The Detroit ‘Bail-In’ Template: Fleecing Pensioners to Save the Banks


The Detroit bankruptcy is looking suspiciously like 10.0pt;line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”> that if Detroit manages to cut its pension obligations, other struggling cities could follow suit. The Detroit bankruptcy is establishing a template for wiping out government pensions everywhere. Chicago or New York could be next.

There is also the systemic risk posed to the municipal bond system. Bryce Hoffman, line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”> on July 30th, warned:

line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”> that could have avoided either robbing the pensioners or scaring off the bondholders: a state-owned bank. If the state or the city had its own bank, it would not need to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes.
10.0pt;line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”>, which would leverage the local government’s capital into credit, back that credit with the deposits created by the government’s own revenues, and return the interest to the government as a dividend, following the ground-breaking model of the state-owned Bank of North Dakota.

There are other steps that need to be taken, and soon, to prevent a cascade of municipal bankruptcies. The super-priority of derivatives in bankruptcy needs to be repealed, and the protections of Glass Steagall need to be restored. While we are waiting on a very dilatory Congress, however, state and local governments might consider protecting themselves and their revenues by setting up their own banks.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In