Daily Updates

July 20, 2013

No signs Washington to come to Detroit’s rescue

During the bleakest days of the Great Recession, Congress agreed in bipartisan votes to bail out two of Detroit’s biggest businesses, General Motors and Chrysler.

Today, however, there seems little appetite from either Democrats or Republicans in Washington for a federal rescue of the birthplace of the automobile industry. Detroit now stands as the largest American city ever to file for bankruptcy protection.

Such a bailout would be huge, perhaps as much as $20 billion. Federal resources are strained, with the national debt at $16.7 trillion and the federal government struggling under the constraints of automatic spending cuts that took effect in March.

President Barack Obama has had a hard enough time getting his present proposals though Congress, where Democrats hold a narrow majority in the Senate and Republicans are in firm control of the House.

“I think it would be a waste of the president’s time to even propose it. His plate is so full and throwing Detroit into the mix is the last thing in the world he’d want,” said Ross Baker, a political science professor at Rutgers University who specializes in Congress. “I think the era of big government bailouts is over.”

Political leaders in Washington haven’t pushed for a bailout of Detroit, which was the nation’s fourth-largest city in the 1950s but since has had a declining population, accelerated by hard times for the auto industry during and right after the punishing 2008-2009 recession.

Congress is still in near-gridlock territory. Opportunities for spending vast sums of money on a bailout for Detroit seem severely limited. The White House is taking a wait-and-see approach, but clearly exhibiting little enthusiasm for another big bailout.

“Can we help Detroit? We don’t know,” Vice President Joe Biden said in a response to a reporter’s question about a possible federal rescue. Presidential spokesman Jay Carney, when asked directly if a bailout was a possibility, appeared to rule out such assistance.

“We will, of course, as we would with any city in this country, work with that city and have policy discussions with leaders in the city, and make suggestions and offer assistance where we can,” Carney said. “But on the issue of insolvency ... that’s something that local leaders and creditors are going to have to resolve. But we will be partners in an effort to assist the city and the state as they move forward.”

Local leaders aren’t pushing for a federal bailout after the city filed for Chapter 9 bankruptcy protection Thursday, and Republican Gov. Rick Snyder isn’t, either.

“People should not expect bailouts at either the federal or the state level,” Snyder said in an interview with The Associated Press.  “We’ve been very diligent about this. We want to be a supportive partner at the state level. I believe the federal government does (too).”

Members of Michigan’s congressional delegation aren’t clamoring just yet for a federal bailout. “We just need to step back and think about it,” said Rep. Sander Levin, D-Mich.

The city’s emergency manager, Kevyn Orr, says that for now, Detroit will stay open, bills will be paid and city services provided.

But the bankruptcy case could take years to resolve. Ahead of the filing, the city’s two pension funds sued to block a bankruptcy. Bankruptcy could change pension and retiree benefits, which are guaranteed under state law. The impact on current city workers is unclear.

President Gerald Ford, after threatening in 1975 to veto any bill that would bail out New York City, went along with a $2.3 billion rescue loan that had strings attached.

More recently, the federal government threw a financial lifeline to both General Motors and Chrysler (the Ford Motor Company didn’t request the aid) and acted to protect major Wall Street and banking institutions from insolvency. Federal stimulus spending and rescue loans started in the final year of the George W. Bush administration and extended through the Obama presidency.

Now, with the economy slowly recovering, most of the direct government anti-recession aid has ended although the Federal Reserve continues to provide financial stimulus by keeping short-term interest rates extremely low while buying $85 billion a month in government and mortgage bonds to keep mortgage and other long-term rates low.

“The chances of a federal bailout are remote” given partisan gridlock in Washington, said Bruce Katz, a former official with the Department of Housing and Urban Development who now is director of the metropolitan policy program for the Washington-based Brookings Institution.  

“But I don’t think the federal government is off the hook,” Katz said. “It is a substantial investor in Detroit. Whether it’s community development block grants or federal contracts or assistance to nongovernmental recipients, there’s a substantial amount of federal money that goes into Detroit. There’s a role for the federal government. And it needs to make its resources more flexible than today and align them with the priorities of Detroit.”

“A lot of this could be done administratively, but in the end it will have to have some congressional engagement. This is almost like a Hurricane Sandy situation,” Katz said.

Norman Ornstein, an expert on Congress with the American Enterprise Institute, said that “despite the great success with the bailout of the auto industry,” such rescues by the government “are going to be hard to come by in the future.”  

As to extending a helping hand for Detroit, Ornstein said it would be hard to get any federal aid package past House Republicans, “who I just can’t imagine have any interest in doing anything for Detroit.” The city is heavily Democratic.

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