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It’s the End of Detroit as We Know it

November 10, 2008

Election Night 2008
Obama at Grant Park
Grant Park 200000 cheering
Thanks President Obama

Detroit is begging the U.S. government to allow them to pull from the $700 bailout while the last mayor of Detroit sits in jail. The losses of GM, Ford, and Chrysler have deepened as the cash burned from the three companies last quarter exceeded 14 billion dollars. And today, Deutsche Bank of Germany is recommending that everyone sell GM bonds and stock, down 22-30% today to as low as $3.02 per share, the lowest price in 60 years. Deutsche is predicting the stock will end at Zero.

            The path to bankruptcy seems closer than ever. Even the $50 billion the “Big 3” asks in loans from the government will only give them a few extra months of survival.

No one is buying cars, not just American cars but cars, period. Even Toyota, the worldwide leader in the auto industry, expects its profits this year to be 73% less than last year because of the sudden worldwide drop in sales. At least, Toyota still has profits, something Detroit’s “Big 3” haven’t seen in awhile.

The confidence of the American consumer is at a 27 year low and the availability of credit is limited. Foreclosures are still rising as the value of American houses falls as has the stock market which is down 35% from its peak a year ago. In this financial cataclysm, purchases of “big ticket” items like cars and houses are virtually non-existent.

 Showrooms are ghost towns. As you listen to the frightening news about the future of American automobile companies, who is confident enough to go out and get a loan to buy a car from a company that may not be there in the future? That is the really scary question. Loan or no loan from the government: is the path to non-existence inevitable?

Companies that have flourished in the 20th century, for over a hundred years, are in a life and death battle for survival. Circuit City, an American icon in electronic product sales, is the latest company to declare bankruptcy, following Linens & Things and Mervyn’s. And though the country can survive without those retailers, how will it survive the collapse of GM and Ford?

The car companies’ hopes and ours is a government that is in bleeding in astronomical debt levels. But that doesn’t stop the U.S. Treasury and Federal Reserve from offering bailout after bailout to keep companies like AIG, Fannie Mae, and Goldman Sachs alive.

We are all dependent and hopeful for the “new guy”, the inexperienced African American from Chicago to lead us to the Promised Land.

The fury over George W. Bush, accelerated by his weak and uninspired efforts while the financial and stock markets shrunk, and the uncertainty over a 72-year-old war hero senator with an inexperienced governor sidekick who often seemed simply stupid, made it easy to elect a liberal, well-spoken Democrat who seems to have a consistent, unruffled temperament.

The country hopes Barack Obama, like an imaginary superhero, can save the American auto industry, rescue Wall Street, and “give money to Main Street,” all before he’s even sworn into office.

Economist Robert J. Samuelson writes in the Newsweek cover story, “A Darker Future for us” (November 10, 2008) that “We Americans are progress junkies. We think that today should be better than yesterday and that tomorrow should be better than today. Compared with most other peoples, we place more faith in ‘opportunity’ and ‘getting ahead.’ We may now be on the cusp of a new era that frustrates these widespread expectations. It is not just the present financial crisis and its astonishing side effects, from bank rescues to frenzied stock-market swings. The crisis coincides with a series of other challenges—an aging society, runaway health spending, global warming—that imperil economic growth. America’s next president takes office facing the most daunting economic conditions in decades: certainly since Ronald Reagan and double-digit inflation, and perhaps since Franklin Roosevelt and 25 percent unemployment.”

Investor Doug Kass writes, “As we approach the next decade, our social, economic and political future has materially changed, owing to the deep and muddy financial ditch in which we are now squarely stuck. Moreover, the scope and duration of the financial meltdown has placed our economy well past the tipping point, and it will have an enduring and negative effect. Consider that U.S. home prices have dropped by over $5 trillion in the last one and a half years and that, during the month of October alone, nearly $10 trillion has been lost in the global equity markets. Quite frankly, that ditch is so deep right now that we are in big trouble if our policymakers get it wrong over the next 12 months. My concern is that we might even be in trouble for a long period of time if they get it right.” (“Welcome to Dystopia,” 11/03/08, thestreet.com.)

The outlook is bleak in Detroit and it’s not much better in the other main streets in America. Kass and Samuelson look realistically at social, political, and economic scenarios and their conclusions are that we will face what Samuelson calls “affluent deprivation,” fighting over “pieces of a fairly fixed economic pie rather than sharing ever-larger pieces of an expanding pie.”

It is the end of Detroit as we know it, and probably the end of increasing affluence many Americans felt in the last few decades.

Even with the prevalent fears, we need to be somewhat optimistic. Like much of America, we have to have hope in our new president and the government of the United States. It is easy to be cynical and pessimistic but it’s also important to realize the passionate excitement of so many in America who have celebrated this historic election.

Instead of brooding on the future of GM, Ford, and American affluence, let’s look at some of the joyous photos from Grant Park on Election Night 2008. My son, Kyle, a recent graduate of Wharton Business School and an ardent supporter of Obama, went to Grant Park to take part in the celebration.

My wife, Judy, and daughter, Marlee, were in Washington D.C. on Election Day with our daughter’s eighth grade class. In their two days in this memorable time, they went from Gettysburg to the White House, to the Washington Monument, the Lincoln Memorial, viewed the actual Declaration of Independence, visited the Smithsonian, and were moved at Arlington National Cemetery and at the U.S. Holocaust Memorial Museum. The eighth graders, especially our daughter’s black friends, were especially excited that an African American was elected president for the first time. To them and so many others, this is the New Day in America.

We must be like these eighth graders and pray that the new leader of America will help stop the spread of fear and bring optimism back to a nation that is sorely lacking it. We must hope that the death of the Detroit we knew is not the end of the America we cherish.

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