Thursday, May 6, 2010

Is Detroit Our Future?

Note: The closest thing I have to gurus are the editors of "Daily Reckoning." They were years ahead of the pack in calling the housing bust a housing bust. Their logic is constant.

I don't know much about Bill Bonner and Gary North. I'm not always sure who is writing what. They switch off form an editorial 'we' to an editorial 'I' routinely. But the ideas are always brilliant.

I subscribe to their daily newsletter and of course I am weeks behind in my reading. It is recommended that everyone subscribe t this newsletter! Usually I would link to a passage this long but I cannot find this essay at The Daily Reckoning website. So I am cutting and pasting from the newsletter. If the editors object to my cut and paste, I will remove it.

And by the way, their website is our link of the day.

http://dailyreckoning.com/

Issue 946 March 23, 2010

HEALTH CARE AND DETROIT: KILLED BY GOVERNMENT

To understand what is going to happen to America's
health care delivery system, we must first understand what
has happened to Detroit.

Detroit is dying. Yes, I know that there are lots of
books on "The Death of. . . ." That word sells books. But
Detroit really is dying. It is the first metropolis in the
United States to be facing extinction. We have never seen
anything like this in American history. It is happening
under our noses, but the media refuse to discuss it. To do so
would be politically incorrect.

Two factors tell us that Detroit is dying. The first is
the departure of 900,000 people -- over half the city's
population -- since 1950. It peaked at 1.8 million in 1950.
It is down to about 900,000 today.

http://GaryNorth.com/public/935.htm

In 1994, the median sales price of a house in Detroit
was about $41,000. The housing bubble pushed it up to about
$98,000 in 2003. In March 2009, the price was $13,600.
Today, the price is $7,000. Check the price chart.

http://GaryNorth.com/public/6259.cfm



There has never been a collapse of residential real
estate values of this magnitude in peacetime history,
anywhere. Detroit is dying.

We are unfamiliar with anything like this. The media
are silent. The Powers That Be are not interested in
reporting on this, because readers might ask the obvious
question: "How did this happen?" Obvious questions tend to
lead to obvious answers.

Detroit has been killed by flight out of the city. The
2008 Clint Eastwood movie, "Gran Torino" dealt with this
problem. Eastwood plays an 80-something Korean War veteran
who will not leave the neighborhood. His children keep
bugging him to sell and move into a retirement home. He will
not hear of it. He is alienated from them and from his
immigrant neighbors: Hmong refugees from South Vietnam. The
Hmong have trouble with the Blacks. Every group is
essentially trapped in a neighborhood, with the gangs running
the show.

There is no surge of buyers to take advantage of
fabulously low prices in Detroit. Can you imagine buying a
home for cash for $13,600 in 2009 -- a house that had sold
for $98,000 six years earlier -- and losing half your money?
It's incredible.

The "Wall Street Journal" recently ran one of the most
creative stories I have seen in years. The journalist told
the story of the history of a 5-bedroom home in Detroit, from
the land purchase to its recent sale. It was built by one of
the most influential men you have never heard of, Clarence
Avery. Avery was on the Ford Motor Company team that
Conceived of implementing an assembly line for Ford's factory.
He copied the idea from a hog-slaughtering operation.

His home was a very nice home for the time. The
journalist located his daughter, now age 91. She said that
she always thought the home was the best home she ever lived
in.

As recently as 2005, the home sold for $250,000. It was
purchased by a woman who was lent $200,000 to buy it. It was
financed by a subprime loan. The asking price was $189,000.
Where the other $61,000 went, the woman has no idea. She
defaulted.

The deteriorating house was bought by a Christian
organization that is renovating it. The house sold for
$10,000.

http://GaryNorth.com/snip/936.htm

This is simply inconceivable to anyone who is unfamiliar
with Detroit since 2005. Nothing like this has ever
happened. How can we conceive of a lender lending $200,000
to a woman to buy a $250,000 home offered at $189,000? How
can we conceive of a fall in price from $250,000 to $10,000?

This is the sign of a dying city. This does not happen
in a normal environment. Even with the mania created by
Fannie Mae and Freddie Mac, in conjunction with Alan
Greenspan's Federal Reserve, nothing like this has happened
anywhere else.

If you had predicted anything like this in 2005, you
would have been dismissed as a crackpot on crack. You would
not have been taken seriously by anyone. Yet it has
happened.

The city planners, the Federal government's subsidy
defenders, and the welfare state aficionados are all
discreetly silent about Detroit.


The city funds its schools with property taxes.
Property taxes have collapsed as sources of revenue. An
honest property tax system will generate less than ten cents
on the 2003 dollar.

Last week, the school board announced the closing of
one-quarter of Detroit's schools. The city is out of money.
The central agency of propaganda by the government is in the
process of closing up shop. This is not "anti-business as
usual." This is collapse.

The American public does not perceive what is happening
in Detroit.

When a city simply shuts down from the effects of
government mismanagement, the media say nothing. Detroit has
become the poster child of government regulation, welfare
systems, and a population that has given up hope.

The media say nothing because they are caught in a
dilemma. If they say that the local government's welfare
programs are not really to blame, what does that leave? The
unmentionable issue: 82% of the city is Black. So, that
means blaming white employers, who discriminate, despite 40
years of Federal anti-discrimination laws. But the main non-
employers today are the region's auto companies, and two of
the three are partially owned by the U.S. government. One --
GM -- is mainly owned by the retirement fund of the United
Auto Workers. So, the media are not about to blame the auto
companies -- not now.

That leaves that other politically incorrect issue: the
rate of illegitimacy, which is in the 80% range. That social
phenomenon represents a moral collapse, but the participants
were all educated by the tax-funded schools.

Who ya gonna blame?

The media pundits cannot decide, so they simply ignore
the collapse. "Detroit? Never heard of it."

The lesson of Detroit is this: the experts do not see a
collapse coming. They assume that next year will be like
today, give or take 3%. They do not believe that anything as
complex as a city can collapse. So, they believe that things
will continue, as they always have. Taxes need not be cut.
Spending need not be cut. Schools should be allowed to
educate. Tax-funded welfare programs should be increased.
When it comes to tax revenues, "there's always more where
that came from."

And then, overnight, the system collapses. The
assumptions were wrong. Real estate prices collapse,
indicating an irreversible flight of capital from the city.
The ability of the government to collect taxes collapses.

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