Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Death of Detroit, the first U.S. city to face extinction

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by Gary North
Originally posted Mar 24, 2010

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.

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. 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 man 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.

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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