Should the Detroit city government spend $185 million/year on art?

Let´s apply the “Piketty 5% rule” to the City of Detroit.  More specifically, their art wealth:

DETROIT — A city-commissioned report on Detroit’s fine-art collection released Wednesday pegs its entire value between $2.8 billion and $4.6 billion, a sharp increase over a previous estimate that could create a headache for the city in bankruptcy court.

Some creditors pushing the city to sell or lease its world-class art collection argue that the city previously lowballed the artwork by valuing only a slice of the collection at the Detroit Institute of Arts.

With the comprehensive estimate by Artvest Partners many times the earlier estimate of up to $867 million, the battle over Detroit art could play a big role in a trial on the city’s debt-cutting plan to be held next month.

On Wednesday, Detroit’s emergency manager who represents the city in its municipal bankruptcy case said the report wouldn’t change his support to keep the city-owned collection intact and transfer ownership to a nonprofit separate from the city. His office also noted that selling off the entire collection immediately would only yield a fraction of the overall valuation, according to the report.

“The report makes it abundantly clear that selling art to settle debt will not generate the kind of revenue the City’s creditors claim it will,” Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, said in a statement Wednesday.

Abundantly clear?  Only to people who have already made up their minds. Imagine how much billionaires in places like New York and LA would pay for that collection.  Imagine how much the Getty Foundation would pay.  And 5% of $3.7 billion is $185 million a year, the annual income that (according to Piketty) could be generated by the midpoint of the Detroit art wealth estimate. What else could be done in Detroit for $185 million/year, forever?

When individuals have expensive art collections they are viewed as being “rich.”  When the City of Detroit has a lot of this sort of wealth most pundits let the city get away with pleading poverty.  The paintings suddenly don´t “count.”

Is anyone surprised by this?  Is wealth inequality really about wealth inequality?  Or is it about power and envy?

PS.  Should Detroit be contemplating giving away $3.7 billion in wealth?

PPS.  Detroit could sell a handful of the most valuable paintings for $1 billion and keep the museum mostly intact.

PPPS.  TravisV sent me a good Paul Krugman post on interest rates.  Of course this is also the market monetarist view.


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73 Responses to “Should the Detroit city government spend $185 million/year on art?”

  1. Gravatar of Major-Freedom Major-Freedom
    10. July 2014 at 03:07

    “Is anyone surprised by this? Is wealth inequality really about wealth inequality? Or is it about power and envy?”

    It is about selfishness.

    Expensive art owned by a private citizen is viewed by such pundits as “not even partly mine”.

    Expensive art owned by a government is viewed by such pundits as “this is (or could be if I were to move there to live) partly mine”.

    Power and envy? Yes, they’re related to this. These pundits feel empowered when governments become wealthier, and they are envious of both other wealthy governments and wealthy individual citizens.

  2. Gravatar of Philippe Philippe
    10. July 2014 at 04:48

    I never think of art held in public galleries as being “partly mine”. However I know that I can always go and see it, and that future generations will be able to do the same. It’s part of the culture of the society in which I live, and is accessible to all.

  3. Gravatar of Max Max
    10. July 2014 at 05:11

    I don’t recall anyone complaining about Detroit’s art “expenditure” (paper wealth) until creditors decided they wanted it. Then suddenly selling it is a great idea. Hmm…suspicious!

  4. Gravatar of Handle Handle
    10. July 2014 at 05:16

    Detroit being in Bankruptcy changes the calculus. Whatever the total value of the art is, it is still less than the amount of debt that Detroit is asking be forgiven.

    The issue is whether the court decides that the art collection can be used to satisfy creditors’ claims. There are two main courses of events.

    1. The court compels the sale of the art, and all the revenues derived thereby are transferred to bond-holders, retirees, and so forth.

    2. The court decides to exempt and exclude the art collection from the set of city assets that can be used to satisfy claims. At the end of the bankruptcy, Detroit emerges debt-free and with its multi-billion dollar art collection. And, at that point, the city can decide what to do with the art, to include selling it in whole or in part and reaping the windfall and using it to supplement collapsed city tax revenues.

    One argument in favor of exempting the art for reasons of public policy revolves around the question of how the museum came into possession of the collection. If most of the funds or artworks were donated as gifts with the expectation of the donors that the art would be displayed in Detroit in perpetuity, then future donors will be reluctant to make such gifts to their communities.

    In the alternative, you’ll see a lot more, “Displayed on indefinite loan from the collection of Mr. Richie Moneybags,” or gifts written with legal clauses to revert to a descendant in the event of an attempted sale or a municipal bankruptcy.

    If the judge declares that it’s public policy to encourage absolute gifts of art – and money for art – and that donors wont do this without assurance that the art will remain owned by a public institution and displayed forever in their local communities, then he has to put a ‘pox on both their houses’ and prevent the creditors from getting their money, but also put a permanent injunction on the city of Detroit to prevent them from ever selling the art following the bankruptcy.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    10. July 2014 at 06:22

    Much of that art was donated to the museum by capitalists named Ford, Dodge, Firestone, Scripps….

    Speaking of Piketty, Alan Reynolds has a fun piece in the WSJ over Piketty’s pas plus;

    http://online.wsj.com/articles/alan-reynolds-why-pikettys-wealth-data-are-worthless-1404945590

    ‘Tax law changes, in summary, have increased capital income reported at the top and shifted business income from corporate to individual tax returns, while sheltering most capital income of middle-income savers and homeowners. Using reported capital income to estimate changing wealth patterns is hopeless.’

    Which reminds me of a conversation I (and others) had with Brad DeLong more than a decade ago, over Saez and Piketty using AGI from income tax returns without seemingly realizing the drastic changes in the ways AGI was calculated over the years.

  6. Gravatar of SG SG
    10. July 2014 at 06:33

    @Max
    Creditors want cash, not art. They don’t care how the city repays what it borrowed.

    @Scott
    Krugman’s followed up the (good) post debunking the “unnaturally low” meme with a series of (evil) posts that do a masterful job of poisoning the well by framing monetary policy in terms of “class interests.”

    My question is whether it is reasonable for Krugman to attribute losses in interest income to the low interest interest rate environment? Isn’t it possible that the deleveraging process has forced rich people to sell off finanical assets, leading to a loss of interest income? Can’t losses from interest income have been offset by shifting into other assets? Am I missing something?

    And, of course, there’s zero mention of the fact that even the purported logic of the wealthy rentiers would favor NGDPLT because it would normalize interest rates much faster than curreny policy.

  7. Gravatar of SG SG
    10. July 2014 at 06:35

    Whoa, Brad Delong made the point much better than I did!

    “I think Paul Krugman is wrong here. It is true that the rich do have more nominal assets than liabilities (not all of those Treasury bonds are held by the PBoC, after all). But it is also true that America’s rich have a lot of real assets whose value depends on a strong and growing economy.

    I find it implausible to claim that the net gain is positive when we net out the (slight) real gain to the rich from lower inflation with the (large) real loss to rich from lower capital utilization.

    It’s not a material interest in low inflation that we are dealing with here…”

    http://delong.typepad.com/sdj/2014/07/i-think-paul-krugman-is-wrong-on-class-and-monetary-policy.html

  8. Gravatar of Tiago Tiago
    10. July 2014 at 06:38

    My view is that this is status quo bias to the extreme. If Detroit didn’t have that art collection, who could possibly argue that they now buy all that art?
    Sure, there is some attachment value which makes the art now more valuable to Detroit than to other people and places – everything else constant. But how much more valuable can it be?

  9. Gravatar of John Thacker John Thacker
    10. July 2014 at 07:03

    @Max:

    Yes, people who tolerated Detroit owning lots of fine art when it was prospering are skeptical that it’s a good idea when Detroit is bankrupt and isn’t able to pay its pensioners. Not a shock.

  10. Gravatar of John Thacker John Thacker
    10. July 2014 at 07:05

    Similarly in Detroit, criticism of the lavish spending of the Stroh family stepped up once they lost their fortune and the trust funds ran dry.

  11. Gravatar of Matt McOsker Matt McOsker
    10. July 2014 at 07:10

    RE the Krugman piece. The Japanese discount rate has been “artificially low” staying below 80 bps for about 2 decades. And much of that time at 50 bps or lower.

  12. Gravatar of Matt McOsker Matt McOsker
    10. July 2014 at 07:10

    RE the Krugman piece. The Japanese discount rate has been “artificially low” staying below 80 bps for about 2 decades. And much of that time at 50 bps or lower.

  13. Gravatar of Matt McOsker Matt McOsker
    10. July 2014 at 07:10

    RE the Krugman piece. The Japanese discount rate has been “artificially low” staying below 80 bps for about 2 decades. And much of that time at 50 bps or lower.

  14. Gravatar of Major-Freedom Major-Freedom
    10. July 2014 at 10:14

    Philippe:

    “I never think of art held in public galleries as being “partly mine”. However I know that I can always go and see it, and that future generations will be able to do the same. It’s part of the culture of the society in which I live, and is accessible to all.”

    That is what I mean by “partly mine.” It is your beliefs of what rights you have to the art.

    Imagine you were prevented by your “representatives” from ever seeing it, or stepping foot in the gallery.

  15. Gravatar of Vivian Darkbloom Vivian Darkbloom
    10. July 2014 at 10:35

    “And 5% of $3.7 billion is $185 million a year, the annual income that (according to Piketty) could be generated by the midpoint of the Detroit art wealth estimate. What else could be done in Detroit for $185 million/year, forever?”

    This is not the right way to look at the Detroit example. The battle is over whether these assets are within the reach of creditors. If Detroit is forced to sell the artwork, the proceeds would go to its creditors and would not be invested. Nothing would be left over to invest. Detroit is hoping to keep the artwork outside the reach of creditors so the creditors end up with the loss. So, Detroit would not have to pay its debts in full and get to keep the artwork, too. If Detroit can keep the art and the creditors get paid less on their claims, the US Treasury would end up bearing a portion (about one-third for US creditors) due to the deduction of additional bad debt. That would be an indirect bailout.

    The example is more appropriate for a city that is not in bankruptcy proceedings.

  16. Gravatar of Don Don
    10. July 2014 at 10:46

    There used to be an automobile museum in Flint, MI called AutoWorld (http://en.wikipedia.org/wiki/AutoWorld_%28theme_park%29) that had to sell its car collection to pay debt. Having easels with photos of the cars instead of the cars was not sustainable. It is sad to see an empty museum.

  17. Gravatar of Philippe Philippe
    10. July 2014 at 11:05

    “That is what I mean by “partly mine.” It is your beliefs of what rights you have to the art.”

    I have certain rights as a member of the society in which I live, but so does everyone else in that society.

    “Imagine you were prevented by your “representatives” from ever seeing it, or stepping foot in the gallery.”

    Why?

  18. Gravatar of tesc tesc
    10. July 2014 at 12:03

    power and envy

    Left-wing reality show

  19. Gravatar of Doug M Doug M
    10. July 2014 at 12:33

    Patrick Sullivan,

    “Much of that art was donated to the museum by capitalists named Ford, Dodge, Firestone, Scripps…”

    It is my understanding that artwork donated to the museum would be off-limits. But much of the DAI collection was purchased with city money. And this portion of the collection, creditors are saying could be sold.

  20. Gravatar of Major-Freedom Major-Freedom
    10. July 2014 at 14:54

    Philippe:

    “I have certain rights as a member of the society in which I live, but so does everyone else in that society.”

    Certain rights you desire for yourself.

    “Imagine you were prevented by your “representatives” from ever seeing it, or stepping foot in the gallery.”

    “Why?”

    To test yourself. To think about these “rights as a citizen” you speak of, and whether and/or to what extent you experience utility from others viewing the art pieces, in comparison to you yourself being able to view such art pieces. In other words, your experience of utility from the government controlling the art for other citizens to view, and your experience of utility from the government controlling the art for you to view.

  21. Gravatar of ssumner ssumner
    10. July 2014 at 15:12

    Philippe, Then why doesn’t Detroit sell it to other museums?

    Max, I don’t recall Detroit asking for a bailout from the rest of us until recently.

    Handle, Good comment, but:

    1. How much is Detroit asking to be forgiven? Are you sure it is more than 4 billion?

    2. The donations were mostly long ago. Back then they certainly would have expected any city owned art to be lost in bankruptcy.

    Patrick, Good point.

    SG, Yes, that was a weak post.

    Tiago, Great comment.

  22. Gravatar of ssumner ssumner
    10. July 2014 at 15:21

    Vivian, Yes, I understand the bankruptcy angle, but I was also trying to consider the broader issues. Suppose Detroit holds on to the art after the bankruptcy. What then?

    Doug, Interesting, I was not aware of that angle. I wonder if the estimates include all the art, or only the purchased art? Then there is the unfortunate precedent set by the Barnes Collection fiasco, where the provisions of the original donation were ignored after the donor had died.

  23. Gravatar of Philippe Philippe
    10. July 2014 at 15:41

    Scott,

    “Then why doesn’t Detroit sell it to other museums?”

    They could potentially do that, if they have to. It might be better than selling it on the private art market if the goal is to keep the artworks in the public domain. That doesn’t mean that the art would have to leave Detroit however.

  24. Gravatar of Philippe Philippe
    10. July 2014 at 15:45

    “Certain rights you desire for yourself”

    Certain rights which I think others should have, even if I can’t enjoy them.

  25. Gravatar of Major-Freedom Major-Freedom
    10. July 2014 at 15:50

    Philippe:

    “Certain rights which I think others should have, even if I can’t enjoy them.”

    Just like private property rights.

  26. Gravatar of Philippe Philippe
    10. July 2014 at 16:27

    Agreed. Though I wouldn’t define private property rights in exactly the same way as you.

  27. Gravatar of TravisV TravisV
    10. July 2014 at 18:21

    The problem with this new Krugman column and post is their suggestion that tight money is a net benefit for the ultra-rich. It isn’t.

    http://www.nytimes.com/2014/07/11/opinion/paul-krugman-who-wants-a-depression.html?src=twr

    http://krugman.blogs.nytimes.com/2014/07/07/knutty-asset-prices

    The macroeconomy is not a zero-sum game. Easier money would benefit almost everyone.

  28. Gravatar of TravisV TravisV
    10. July 2014 at 18:36

    By the way, What The Hell Happened To Mark Sadowski???????????

  29. Gravatar of Major-Freedom Major-Freedom
    10. July 2014 at 18:40

    Philippe:

    You can use any phrase you want to refer to what I am talking about regarding “just” actions. Same thing for what you are talking about. If you want to use the words “private property” to refer to something different than what I refer to using those words, then go right ahead. I would rather not start a battle that cannot be won or lost. I will not use those words to refer to the same thing as you. Neither of us would be right or wrong because of this.

  30. Gravatar of Philippe Philippe
    10. July 2014 at 19:08

    “You can use any phrase you want to refer to what I am talking about regarding “just” actions”

    I’m not sure what ‘just’ actions you are referring to.

    “If you want to use the words “private property” to refer to something different than what I refer to using those words, then go right ahead.”

    You believe that private property rights are absolute, that they are somehow given by ‘nature’ or by ‘natural law’, and that they somehow override all other rights and obligations. I disagree.

  31. Gravatar of Morgan Warstler Morgan Warstler
    10. July 2014 at 20:59

    Greece should sell islands.

    And while we’re at it, let’s all CHEER Ted Cruz’s efforts to force US to sell land / give it back to states.

  32. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 00:33

    “Suppose Detroit holds on to the art after the bankruptcy. What then?”

    Then I suppose Detroit would open itself up to a charge of bankruptcy fraud and the creditors would re-open the case to get at the cash. If the reason for keeping the art out of the debtor’s estate is that they are not sellable, to later renege on that representation would, I think, be a real problem for the city and its lawyers.

    But, again, your larger point is well taken. Just not especially in the case of Detroit at this time.

  33. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 00:42

    Just to clarify the above comment: the original scenario was that the city could sell its art (to billionaires) to generate cash or another income producing asset ($185 million per year). If the city is not allowed to sell the art after the bankruptcy (either because it really can’t sell or because doing so would open them up to problems referred to above) then the art might continue to increase in value, but it would not generate any cash that could be used for other purposes. In other words, as regards the art, Detroit would be in precisely the same situation they are now in.

  34. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 00:48

    Another thought:

    Based on the mid-range valuation of $3.7 billion and the current population of Detroit, the artwork appears to be worth about $5,000 per Detroit resident (not household).

    Suppose a city like that (not in bankruptcy) were to hold a referendum that asked resident voters whether they would like to keep the art or sell the art and give a $5,000 (refundable) tax credit to each and every resident. Since this is a referendum, elite art lovers would not be calling the shots.

    Any doubt as to the probable outcome?

  35. Gravatar of ssumner ssumner
    11. July 2014 at 00:52

    Vivian, My hunch is that the creditors would accept a deal where Detroit got to keep a substantial share of the proceeds of any sales, but that’s just a guess. Do you know how much Detroit is asking to be forgiven?

  36. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 03:35

    Scott,

    I understand that the total Detroit debt is between $18 and $20 billion. The value of the artwork is disputed and it is also disputed how much of that artwork is subject to claims of creditors due to donor restrictions. The earlier appraisal apparently included only about 5 percent of the artwork that was paid for with city funds.

    The judge hasn’t issued a ruling on whether or how much of the artwork is subject to sale and the claims of creditors. It appears that he is trying to encourage a settlement by remaining non-committal and keeping both parties guessing. Per the following older article, it appears that there may be a plan to have the city agree to pay for some of the artwork through future revenues and to have private donors pony up some of the rest to keep some art in the museum. The article talks about a combined $600 million or so.

    http://www.freep.com/article/20140122/NEWS01/301220086/Judge-Steven-Rhodes-Detroit-Institute-of-Arts-bankruptcy

    I do not see any realistic chance that the city would be permitted to sell artwork for cash and any keep the resulting proceeds. Whatever cash is generated will be fought over and divvied up by the various creditors. Any compromise will likely be on terms similar to those discussed in the article referenced above, with some of the artwork being “purchased” by the city and donors and other portions being declared off limits (and not subject to sale).

  37. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 03:45

    *and keep any of the resulting proceeds*

    PS. Donors put restrictions on sale, etc., of artwork they donate because they don’t want their legacy to be that of helping Detroit and similar entities to satisfy the claims of bond holders and insurers. Or to be known and quickly forgotten as having been responsible for temporarily easing the financial burden of a city’s residents (per the referendum hypothetical I gave above). They want their names permanently inscribed on those buildings and the works of art contained therein.

  38. Gravatar of Benny Lava Benny Lava
    11. July 2014 at 04:58

    I love it when self described conservatives argue that a city of mostly poor black people don’t deserve to have a world class art museum. Better to turn over those lovely cultural goods to big banks! They deserve it more. Heck and might as well turn over the city’s best park to some rich white folk as well.

  39. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 05:11

    “I love it when self described conservatives argue that a city of mostly poor black people don’t deserve to have a world class art museum.”

    If you want to ask that question, then I suggest a more appropriate group to direct it to would be the current and prior managers of the city of Detroit and other interest groups responsible for destroying the city’s finances. The residents of Detroit should be saying to *them* “yes, we do deserve better and because of you we are in danger of losing our world class art museum”.

    I seriously doubt that the most of the people responsible for ruining Detroit’s finances are “self-described conservatives”.

  40. Gravatar of TravisV TravisV
    11. July 2014 at 05:12

    Ashok Rao on Krugman’s unconvincing column / post:

    http://ashokarao.com/2014/07/11/interest-income-and-the-upper-class

  41. Gravatar of SG SG
    11. July 2014 at 05:43

    I’m glad I caught Brad Delong’s comments when I did… he’s since taken down his Krugman takedown!!

  42. Gravatar of SG SG
    11. July 2014 at 05:47

    Ah, I spoke too soon… he just moved the post.

    http://equitablegrowth.org/2014/07/10/think-paul-krugman-wrong-class-monetary-policy/

  43. Gravatar of Benjamin Cole Benjamin Cole
    11. July 2014 at 05:55

    Sad to say, but Detroit should sell it. Especially now. The art market is bonkers.

    As a libertarian, I say sell anyway, though part of me suspects that the private sector is inevitably crass and coarse in its choice of arts.

    A tit-fot-tat argument: Well, if cities subsidize NFL teams, can not they subsidize an art museum?

  44. Gravatar of Benjamin Cole Benjamin Cole
    11. July 2014 at 06:15

    Re Krugman:

    1. I think the monetary rightie-tighties are even sillier than class warriors–I think it is a fad, or pseudo-cult-religion that has people enfevered for tight money. Some sort of deontology. But then, the libs insist deficit-spending works.

    2. Another oddity: The Fed cannot successfully tighten its way to higher interest rates, certainly not now, and certainly not in anything but the short run.

    As Milton Friedman noted, low interest rates are the result of tight money. A tight Fed will ultimately accomplish a deflationary recession–oh, we tried that not fun.

    Ironically, if you want higher (real) interest rates, I suggest a few bouts of inflation to make savers demand an inflation-uncertainty premium.

    A red-hot economy that demands more capital than markets can supply would also raise real interest rates.

    Otherwise, get used to soccer score interest rates. Well, not counting the Germany score.

  45. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. July 2014 at 06:19

    “Much of that art was donated to the museum by capitalists named Ford, Dodge, Firestone, Scripps…”

    Yep, and I suppose none of the above were “self-described conservatives”. How very ironic.

    Apparently, they thought the residents of Detroit “deserved” a world-class art museum.

    @Benjamin Cole

    Benjamin, as indicated above, I seriously doubt that sale of this artwork, *especially now* will do much to directly benefit Detroit or its residents. It will, however, increase the pool of assets claimable by its creditors. Admittedly, some of them might be Detroit pensioners.

  46. Gravatar of Student Student
    11. July 2014 at 07:58

    Off topic to this post but growth in Q2 isnt looking good. I would start working on a better defense than the data is bad.

  47. Gravatar of Doug M Doug M
    11. July 2014 at 08:16

    The art is really just a pawn in this game.

    The creditors of Detroit are professional Muni bond investors. The precedents set in Detroit will spill over to other municipalities and will shape recovery expectations for years to come. Other cities don’t have big art collection owned by the city. The precedent of forcing one city to sell its art makes little difference.

    Detroit, and many other cities have big obligations to the union pension systems. The creditors don’t want a settlement that is favorable to the unions. If Detroit protects the unions other cities will protect their unions. Creditors will use whatever leverage they have over the city to steer the discussion.

    Screw the union, keep your art. Bail-out the union, we will make what pain we can for you.

  48. Gravatar of Tom Brown Tom Brown
    11. July 2014 at 08:50

    Benjamin Cole, you write:

    “2. Another oddity: The Fed cannot successfully tighten its way to higher interest rates, certainly not now, and certainly not in anything but the short run.”

    What if, right now, they increased the legal reserve requirement to 180%?

  49. Gravatar of Tom Brown Tom Brown
    11. July 2014 at 08:58

    … maybe 180% is a bit high: but high enough to eliminate all the reserves in excess of what the banks, in aggregate, want to hold. This is how I put it to David Andolfatto of the St. Louis Fed (his response below my question):

    http://andolfatto.blogspot.com/2014/06/excess-reserves-and-inflation-risk.html?showComment=1403629484204#c6227891147300661177

    I’m just curious what you think would happen.

  50. Gravatar of benjamin cole benjamin cole
    11. July 2014 at 12:48

    Tom Brown: Egads. I suspect we would migrate to non-bank banking and no FDIC insurance. Probably you would pay for banking services.

  51. Gravatar of Tom Brown Tom Brown
    11. July 2014 at 14:35

    Benjamin, I supposed that you meant that the Fed couldn’t raise rates now because there were so many excess reserves out there. Back in pre-2008 days, when ER was close to 0, if the Fed wanted to raise rates, no problem: a small adjustment in reserve levels could do it. But now, they have to use IOR as the instrument, or they could use my method and simply eliminate all ER overnight by changing the required % (w/o any OMOs or change in IOR). Thus they could go straight back to the pre-2008 times instantly. The Fed pays IOR on both RR and ER (the same rate), so that doesn’t change anything. Banks that have more than average ER could lend to banks with less than average ER (so the deficient banks could meet the new requirements). And what’s it to them? They get paid the same one way or the other (since the Fed keeps the ER and RR IOR flowing: they’re essentially subsidizing any interest payments the banks make to each other). But after the elimination of ER, if the Fed then takes a dollar away from the reserves… a dollar that some bank somewhere would like to keep… rates start to rise: just like in the good old days.

    Like I wrote to David, I realize that excess in the sense of more than desired is different than the legal excess, so that jumping straight to 170% (or whatever it is on paper to eliminate all legal ER out there in one step) might be too much: maybe we have to sneak up on it, 10% at a time. Where do we eliminate ER (in the “desired” sense)? Perhaps at 120%? 150%? I’m not sure… so you’d have to proceed w/ caution.

    And then you can continue to make further adjustments to this percentage too… it doesn’t have to stay > 100% forever. It’s another lever for the Fed to pull on, is the way I look at it. Redundant? Yes, but it seems like a great emergency brake to me to sell to inflation-phobes. I still don’t think that Vincent Cate (the committed hyperinflationist) has come up with a good counter-argument to that one: it doesn’t require any OMOs or any more expense in terms of IOR than what we have now, and it can be done almost instantly, and in a way that doesn’t bankrupt any banks (i.e., the sneak up on it approach). I still haven’t heard a hyperinflationist give a coherent counter-argument to it. Plus, as a bonus, it leaves the Fed in a position to change rates with pre-2008 style small OMOs (instead of raising or lowering IOR).

    So my purpose is not to eliminate fractional reserve banking… it’s to have a method to quickly eliminate ER, if need be.

  52. Gravatar of Benny Lava Benny Lava
    11. July 2014 at 16:11

    I seriously doubt that the most of the people responsible for ruining Detroit’s finances are “self-described conservatives”.

    Ah but Vivian I didn’t write about responsibility, now did I? Either you misread what I wrote, and you should read again and apologize, or you are being mendacious.

  53. Gravatar of Benny Lava Benny Lava
    11. July 2014 at 16:19

    “The residents of Detroit should be saying to *them*”

    I also love it when conservatives like Vivian tell people they don’t know what they should do. Typical.

  54. Gravatar of Benny Lava Benny Lava
    11. July 2014 at 16:21

    “I seriously doubt that the most of the people responsible for ruining Detroit’s finances are “self-described conservatives”.”

    I never said they were. How mendacious of you Vivian.

    Not sure why my earlier comment didn’t post but this will suffice…

  55. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. July 2014 at 01:10

    Benny,

    I guess this is the scenario you think should play out:

    Step 1:

    “Self-described conservatives” donate artwork to DIA and create a “world-class museum”.

    Step 2:

    “Self-described progressives” ruin the cities finances thereby endangering the existence of that world class museum;

    Step 3:

    The only consequence of Step 2 should be that “self-described conservatives” (presumably, those evil bond holders and insurers) should step up and bail out the city so that the museum can be preserved because “the c

    Do I have that right? I’m being here only partly facetious in using your own caricatures.

    I don’t recall anyone here “self-describing” himself or herself as a “conservative”, but I guess your judgement will have to suffice. Thank *you* for that bit of mendacity.

    To be honest, I do believe that this exchange is typical of the rhetorical divide between left and right. Rather than put forth any real argument, Benny, your initial comment rested solely on the implicit claim that “self-described conservatives” don’t care about poor black inner city residents. The implication is clearly that such people are morally inferior and armed with bad intentions. That’s ad hominem. I strongly believe that conservatives and progressives, however you might what to draw those rather arbitrary distinctions, are equally desirous of improving the lot of the poor, including minorities of all kinds. We can and do, however, have very different views as to how those mutual goals can be best achieved.

    “I also love it when conservatives like Vivian tell people they don’t know what they should do. Typical.”

    This is also a silly argument. Think about it, Benny. Every time an opinion or argument is expressed, one is implicitly, if not explicitly, saying “this is the what “you should do” (or even think). So, yes, I think the residents of Detroit *should* blame their city’s management for the mess they’re in. There is a world of difference between arguing what another *should* do or think and compelling what another *must* do or think.

    I’m just guessing that the purpose of your participating in this forum is to try to convince people here what they should think. If it is otherwise, I respectfully submit that you are wasting your time.

  56. Gravatar of Kevin Donoghue Kevin Donoghue
    12. July 2014 at 04:47

    “When the City of Detroit has a lot of this sort of wealth most pundits let the city get away with pleading poverty.”

    AFAICT we’re talking about $5,000 per capita. My art collection isn’t worth that much, but even if it was I really wouldn’t consider myself a wealthy art collector. As to whether I should have to flog my paintings to pay my creditors, that’s a matter for the judge. I presume Detroit hasn’t given bondholders a floating charge over all assets, including public parks, buildings and suchlike as well as paintings?

    “Is wealth inequality really about wealth inequality? Or is it about power and envy?”

    When the American subjects of George III fell out with him, one of the points of contention was that he wouldn’t let them help themselves to large tracts of the Ohio Valley, then controlled by people deemed unworthy of such riches. Arguments about wealth are almost always arguments about power. Only a fool could suppose otherwise.

  57. Gravatar of benjamin cole benjamin cole
    12. July 2014 at 16:24

    Tom Brown: Well, I was thinking a bank business would not be viable at 180 percent reserves, as non-banks would steal business.
    But if the Fed essentially subsidizes banks by paying interest on reserves then…it is too complicated for me to come up with an answer.

  58. Gravatar of Major-Freedom Major-Freedom
    12. July 2014 at 19:17

    Philippe:

    “You believe that private property rights are absolute, that they are somehow given by ‘nature’ or by ‘natural law’, and that they somehow override all other rights and obligations. I disagree.”

    Disagreeing with them, presupposes them.

  59. Gravatar of ssumner ssumner
    13. July 2014 at 01:20

    Student, Defense of what?

    Thanks Vivian..

    Kevin, Not quite sure what point you are trying to make. I was not suggesting that individual Detroit citizens were wealthy. The unfunded pension liabilities of Detroit are $3.5 billion. That’s also only about $5000 per capita. Are those unfunded liabilities “small?”

  60. Gravatar of Daniel Daniel
    13. July 2014 at 02:34

    Disagreeing with them, presupposes them.

    So when you disagree with my assessment of you being a moron, you’re presupposing you are a moron ?

    Sweet.

  61. Gravatar of Philippe Philippe
    13. July 2014 at 04:59

    “Disagreeing with them, presupposes them.”

    I disagree with your beliefs.

  62. Gravatar of Philippe Philippe
    13. July 2014 at 05:02

    “You believe that… (etc) … I disagree.

    ok?

  63. Gravatar of Student Student
    14. July 2014 at 04:35

    Defense of why monetary policy hasn’t seemed to offset the austerity of 2013 very well. In my mind the test was never 2013 because budget cuts take at least a year to show up in reduced expenditures. The real test was more like 2013Q2 – 2014Q2 or Q3. It isnt looking good and you can only cry bad data for so long.

  64. Gravatar of Benny Lava Benny Lava
    14. July 2014 at 04:40

    Vivian,

    No, you don’t have that right. Not a surprise though, since you are an obvious troll. Next time, try reading.

  65. Gravatar of Benny Lava Benny Lava
    14. July 2014 at 04:57

    “Do I have that right? I’m being here only partly facetious in using your own caricatures.”

    No, you don’t have that right. You are being dishonest and you know it, which makes you a troll.

    “I don’t recall anyone here “self-describing” himself or herself as a “conservative”, but I guess your judgement will have to suffice.”

    Scott is, so there is that. And you taking offense to my description means you are as well. I mean if you aren’t a conservative then why do you care what I say about them?

    “I do believe that this exchange is typical of the rhetorical divide between left and right.”

    This is because you are an idiot. You think in terms of binary terms when looking at political philosophy because someone told you that is how to think about it and you are incapable of thinking for yourself. I’m not a liberal or a progressive. But when I attack conservatives you make all these assumptions about me just like you make assumptions about all the Detroit patriarchs. Do you know the Dodges and the Firestones personally? No but you assume their political ideology because some conservative told you that all rich people are like you. You are pathetic.

    “So, yes, I think the residents of Detroit *should* blame their city’s management for the mess they’re in. There is a world of difference between arguing what another *should* do or think and compelling what another *must* do or think.”

    What you failed to grasp is that you assumed that you know better than Detroiters and presume that they should do what you say. I don’t presume that I know more than thousands of people I don’t know. But I do know that the city’s residents have expressed their views that the city should not liquidate their art museum to pay banks.

    You see you not only made the arguement that the city should liquidate some or all of the art museum to pay bankers, but you then go on to make a moral judgement about the city residents. You moralize that they need to blame the people you don’t like for their ills. You’d cast blame on the liberals who are running successfully running Portland for all of Detroit’s ills because you are a sheep. Part of the hive mind.

    And as for me accusing people of prejudice? Well I searched and I searched and I don’t recall anyone suggesting that Stockton liquidate its museum. Of that Detroit liquidate the other museums and cultural institutions it owns. So why the DIA? Since no one can proffer and sort of explanation this is the only consclusion.

  66. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. July 2014 at 06:35

    Benny,

    I’m not going to respond to most of your comments (especially, the non-substantive parts) because they speak loudly for themselves.

    Nonetheless, I will make a couple of substantive points:

    First, contrary to what you have stated, nowhere have I indicated that Detroit should sell its art to benefit bankers (or anyone else). Had you bothered to read what I have written on the subject, you would know that I expressed the view that there would be nothing in it for Detroit or its residents to do so. That is because the proceeds would go solely to creditors (not only “bankers”, but many others, including pensioners). This is consistent with my view that neither the creditors nor the city should be obligated to anything that is contrary to their contractual or legal rights, whatever those may be.

    Second, I find it difficult to reconcile your views that one “should not tell someone one does not know what they should do” (I’m paraphrasing, Benny) and your apparent opinion that creditors (each of whom you are apparently well acquainted with) should relinquish their contractual and legal claims for the benefit of the citizens of Detroit. In essence, this is the equivalent of suggesting that those creditors should, in the interests of the Detroit Art Institute and the residents of that city, make a very large charitable contribution. I would suggest that the more appropriate thing, if someone feels strongly about the fate of the Museum and effect on Detroit residents, is to immediately write a check (preferably a large one) to that institute. But, then again, I don’t know you and shouldn’t be suggesting anything. If you provide proof of your personal contribution, I’d be happy to match it.

  67. Gravatar of ssumner ssumner
    14. July 2014 at 07:40

    Student, Most Keynesian economists I read thought growth would pick up in 2014 because of reduced austerity. Apparently whatever happens confirms Keynesian theory.

  68. Gravatar of Student Student
    14. July 2014 at 07:47

    touche.

  69. Gravatar of Student Student
    14. July 2014 at 07:56

    FYI, I am not a macro economist so I have no real academic skin in the game. However, I do have priors and as I have found Keynesians to present the most convincing case, I tend to camp with them. You may be changing my mind on that though, thus the occasional provoking comments.

  70. Gravatar of Virginia Postrel Virginia Postrel
    14. July 2014 at 10:24

    Welcome to the contrarian party. I wrote about this in June 2013 and you wouldn’t believe the onslaught of hate mail. The issue is (almost entirely white) tribalism and city pride–nothing to do with either finances or art.

    http://www.bloombergview.com/articles/2013-06-06/detroit-s-van-gogh-would-be-better-off-in-l-a-

    http://www.deadlinedetroit.com/articles/5157/exclusive_virginia_postrel_replies_to_critics_of_her_dia_column

    http://www.bloombergview.com/articles/2013-06-07/hey-picasso-how-about-a-time-share-in-arkansas-

  71. Gravatar of ssumner ssumner
    15. July 2014 at 09:55

    Thanks student. Keep an open mind, and I’ll try to do the same.

    Thanks Virginia, And don’t worry about the hate mail.

  72. Gravatar of Benny Lava Benny Lava
    16. July 2014 at 04:50

    There you go again Vivian, telling me what to do. I know you didn’t think about this so you don’t understand the difference between arguing over what is the optimal policy for reducing unemployment and telling someone what personal choices they should make or how they should feel about something. I know this subtle difference will always elude you, so I won’t bother trying anymore. I can’t help someone who steadfastly refuses to think.

  73. Gravatar of Benny Lava Benny Lava
    16. July 2014 at 04:55

    Virginia, maybe you deserved the hate mail? After all, how many Bloomberg articles did you write about Stockton selling off its museum? Or Detroit selling off it’s other museums and cultural institutions? Why are you so intent on prying the Van Gogh and Picasso out of Detroit?

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