If Detroit's not too big to fail...

With the instructive Detroit precedent, shrunken populations, and underfunded municipal pensions common, we can conclude that no city, not even Chicago, should be thought of as too big to fail.

About the bonds of Detroit, Barron’s said: “A lot of investors bought this debt because they assumed that the state of Michigan wouldn’t let its largest city default.”1 In other words, they assumed Detroit was “too big to fail.” Nonetheless, Detroit did default and became the largest municipal bankruptcy in history. This bankruptcy, with unfunded municipal employee pensions among the competing creditors, is a hugely important precedent. Is any city too big to fail?

Essential to understanding the record bankruptcy of “Detroit” is that it applies only to a small part of metropolitan Detroit. The bankrupt City of Detroit has only 17 percent of the population of the metropolitan area.  Of the two Detroits, Smaller Detroit is broke, but Bigger Detroit, which is five times as big, isn’t.

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Alex J.
Pollock

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