In the US, Yet Another Town Goes Bankrupt: How Much of This Can Be Tolerated?

It seems that the slogan, “Time to blame!” is becoming more relevant not only for residents suffering the financial crisis in Europe, but also for citizens of the United States. Ownership of printing presses and aircraft carrier strike groups will not save the American government from the bankruptcy of entire towns, which is happening more and more often. Yesterday, it was confirmed that another such town appealed to the court for protection from its creditors.

American Towns Are Like Domino Pieces

This time, it was San Bernardino, not far from Los Angeles, California, which was struck by an insufficiency of funds. One of the oldest cities in the state, which was founded by Mormon settlers and today numbers about 210,000 residents, is asking the court to protect it from its creditors.

The corresponding announcement was filed on Aug. 1 according to the American law that prescribes special procedures for cities. The city’s debt is about $1 billion, roughly equivalent to the value of all of its assets.

Now the town is obligated to suspend payment of debts, the hiring of workers and payments into the fund for medical support of retirees. The situation is aggravated by the fact that it was greatly complicated by the criminal acts of its officials, who hid the truth about the size of the debt and deficit for the past 13 years.

We can judge what might happen to San Bernardino in the near term by looking at another bankrupt town in California: Stockton.

There are piles of garbage in the central streets; barricaded entrances to once-luxurious shopping centers; homeless, drunken beggars; rampant crime; and an unemployment rate of 20 percent. That’s what Stockton, the biggest bankruptcy in U.S. history, is like today.

A little earlier in 2011, the town of Jefferson, Alabama, with a population of 660,000, applied for bankruptcy. It owes its creditors a total of $4 billion.

But the leader in the number of city bankruptcies is California. Just this summer, three towns in the state announced their insufficiency of funds.

It’s Not Only Cities that Are Ruined

In the first half of 2012, shareholders in the largest U.S. auto company, General Motors, saw their profits reduced by 53.7 percent. General Motors’ net profit in the same period was reduced by 41 percent; the adjusted earnings per share were $0.90, which is 41.6 percent lower than last year’s indicators.

The auto company cannot climb out of this financial pit. In 2009, General Motors moved to start bankruptcy proceedings. As a result, 60 percent of its assets were turned over to the U.S. government and another 16 percent to the Canadian government. But that did not save the company. The following year, General Motors made an initial public offering to sell off its government-held shares. The size of the initial public offering was a record $23.1 billion and became the largest in U.S. history.

It is symptomatic that General Motors’ headquarters is located in Detroit, which never recovered after the oil crisis of the 1970s. Once a flourishing industrial center, it is now a ghost town and the most dysfunctional city in the United States. Every fourth resident here is unemployed, and the crime rate is ten times higher than in New York City. In the ruined buildings of the former auto industry, they film Hollywood blockbusters and conduct excursions for tourists, who are shocked with surprise.

Debts Cannot Be Canceled

Economic problems in the U.S. are snowballing. They still have not overcome the effects of the 2008 mortgage crisis, and the housing market is threatened by a new collapse. Barack Obama and the Treasury Department put forward a plan which envisioned cancelling some of the mortgage debt for individual Americans, but it didn’t pass. The Federal Housing Finance Agency, the main regulator of the U.S. housing sector, did not support the Obama initiative, depriving him of that opportunity to play a trump card before the elections.

According to the regulator, transferring debt from the shoulders of debtors onto the shoulders of honest taxpayers would not resolve the problem in any way.

The “anticipated benefits do not outweigh the costs and risks,” said the head of the Federal Housing Finance Agency, Edward DeMarco.

This decision provoked resentment from the Treasury Department and an angry retort from Timothy Geithner, but the decision remained unchanged.