Finances Don't Haul Along the Economy

The city of cars has broken down. Detroit, the birthplace of the American dream of four-wheeled mobility, of the legendary music of Diana Ross, Marvin Gaye and Stevie Wonder and of a legendary basketball team, went bankrupt last week.

The bankruptcy — the biggest economic crash ever by an American city — was caused by corrupt politicians, excessively generous pensions and vast economic inequality. “The difference between the rich and the poor,” a friend who was born and lived in Detroit told me, “is of Dante-esque proportions.” There was social and economic pandemonium which no one wants to be held responsible for. Not the local politicians, not the Obama administration and certainly not the Wall Street banks which have fueled the economic negligence of an incompetent ruling class. In that case, it’s better to hide behind the numbers: a $19 billion debt, 20,000 pensioners and the city’s highest homicide rate in 40 years.

But when such an important and symbolic city in the heart of industrial America goes comatose, numbers aren’t sufficient. As often in the short but intense history of the United States, the country’s economy is mirrored by the joys and dramas of Detroit.

The bankruptcy of Motown — the motor city — is emblematic of an American economy which has not bounced back yet. America today is stuck in the middle: not in a recession, but incapable of growing enough to pull the rest of the world out of the economic crisis.

It’s an uncomfortable position for those whose job it is to lead the planet’s biggest economy, from the head of the Federal Reserve, Ben Bernanke, to the head of everything else, Barack Obama.

Detroit has been in a bad way for a while and would have collapsed eventually, but it was given its coup de grace by an economy which, after five years of a worldwide recession, has not succeeded in finding cruising speed again. There are many “mini Detroits” in America today, not only cities, but also businesses and families — prisoners of a financial limbo which doesn’t allow them to invest, grow and start living again.

It’s enough to look at consumers, the traditional engine of growth in the U.S. In June, consumers spent 0.4 percent more than last year, in other words almost nothing — a sensational number if you think that in this phase of the economic cycle, John and Jane Doe ought to have a very intimate relationship with their credit cards. Yet instead, the Rossis of Michigan, Oregon and California are not opening their wallets.

The experts don’t know what to say and the men at the Fed don’t know what to do. For them, the economic situation is a headache: The growth of certain sectors, above all the housing sector and, paradoxically, the car industry, is feeding inflationary pressures.

But the rest of the country isn’t following them. The recent forecasts say that the American economy grew by 1.5 percent between March and June, which is far too little to help the millions of Americans out of work and the businesses that are unwilling to invest.

A little inflation in certain parts of the economy and almost zero growth in other parts: It is a nightmare dilemma for the central banks. Whatever they do, they’ll mess up. If they stop trying to stimulate the economy, the country could fall into a recession once again, but if they continue to pump in money, they’ll almost certainly form inflationary bubbles.

For now, Bernanke’s men have chosen the second route and the market is applauding. Anyone who is depressed by the news coming from Detroit should take a walk around parts of the New York Stock Exchange. It’s as if it were another planet: The empty streets and the decrepit buildings of Motown against the frenetic activity and the breathless pace of those who make money from money.

The only sector in America which really is in a boom is the financial sector. It seems incredible, considering that the crisis in 2008 had decimated Wall Street, but the flexibility of the money men never ceases to amaze.

It is almost a feudal system. If the Fed wants to stimulate the economy, it puts on a masquerade for banks and markets, the transition mechanisms of any capitalist system. But it’s not a free service: The first pockets to be filled when the central bank injects money into the system are those of the bankers Canali and Armani, certainly not those of Detroit’s pensioners.

It is for that reason that, despite the feeble growth of the rest of the economy, stock markets are at record levels. Banks like JP Morgan Chase and Goldman Sachs are making money just like before the crisis. The restaurants near the New York Stock Exchange are crammed full of people who are eating oysters as if they were peanuts.

Detroit’s basketball team is called the Pistons, but the real pistons of the American growth are the computers, the iPads and the Manhattan Stock Exchange operators’ telephones.

It would be stupid to criticize the markets just because they are on the rise. The flow of money is logical and rational. If the Fed wants to give away free money, and if the markets take it, it would not be surprising. And there is no doubt that the growth of the financial sector is positive for the economy and causing a flywheel effect for investors, consumers and pension funds. Without the banks and markets, America would be even worse.

The problem is that an economy doesn’t live on only money. The finances have to be the glue which brings consumers and producers together. But at this point in time, it is isolated and an end to itself, incapable of giving a vital impetus to more important sectors.

“Hope isn’t a plan,” Kevyn Orr, special administrator of Detroit, said this week. Even those who don’t come from Motown know that a car needs all of its cylinders to work.