Last week, New York City Democratic voters chose a leftist extremist who has outlined policies that, if carried out, would bring severe damage to the city. Indeed, that the voters would choose Zohran Mamdani to be the city’s next mayor demonstrates that New York’s state of delusion is not limited to its politicians. Delusional officials are placed in office by delusional voters and delusion has reigned in the Big Apple for more than 50 years.
In 1975, New York City’s government faced an insolvency crisis. The New Yorker declared:
On October 16, 1975, New York City was deep in crisis. At 4 P.M. the next day, four hundred and fifty-three million dollars of the city’s debts would come due, but there were only thirty-four million dollars on hand. If New York couldn’t pay those debts, the city would officially be bankrupt.
The short story is that officials worked out agreements with the bank while the federal government furnished bailout funds to help NYC officially avoid bankruptcy. While the city’s political establishment and the media declared victory and turned their attention to other matters, the truth of this sordid affair is too important to be left to New York’s progressive journalists.
However, as we work our way through the city’s fiscal crisis of 1975, we realize that like Tallyrand’s description of the Bourbons after they were placed back in power, “They learned nothing, and forgot nothing,” New York’s political, media, and educational elites have not forgotten how to spend wastefully, and they insist that they will do no damage as they seek new monies in the billions of dollars to promote Mamdani’s promises. The short version is that New York City did recover from the 1975 crisis, but when a crisis inevitably returns—as it will under leftist leadership—the Big Apple is likely to see a long-term decline with no hope in sight.
How New York City Bonds Lost Their Value in 1975
Probably the best account of New York’s 1975 collapse comes from A Time for Truth, a highly-influential book written by former Treasury Secretary William E. Simon in 1978. His chapter on the NYC collapse: “New York: Disaster in Microcosm,” lays out how New York’s financial collapse happened and how then, just as now, the city’s political and media elites were clueless about economics and finance.
Simon writes that, in early 1975, New York’s capital bonds were not doing well in the markets despite their offering an attractive interest rate of more than nine percent. Mayor Abraham Beame told Simon that the city was suffering a “great injustice” and insisted that the US Treasury be required to purchase New York’s indebtedness. Simon, of course, refused.
Soon enough, the banks and other institutions that had been purchasing these bonds on the assumption that New York could pay its bills realized something was up—and it was. At the time, the city was engaged in the highly illegal practice of paying off at least some of its previous indebtedness with revenues it received from the sale of new bonds, something that is highly illegal in municipal finance. (Alas, the federal government is the only entity that can pay off previous issues of bonds with new issues and its financial officers not having to worry about jail time).
Being that it was New York and the fact that Democrats are reluctant to imprison their own, no one was charged with any crimes, even if the behavior was criminal. Martin Mayer wrote in “Default at the New York Times” in Columbia Journalism Review:
On the simplest level, the story of New York’s financial collapse is the tale of a Ponzi game in municipal paper—the regular and inevitably increasing issuance of notes to be paid off not by the future taxes or revenue certified to be available for that purpose, but by the sale of future notes. Like all chain-letter swindles, Ponzi games self-destruct when the seller runs out of suckers, as New York did in spring 1975.
When the banks and other institutions found out what was happening, Beame turned to the Department of the Treasury in the Gerald Ford administration, which understandably turned down his request. Even though the city government was engaged in criminal fraud, Democrats (who apparently are fine with these kinds of crimes if Democrats in government are the ones doing them) insisted that the US government give Beame what he demanded. To refuse was not simply the act of an enemy but a Philistine enemy at that. Wrote socialist Irving Howe in The New York Times:
…our true sin, in the eyes of Philistine skinflints and neoconservative ideologues, has been the decency—if not sufficient, still impressive—with which New York has treated its poor; that two or three pieces of enlightened legislation like federalization of welfare and national health insurance, worthy in their own right and hardly a threat to any hierarchies of power, could soon ease the plight of the city; and that only a fresh national policy emphasizing the social goals of the welfare state, which right now means measures designed to save our cities from collapse, can yield a remedy.
He continued:
The assault on the city is an assault on maintaining, let alone extending, the welfare state. The assault on the welfare state is an assault on the poor, the deprived, the blacks, the Puerto Ricans. Quite like the recent blows struck at our City University, it hurts both the culture of the cities and the masses of people who live in them.
Simon wrote that because of political pressure, Treasury and other government agencies investigated the city’s finances and found that it was not the welfare payments to the poor that were pushing New York over the financial cliff but rather its payments to municipal unions and the perks the city was providing for its middle class like free hospitals and free tuition for higher education through the City University of New York. Wrote Simon:
This is not evidence of an unusual welfare burden. It is evidence of gross mismanagement of city funds and of New York’s capacity to invent burdens to justify the creation of government jobs for its middle class.
And that, ultimately, is New York’s unpleasant little secret. New York’s subsidies to its middle class have been overwhelmingly greater than its subsidies to the poor.
In the end, officials worked out agreements that were essentially a form of bankruptcy proceedings even if they were not called as such. Instead, the media—and especially The New York Times—insisted on presenting the whole affair as a good versus evil episode in which the “good guys” (New York City officials) battled the “evil” Ford administration for aid that any good progressive could see rightfully should go to New York. True, city officials were committing felony financial fraud—but their hearts were in the right place.
Will Mamdani Lead New York to a New Financial Crisis?
New York had a happy outcome of sorts, as some financial deregulation and the explosion of capital markets brought something like a renaissance to the city. Although New York’s elites decried the “Decade of Greed” in the 1980s and The New York Times and Wall Street Journal aided and abetted Rudy Giuliani’s lawbreaking in his pursuit of “junk bond king” Michael Milken, New York City grew wealthier and even was able to pay its bills.
During the mid-to-late 1990s, when Giuliani was mayor, New York’s crime rate plummeted and the city even grew in population. Yet, the city kept its rent control laws, which had contributed to New York’s decline in the 1960s and 70s, and the attitudes of its elites were unchanged. The September 11, 2001, destruction of the Trade Towers, as bad as it was, did not do as much damage to the city as the 2008 financial meltdown, which came courtesy of the Federal Reserve and the George W. Bush administration’s housing collapse.
With New York depending heavily upon the financial services industry, the 2008 crisis and subsequent recession slammed the city very hard, yet New York survived that calamity better than it had survived the self-inflicted crises three decades earlier. However, in the nearly two decades since then, the city has been roiled by the numerous government-led catastrophes such as the heavy-handed covid lockdowns and eight years of the socialist mayorship of Bill DiBlasio, not to mention the past four years of Mayor Eric Adams.
Since 2019, crime rates in New York have increased, ending what had been a long, steady drop in crime for about 20 years. At the same time, the issues that have made life more difficult in this country have been magnified in NYC, as prices for housing, food, and most everything else there have exploded. In fact, it was the high cost of living that drove voters to Mamdani, as he promised to make life less expensive.
However, as I wrote last week, there is nothing in his platform that will lower the real cost of living. Yes, housing prices are out of reach for most New Yorkers but making rent controls even more draconian will raise the real cost of housing, as shortages will worsen and the supply of housing will deteriorate. Mamdani’s other campaign initiatives, including government grocery stores and free city bus transportation have very predictable results.
On the revenue side, Mamdani already has said he will target the “richer, whiter neighborhoods” for increased taxes, and he has expressed disdain for billionaires and is targeting them for more revenues as well, despite the fact that much of his support has come from those same neighborhoods. Like his political forebears of a half century ago, the man most likely to be the city’s next mayor forgets that both individuals and businesses will leave New York if the tax and regulatory regime becomes too punitive.
As Simon points out in A Time for Truth, the city ultimately had to find more revenues from the middle-class New Yorkers that the government had been subsidizing, and the municipal unions agreed to use their pension funds to purchase NYC bonds despite their questionable status. The tax and regulatory burdens in New York are even heavier and more onerous than they were 50 years ago, and on top of that, the city is less affordable than ever.
There is no doubt that Zohran Mamdani and his supporter, Alexandria Ocasio-Cortez, have extraordinary political skills and can always get favorable media coverage. What they cannot do is create the world they want through socialism. New York City needed more capitalism and free markets in housing and everything else a half-century ago, and it needs capitalism even more today. It doesn’t need the political establishment’s crony capitalism and it certainly doesn’t need socialism, but thanks to the city’s ruling classes, New Yorkers are going to have to suffer through both.
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