The harm in the case of identity theft is virtual, and can be fixed much quicker than a broken arm, by voiding any unauthorized transactions, reimbursing the victim.
I don't think the banks paid much price, or any. They borrow short at 0% and lend long at 10% or 18% or whatever. All they have to do is make the payments by borrowing short, and give people more credit, and they've created the money they supposedly "lost".
Solutions exist, like Aristarchus's heliocentric system existed for millenia while everyone wasted their time working on epicycles.
Solution: basic income, and challenges. Encourage hackers and crackers to work on software that will help, because they don't have to steal to make a living. Improve VRs so anyone can have the experience of owning a boat or whatever.
Financial loss is not the same as physical harm. Money is psychological.
How can we create a culture where there is no incentive to hack or steal?
Then the Constitution's guarantee of equal protection, the principle that the least popular person has the same rights as the most popular person, is violated.
The question is which is the greater harm, enforcing an unfair contract weighted in favor of the most powerful banks while breaking promises to retirees, or working to improve the General Welfare by helping Detroit in a time of crisis? Government should provide for the General Welfare. It's in the Constitution, twice.
It was UBS who loaned money to Detroit, writing a complex contract that imposed very heavy penalties for events such as a ratings downgrade. And of course, the ratings agencies have a conflict of interest: they are biased towards the banks and traders who pay them for ratings. A downgrade of Detroit helped UBS, and UBS pays the ratings agencies.
Detroit should not have entered into a contract with a jackal like UBS. But who will suffer, if the Fed or the federal government bail out Detroit? If they don't, innocent retirees who played no part in the events that led to Detroit's crisis will suffer.
The emergency manager, ideally in collaboration with the state, needs to increase revenue by $198 million annually to bridge Detroit’s budget gap until structural programs can be put in place and the city can benefit from increased general economic improvement. This includes enlisting state involvement on an emergency basis and restoring discretionary state revenue sharing to pre-crisis levels. The shortfall amount can be reduced as FY 2014 proceeds by factors such as improved collection of unpaid taxes (which has yielded modest results to date).
I may have been wrong about the definition of insolvent. Detroit is insolvent because it can't make its payments. There is another kind of insolvency that businesses continue to operate under. From wikipedia:
A business can be cash-flow insolvent but balance-sheet solvent if it holds market liquidity assets, particularly against short term debt that it cannot immediately realize if called upon to do so. Conversely, a business can have negative net assets showing on its balance sheet, making it balance-sheet insolvent, but still be cash-flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default: for instance, if it holds long term debt. Some large companies operate permanently in this state.
One might argue that Detroit has assets and cash flows that, while unable to make its payments right now, will make it solvent in the future. Someone, the state or the federal government or the Fed, should help Detroit in the meantime.
The case of Detroit is somewhat similar to what happened to AIG in 2008.
AIG was exposed on credit default swaps, Detroit was exposed on interest rate swaps. But in both cases, the banks on the other side had written into the contract terms that triggered big payments, in case of a ratings downgrade for example. So when rates went down, Detroit was downgraded by the ratings agencies, and UBS (similar to what Goldman Sachs did in the case of AIG) demanded payment immediately of the future projected values of the swaps.
The Fed bailed AIG out, though. From wikipedia:
"AIG’s credit rating was downgraded and it was required to post additional collateral with its trading counter-parties, leading to a liquidity crisis that began on September 16, 2008 and essentially bankrupted all of AIG. The United States Federal Reserve Bank stepped in, announcing the creation of a secured credit facility of up to US$85 billion to prevent the company's collapse, enabling AIG to deliver additional collateral to its credit default swap trading partners."
SIGTARP was created to bail out AIG.
SIGTARP mentions "retirement accounts" as a concern of the FRBNY leading to the AIG bailout, on page one of its report. Why isn't it concerned about the retirement accounts of the inhabitants of Detroit?
The Fed is not taxpayer-funded. It returns profits to the Treasury each year. It can easily provide Detroit with the same zero-cost borrowing it provides to financial institutions.
The main point is that Detroit is not insolvent. It has cash flows. It should not be in bankruptcy. Putting it in bankruptcy is a political decision to punish city workers by not honoring promises made to them.
Detroit was screwed by banks such as USB. Pre-crash, Detroit bet that interest rates would go up. After the crash, rates went down, and banks and traders did shady things like the LIBOR scandal to lower rates. Detroit thus had big payments to make to USB.
But Detroit isn't insolvent. It has cash flow. There is no reason for Detroit to go bankrupt, it can make payments. Bankruptcy is a scheme to weaken the negotiating power of city workers. If Detroit was a private company, it would be able to renegotiate its payments. Or the Fed would bail it out. Why doesn't the Fed bail out Detroit? One of the reasons the Fed cited when it bailed out banks was that pensions would be threatened otherwise. In Detroit, its precisely pensions that are being reduced. The Fed could act. Why doesn't it?
In conclusion, Detroit should not have been making bets with big jackal banks like USB. But even now, Detroit has cash flow, it is not insolvent. It should be bailed out, because pensions are at stake.
Clarke was probably aware of the following (from wikipedia's article on Iapetus):
In the 17th century, Giovanni Cassini observed that he could see Iapetus only on the west side of Saturn and never on the east. He correctly deduced that Iapetus is locked in synchronous rotation about Saturn and that one side of Iapetus is darker than the other, conclusions later confirmed by larger telescopes.
MOOCs provide free education. Give each child a laptop, or something like that, and they can learn how to use the microscope. Or they can play with it and learn on their own, which is better than not having one, right?
I think when the Fed expands its balance sheet, as it did by a factor of two in a week in 2008, that money is not connected with the stockholder banks,
The value is unaffected by finance. If it's a good idea, how you finance it does not matter. Fear of debt should not be used as a reason not to finance a good idea.
By US law, the Fed returns its profits to the Treasury every year.