The Streets Were Paved with Gold - Ken Auletta [84]
New York’s case before the Congress was also weakened because, contrary to 1975 promises, by 1978 the city had not balanced its budget. It is comforting to portray those opposing loans to New York as neanderthals and bigots. Some are. But there was also a legitimate concern—expressed most eloquently by Proxmire—that if Congress made an exception for New York, another domino theory would unfold: other cities would clamor for similar loans; would fail to balance their budgets if there was a federal Santa Claus to protect them; the federal structure, which defines cities as creatures of states, would be altered. Congress, which can’t manage itself, would be asked to manage local budgets, to pass judgment on local labor settlements and policies.
New York’s best case for federal loan guarantees was predicated on practicality, not principle. The consequences of a bankruptcy are matters of judgment, not fact. If New York’s dire scenario is wrong, a catastrophe is avoided. If opponents of federal assistance are wrong, a catastrophe is ensured. Practically speaking, the worst possible consequences come if the opponents are wrong. A bankruptcy would cost the federal government money. As Senator William Proxmire, in urging President Ford to support seasonal loans, declared on November 10, 1975, “A New York City default would cost the federal government $6.5 billion in loan guarantees by 1980, whereas loan guarantees before default would lead to a maximum of $2.4 billion in guaranteed bonds, in 1977.” Though federal loans or loan guarantees may help drive up federal interest rates, they otherwise don’t cost federal taxpayers a dime—unless the city defaults on the loans guaranteed by the federal government. In fact, over the three years of the seasonal loan program, the federal government, by charging a 1 percent premium above the normal interest rate on these Treasury notes, earned an extra $30 million in interest. And because these notes were taxable—unlike municipal securities—MAC Chairman Rohatyn estimates the federal government was awarded an extra $200 million in taxes.
While it is true that no other city receives federal loan guarantees, many citizens, businesses and countries do. By the end of fiscal 1978, the federal government was expected to have $324 billion outstanding in loan guarantees—contrasted with the $2 billion asked by New York. Senator John Tower of Texas once sat behind a large desk in his Capitol office inveighing against federal loan guarantees for New York. Yet, just moments before, he had kept this reporter waiting while he concluded a session with Texas farmers demanding federal support for their “unprofitable” farms. Tower said he saw no inconsistency between pledging to support loan guarantees for these farmers and opposing them for New York. Nor does Senator Proxmire see any inconsistency between his vote for the New Communities Loan Guarantee Program (1970) and his strenuous opposition to city guarantees. The Congress of the United States has voted loan guarantees to bankrupt corporations (Lockheed), foreign dictatorships, college students (with a one-third default rate), small businesses, tenants, even for the construction of RFK Stadium in Washington. After performing these tricks, members of Congress warned that as a matter of principle they wouldn’t go to bed with the City of New York! In August 1978, the federal government went to bed with the city, approving $1.65 billion of loan guarantees. The loan question—at least for the next four years—seemed settled.
But beyond the loan question lurks another: What, if anything, should the federal government do for depressed areas like New York? Faced with a similar question in 1938, President