The city of Detroit lost its investment-grade credit rating from S&P Tuesday night, slipping to BB after just barely hanging on to a halfway decent rating for the past two decades. New York is not Detroit. But since one of Detroit’s major problems was that it couldn’t politically and psychologically adapt to the long-term changes and failures of its major industry, automobiles, New York can learn a lesson as its major industry possibly goes through a similar long-term local contraction.
Detroit joins New Orleans, Scranton, Littlefield (TX), and East Chicago (IN) in the junk-grade bond category, according to the Free Press.
The downgrade will make it more difficult for Detroit to raise bonds (obviously), because pension funds, insurance companies, and the like often can’t put money in speculative-grade debt. It could also have a ripple effect in the rest of the muni market, as muni mutual funds and other large-scale investors wonder what other cities are on the brink of becoming “fallen angels.”
S&P cut Detroit because, it said, of “the city’s inability to regain structural balance” in its budget. “Additional rating factors include Detroit’s ongoing reliance on the… automobile industry … and a high debt burden that places fixed-cost pressure on operations.”
Plus, truthfully, Detroit isn’t very good at budgeting, seeming not to know how much money it has at any given time.
New York City, thankfully, doesn’t have this particular problem, largely due to reforms that the state made it implement in the last fiscal crisis, in the Seventies.
New York could, however, have one thing dangerously in common with Detroit.
Over three decades, Detroit never could muster the political will or competence to restructure its city budget to deal with a reality in which the Midwest wasn’t the capital of American auto manufacturing. Carmaking changed — and Detroit never did, not even realizing the change until it was too late.
New York, over the next decade or so, may face the same economic challenge Detroit faced starting 30 years ago.
Wall Street, New York’s main private industry, could be changing, not just temporarily, but forever. The financial sector may not return to its size and profitability of the bubble-era mid-2000s.
And neither New York nor London is guaranteed to be a world financial capital, because smaller markets from Asia to Africa to Eastern Europe now possess the capacity to create their own domestic financial markets when the general financial world begins its slow recovery.
Over the past 18 months, New York — while it has operationally competent enough people in government — hasn’t shown the political courage necessary to deal with a challenge of this magnitude.
If it chooses to continue to punt, raising taxes and cutting quality-of-life spending, it will lose the middle class that supports competent leadership.
Then, it really will have a problem from which it’s much more difficult to recover, as Detroit and New Orleans have shown.
This erosion could happen so slowly that we barely notice it until it’s too late. Or it could happen lightning-fast, just as the global manufacturing and services sector have lost business lightning-fast in the past six months as the world economy reversed itself.
Things change — and government shouldn’t be complacent about its ability to deal with the changes after they’ve reached a certain point of no return.
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