of the seclusion of affluent (and mostly white) elites in suburban enclaves. There is a rationale for battening down the hatches: the rich thus ensure that they don’t have to pay any share of the local public goods and services of their less well-off neighbors, and that their children don’t have to mix with those of lower socioeconomic status.

Stiglietz says the question in front of Detroit now is how the city gets through the bankruptcy process, and that "ensuring that bankruptcy proceeds in a way that is good for Detroit will require vigilance."

Part of that vigilance, he writes, will be making sure banks don't manipulate the process in their favor:

With nearly $300 million of outstanding derivatives at stake, they may connive to be first in line for repayment. The Chapter 9 proceeding provides the opportunity to place the banks where they ought to be — at the back of the queue. It was bad enough that these nontransparent financial instruments were used to confuse and deceive investors. It would add insult to injury to reward the banks’ behavior. The priority in the bankruptcy proceedings must be restoring Detroit to vitality as a city, not just getting it out of the red., and is only the first step in recovery.