Financial Crisis | paulhunterjones

This is a brief update to my earlier post that dealt with the city of Detroit’s Bankruptcy filing. In the earlier post entitled “A New Beginning or End for Detroit” I discussed the political and economic ramifications of the once proud city’s fall into the financial abyss known as a bankruptcy court. I have not wavered in my belief that the filing for bankruptcy was in Detroit’s best interests.

I was not surprised when Detroit filed for bankruptcy protection. The news outlets had reported the city’s financial problems for months. The economic situation in the Motor City was not only desperate, it was dire. On July 18, 2013 the city’s Emergency Manager, Kevyn Orr, filed the petition with the court on behalf of Detroit. Since his appointment Mr. Orr had engaged in long and arduous negotiations with the city’s largest and most powerful unions and pensioners. Retirees who had long served the City of Detroit were sweating the negotiations. They worried that a bankruptcy filing could result in a drastic cut in the pensions and other vested benefits. About 38% of Detroit’s annual budget was being spend on “legacy costs such as pensions and debt service. Orr’s cost cutting strategy was no secret; Detroit would cut 11.5 billion in municipal debt down to about 2 billion. Consequently if this cut was spread evenly across all the creditors, each would receive about 17% of what was owed them. Yet, not all the creditors stood on equally footing. Many of the creditors were people who made up the very fabric of the city. It might not be too easy (or politically expedite) to blow off their claims. We cannot ignore the fact some creditors had sacrificed more than 20 years of their lives into securing their investments.

Today, after a protracted and bitterly contested preliminary proceedings, Federal Judge Stephen Rhodes ruled that Detroit could move forward with its bankruptcy petition. Judge Rhodes denied the applications of pensioners, public unions, and other large impacted creditors to derail the filing. The court was keenly aware of Detroit’s deep financial problems. In addressing the magnitude of the problem Judge Rhodes stated that “This once proud and prosperous city can’t pay its debts. It’s insolvent…At the same time, it also has an opportunity for a fresh start.” In announcing his decision to a packed court, Judge Rhodes spoke for more than an hour and dwelled on Detroit’s illustrious past. Now Detroit must prepare a reorganization plan that the court will sign off on. Because of the more than 500 lawsuits against it, the city was forgiven for not negotiating in good faith prior to the filing.

The political landscape in Detroit has changed drastically since the filing of the bankruptcy petition. In my opinion it only made sense that the leaders and the political party that ran Detroit’s finances into the ground should be held accountable for the debacle.

The question that every seems to be asking is if racial considerations played a factor in Detriot’s fall from grace. Once the brash and politically savvy Coleman Young took over the mayor’s office, Detroit’s disenchanted Black community had their man in office. When the 1967 riots razed much of the inner city, Whites decided it was time to move to the suburbs. Soon they were followed by middle class Blacks who wanted safer neighborhoods and better public schools. As Detroit’s tax base dwindled, its revenues began to dry up. Detroit politicians kept borrowing money to keep up public spending. It was only a matter of time before the bad economics caught up with the politicians and city. In my opinion the filing of the bankruptcy also spelled the end to Detroit’s political élite.

On November 5, 2013 Detroit voters in record low numbers cast their votes in the mayoral election. They elected Mike Duggan by a margin of about 10%. When he takes office in January 2014 he will become the first White mayor of the Detroit in the last four decades. Exit poll surveys and post-elections interviews revealed that Blacks did not vote along racial lines. Most Blacks voted for the candidate irrespective of his skin color that offered the best chance of restoring Detroit to respectability. Mayor Elect Duggan will assume office of a Detroit that is in bankruptcy, has a soaring crime rate, and who citizens are suffering from low morale. He will also have to deal with the thousands of pensioners who lost a substantial amount of their investments due to the bankruptcy proceeding. Perhaps Mayor Elect Duggan’s biggest challenge will be repairing the City’s relationship with the State Legislature in East Lansing. Some commentators say that Duggan is in a no-win situation; I disagree with this assessment. In my opinion Duggan takes over a city that cannot not sink any lower. The fact that he was elected mayor is the first step in the reclamation of Detroit.

Venezuela is South America’s forth largest economy. Many people forget that it was one of the founding countries of OPEC. By the early 1990s Venezuela was the third largest oil producing nation in the world. These facts get lost in the never-ending debate over the effects of President Hugo Chavez’s push towards socialism.

The late Hugo Chavez was considered a defender of the poor. He was admired by many of his contemporaries because of his ability to stand up to Western imperialism. The left-leaning South American presidents supported President Chavez’s efforts to lead Venezuela down a path to socialism. In my opinion no head of state of any South America country have Chavez’s political sophistication or ability to manipulate public opinion. For years President Chavez convinced his supporters that their lot in life had improved because of his leadership. Without Chavez’s imposing personality and fiery rhetoric it is likely that Venezuelans will start to question the nation’s economic health. The Venezuelan community be surprised to learn that President Chavez ruined the nation’s oil industry by using its revenues like a piggy bank to fund his socialist experiment. It is time for Venezuelans to ask where the government gets the money to fund so many expensive social programs.

After waging a long battle with cancer Hugo Chavez died on March 5, 2013. According to a statement released by the military he died of a massive heart attack. Most commentators believe that he had returned from Cuba because no further treatment would arrest the progress of his disease. If is safe to assume that Chavez knew that his time was up. I do not believe that Chavez was actually in charge of the country’s daily operations during his last few weeks. The late president was probably consulted on major policy decisions and actions.

On February 8, 2013 the government devalued its currency by 32%. At that time it was suggested that this action was designed to clear the decks for a new economic regime. Most economists concluded that the devaluation by itself would not lead to an appreciable improvement in the economy. I think that the devaluation was part of a strategy to give the President’s presumptive successor a political advantage in the soon to be held elections. I do not believe that this monetary action was taken to improve the lives of poor Venezuelans.

Generally speaking the value of a given currency is determined by its relativity to the value of another currency. This exchange rate is normally based upon the amount of the home currency which is needed to purchase one unit of the foreign currency. It is common for countries to base their currencies upon the U.S. dollar or Eurozone euro. Currencies rise and fall depending on movements in the financial markets. Today major currencies are said to “float” along with market conditions.

Many third world nations have elected to fix the value of their currencies. The New York Fed. Reserve Bank explains how this method of evaluating a country’s currency works:

“Under a fixed exchange rate system, only a decision by a country’s government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value.”

Venezuela’s national currency is the bolivar. Its exchange rate is fixed to the US dollar. Many of the world’s Third World Nations’ currencies are fixed. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves to purchase all offers of its currency at the established rate. Because of the Venezuela’s political and economic isolation the country has always had problems maintaining an adequate amount of foreign reserves. Over the last few years Venezuela has not been able to support (defend) its currency. The country has devalued the Bolivar numerous times the last decade. Most commentators and financial experts believe that Venezuela’s economic problems cannot be addressed by constantly devaluing the Bolivar.

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