Posts tagged with: insolvency

250px-Bankruptcy_monopolyAaron M. Renn’s reflections on the implications of Detroit’s bankruptcy are worth reading, especially as relate to the DIA, a topic of some previous interest over the last year or so:

In the case of the DIA, the city owns the museum and the collection. Hence the question of whether or not art should be sold to satisfy debts. If it were typical separately chartered non-profit institution, this wouldn’t even be a question.

At this point, I’d suggest cities ought to be taking a hard look at whether they own assets like museums, zoos, etc. that should be spun off into a separate non-profit entity. Keep in mind, the tax dollars that support the institutions can continue flowing to it. But this does protect the assets in the event of a bankruptcy.

I think Renn’s advice is spot on, but I would also caution that Detroit’s experience might not be replicable elsewhere. As DIA director Graham Beal put it previously, the DIA’s dilemma is “singular and highly complicated.”

How many cities own art collections worth potentially billions of dollars? Not too many, I’d suspect. And just what would the motivation be for city governments to reduce assets that could be leveraged in bankruptcy negotiations? What is in the best interest of the institution may not be in the interests of the city government and pensioners.

The DIA might be something like Detroit’s “Get out of Bankruptcy Free” card. (Or if not “free,” then less scathed than otherwise. And that’s not counting the loss of cultural treasures, of course!) But even so it’s a card that can only be played once, and it’s a card that other cities might not have.

From Marketwatch today, “Morgan Stanley warns on sovereign defaults”:

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome,” they said. But bondholders could suffer losses from forms of “financial oppression,” such as repaying debt with devalued currency, the analysts warned.

From last week’s Acton Commentary by Sam Gregg, “Deficits, Debt, and Self-Deception”:

Then there is the increased possibility that governments will resort to other, less-conventional means of deficit-reduction. As Adam Smith observed long ago in The Wealth of Nations, “when national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.” Smith went on to explain that “the liberation of the public revenue, if it has ever been brought about all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.”

By “pretended payment,” Smith meant governments would seek to escape their debts by inflating the currency. In this way, governments could legally deny creditors what they are due in real terms, while simultaneously avoiding formal bankruptcy.

Of course, whenever a government resorts to inflation to diminish its debts, it has, for all intents and purposes, effectively acknowledged its insolvency. But such actions, as Smith noted, also constitute gross injustices against numerous innocents. Those who have been frugal and industrious suddenly find the value of their savings and capital arbitrarily reduced because of others’ financial irresponsibility. This also reduces the incentives for people to save and invest. For why should anyone bother to do so if they cannot be reasonably sure that the worth of their savings will not be suddenly diluted by government fiat?