Monday, March 31, 2008



The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.

While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".

"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.



Driven by a painful mix of layoffs and rising food and fuel prices, the number of Americans receiving food stamps is projected to reach 28 million in the coming year, the highest level since the aid program began in the 1960s.

The number of recipients, who must have near-poverty incomes to qualify for benefits averaging $100 a month per family member, has fluctuated over the years along with economic conditions, eligibility rules, enlistment drives and natural disasters like Hurricane Katrina, which led to a spike in the South.

But recent rises in many states appear to be resulting mainly from the economic slowdown, officials and experts say, as well as inflation in prices of basic goods that leave more families feeling pinched. Citing expected growth in unemployment, the Congressional Budget Office this month projected a continued increase in the monthly number of recipients in the next fiscal year, starting Oct. 1 — to 28 million, up from 27.8 million in 2008, and 26.5 million in 2007.

The percentage of Americans receiving food stamps was higher after a recession in the 1990s, but actual numbers are expected to be higher this year.

Federal benefit costs are projected to rise to $36 billion in the 2009 fiscal year from $34 billion this year.

“People sign up for food stamps when they lose their jobs, or their wages go down because their hours are cut,” said Stacy Dean, director of food stamp policy at the Center on Budget and Policy Priorities in Washington, who noted that 14 states saw their rolls reach record numbers by last December.

One example is Michigan, where one in eight residents now receives food stamps. “Our caseload has more than doubled since 2000, and we’re at an all-time record level,” said Maureen Sorbet, spokeswoman for the Michigan Department of Human Services.

The climb in food stamp recipients there has been relentless, through economic upturns and downturns, reflecting a steady loss of industrial jobs that has pushed recipient levels to new highs in Ohio and Illinois as well.

“We’ve had poverty here for a good while,” Ms. Sorbet said. Contributing to the rise, she added, Michigan, like many other states, has also worked to make more low-end workers aware of their eligibility, and a switch from coupons to electronic debit cards has reduced the stigma.

Some states have experienced more recent surges. From December 2006 to December 2007, more than 40 states saw recipient numbers rise, and in several — Arizona, Florida, Maryland, Nevada, North Dakota and Rhode Island — the one-year growth was 10 percent or more.

In Rhode Island, the number of recipients climbed by 18 percent over the last two years, to more than 84,000 as of February, or about 8.4 percent of the population. This is the highest total in the last dozen years or more, said Bob McDonough, the state’s administrator of family and adult services, and reflects both a strong enlistment effort and an upward creep in unemployment.

In New York, a program to promote enrollment increased food stamp rolls earlier in the decade, but the current climb in applications appears in part to reflect economic hardship, said Michael Hayes, spokesman for the Office of Temporary and Disability Assistance. The additional 67,000 clients added from July 2007 to January of this year brought total recipients to 1.86 million, about one in 10 New Yorkers.

Nutrition and poverty experts praise food stamps as a vital safety net that helped eliminate the severe malnutrition seen in the country as recently as the 1960s. But they also express concern about what they called the gradual erosion of their value.

Food stamps are an entitlement program, with eligibility guidelines set by Congress and the federal government paying for benefits while states pay most administrative costs.

Eligibility is determined by a complex formula, but basically recipients must have few assets and incomes below 130 percent of the poverty line, or less than $27,560 for a family of four.

As a share of the national population, food stamp use was highest in 1994, after several years of poor economic growth, with an average of 27.5 million recipients per month from a lower total of residents. The numbers plummeted in the late 1990s as the economy grew and legal immigrants and certain others were excluded.

But access by legal immigrants has been partly restored and, in the current decade, the federal and state governments have used advertising and other measures to inform people of their eligibility and have often simplified application procedures.

Because they spend a higher share of their incomes on basic needs like food and fuel, low-income Americans have been hit hard by soaring gasoline and heating costs and jumps in the prices of staples like milk, eggs and bread.

At the same time, average family incomes among the bottom fifth of the population have been stagnant or have declined in recent years at levels around $15,500, said Jared Bernstein, an economist at the Economic Policy Institute in Washington.

The benefit levels, which can amount to many hundreds of dollars for families with several children, are adjusted each June according to the price of a bare-bones “thrifty food plan,” as calculated by the Department of Agriculture. Because food prices have risen by about 5 percent this year, benefit levels will rise similarly in June — months after the increase in costs for consumers.

Advocates worry more about the small but steady decline in real benefits since 1996, when the “standard deduction” for living costs, which is subtracted from family income to determine eligibility and benefit levels, was frozen. If that deduction had continued to rise with inflation, the average mother with two children would be receiving an additional $37 a month, according to the private Center on Budget and Policy Priorities.

Both houses of Congress have passed bills that would index the deduction to the cost of living, but the measures are part of broader agriculture bills that appear unlikely to pass this year because of disagreements with the White House over farm policy.

Another important federal nutrition program known as WIC, for women, infants and children, is struggling with rising prices of milk and cheese, and growing enrollment.

The program, for households with incomes no higher than 185 percent of the federal poverty level, provides healthy food and nutrition counseling to 8.5 million pregnant women, and children through the age of 4. WIC is not an entitlement like food stamps, and for the fiscal year starting in October, Congress may have to approve a large increase over its current budget of $6 billion if states are to avoid waiting lists for needy mothers and babies.


Clean Energy Scam

From his Cessna a mile above the southern Amazon, John Carter looks down on the destruction of the world's greatest ecological jewel. He watches men converting rain forest into cattle pastures and soybean fields with bulldozers and chains. He sees fires wiping out such gigantic swaths of jungle that scientists now debate the "savannization" of the Amazon. Brazil just announced that deforestation is on track to double this year; Carter, a Texas cowboy with all the subtlety of a chainsaw, says it's going to get worse fast. "It gives me goose bumps," says Carter, who founded a nonprofit to promote sustainable ranching on the Amazon frontier. "It's like witnessing a rape."

The Amazon was the chic eco-cause of the 1990s, revered as an incomparable storehouse of biodiversity. It's been overshadowed lately by global warming, but the Amazon rain forest happens also to be an incomparable storehouse of carbon, the very carbon that heats up the planet when it's released into the atmosphere. Brazil now ranks fourth in the world in carbon emissions, and most of its emissions come from deforestation. Carter is not a man who gets easily spooked--he led a reconnaissance unit in Desert Storm, and I watched him grab a small anaconda with his bare hands in Brazil--but he can sound downright panicky about the future of the forest. "You can't protect it. There's too much money to be made tearing it down," he says. "Out here on the frontier, you really see the market at work."

This land rush is being accelerated by an unlikely source: biofuels. An explosion in demand for farm-grown fuels has raised global crop prices to record highs, which is spurring a dramatic expansion of Brazilian agriculture, which is invading the Amazon at an increasingly alarming rate.

Propelled by mounting anxieties over soaring oil costs and climate change, biofuels have become the vanguard of the green-tech revolution, the trendy way for politicians and corporations to show they're serious about finding alternative sources of energy and in the process slowing global warming. The U.S. quintupled its production of ethanol--ethyl alcohol, a fuel distilled from plant matter--in the past decade, and Washington has just mandated another fivefold increase in renewable fuels over the next decade. Europe has similarly aggressive biofuel mandates and subsidies, and Brazil's filling stations no longer even offer plain gasoline. Worldwide investment in biofuels rose from $5 billion in 1995 to $38 billion in 2005 and is expected to top $100 billion by 2010, thanks to investors like Richard Branson and George Soros, GE and BP, Ford and Shell, Cargill and the Carlyle Group. Renewable fuels has become one of those motherhood-and-apple-pie catchphrases, as unobjectionable as the troops or the middle class.

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it's dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry. The grain it takes to fill an SUV tank with ethanol could feed a person for a year. Harvests are being plucked to fuel our cars instead of ourselves. The U.N.'s World Food Program says it needs $500 million in additional funding and supplies, calling the rising costs for food nothing less than a global emergency. Soaring corn prices have sparked tortilla riots in Mexico City, and skyrocketing flour prices have destabilized Pakistan, which wasn't exactly tranquil when flour was affordable.

Biofuels do slightly reduce dependence on imported oil, and the ethanol boom has created rural jobs while enriching some farmers and agribusinesses. But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

Backed by billions in investment capital, this alarming phenomenon is replicating itself around the world. Indonesia has bulldozed and burned so much wilderness to grow palm oil trees for biodiesel that its ranking among the world's top carbon emitters has surged from 21st to third according to a report by Wetlands International. Malaysia is converting forests into palm oil farms so rapidly that it's running out of uncultivated land. But most of the damage created by biofuels will be less direct and less obvious. In Brazil, for instance, only a tiny portion of the Amazon is being torn down to grow the sugarcane that fuels most Brazilian cars. More deforestation results from a chain reaction so vast it's subtle: U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon. It's the remorseless economics of commodities markets. "The price of soybeans goes up," laments Sandro Menezes, a biologist with Conservation International in Brazil, "and the forest comes down."

Deforestation accounts for 20% of all current carbon emissions. So unless the world can eliminate emissions from all other sources--cars, power plants, factories, even flatulent cows--it needs to reduce deforestation or risk an environmental catastrophe. That means limiting the expansion of agriculture, a daunting task as the world's population keeps expanding. And saving forests is probably an impossibility so long as vast expanses of cropland are used to grow modest amounts of fuel. The biofuels boom, in short, is one that could haunt the planet for generations--and it's only getting started.

Why the Amazon Is on Fire

This destructive biofuel dynamic is on vivid display in Brazil, where a Rhode Island--size chunk of the Amazon was deforested in the second half of 2007 and even more was degraded by fire. Some scientists believe fires are now altering the local microclimate and could eventually reduce the Amazon to a savanna or even a desert. "It's approaching a tipping point," says ecologist Daniel Nepstad of the Woods Hole Research Center.

I spent a day in the Amazon with the Kamayura tribe, which has been forced by drought to replant its crops five times this year. The tribesmen I met all complained about hacking coughs and stinging eyes from the constant fires and the disappearance of the native plants they use for food, medicine and rituals. The Kamayura had virtually no contact with whites until the 1960s; now their forest is collapsing around them. Their chief, Kotok, a middle-aged man with an easy smile and Three Stooges hairdo that belie his fierce authority, believes that's no coincidence. "We are people of the forest, and the whites are destroying our home," says Kotok, who wore a ceremonial beaded belt, a digital watch, a pair of flip-flops and nothing else. "It's all because of money."

Kotok knows nothing about biofuels. He's more concerned about his tribe's recent tendency to waste its precious diesel-powered generator watching late-night soap operas. But he's right. Deforestation can be a complex process; for example, land reforms enacted by Brazilian President Luiz Inácio Lula da Silva have attracted slash-and-burn squatters to the forest, and "use it or lose it" incentives have spurred some landowners to deforest to avoid redistribution.

The basic problem is that the Amazon is worth more deforested than it is intact. Carter, who fell in love with the region after marrying a Brazilian and taking over her father's ranch, says the rate of deforestation closely tracks commodity prices on the Chicago Board of Trade. "It's just exponential right now because the economics are so good," he says. "Everything tillable or grazeable is gouged out and cleared."

That the destruction is taking place in Brazil is sadly ironic, given that the nation is also an exemplar of the allure of biofuels. Sugar growers here have a greener story to tell than do any other biofuel producers. They provide 45% of Brazil's fuel (all cars in the country are able to run on ethanol) on only 1% of its arable land. They've reduced fertilizer use while increasing yields, and they convert leftover biomass into electricity. Marcos Jank, the head of their trade group, urges me not to lump biofuels together: "Grain is good for bread, not for cars. But sugar is different." Jank expects production to double by 2015 with little effect on the Amazon. "You'll see the expansion on cattle pastures and the Cerrado," he says.

So far, he's right. There isn't much sugar in the Amazon. But my next stop was the Cerrado, south of the Amazon, an ecological jewel in its own right. The Amazon gets the ink, but the Cerrado is the world's most biodiverse savanna, with 10,000 species of plants, nearly half of which are found nowhere else on earth, and more mammals than the African bush. In the natural Cerrado, I saw toucans and macaws, puma tracks and a carnivorous flower that lures flies by smelling like manure. The Cerrado's trees aren't as tall or dense as the Amazon's, so they don't store as much carbon, but the region is three times the size of Texas, so it stores its share.

At least it did, before it was transformed by the march of progress--first into pastures, then into sugarcane and soybean fields. In one field I saw an array of ovens cooking trees into charcoal, spewing Cerrado's carbon into the atmosphere; those ovens used to be ubiquitous, but most of the trees are gone. I had to travel hours through converted Cerrado to see a 96-acre (39 hectare) sliver of intact Cerrado, where a former shopkeeper named Lauro Barbosa had spent his life savings for a nature preserve. "The land prices are going up, up, up," Barbosa told me. "My friends say I'm a fool, and my wife almost divorced me. But I wanted to save something before it's all gone."

The environmental cost of this cropland creep is now becoming apparent. One groundbreaking new study in Science concluded that when this deforestation effect is taken into account, corn ethanol and soy biodiesel produce about twice the emissions of gasoline. Sugarcane ethanol is much cleaner, and biofuels created from waste products that don't gobble up land have real potential, but even cellulosic ethanol increases overall emissions when its plant source is grown on good cropland. "People don't want to believe renewable fuels could be bad," says the lead author, Tim Searchinger, a Princeton scholar and former Environmental Defense attorney. "But when you realize we're tearing down rain forests that store loads of carbon to grow crops that store much less carbon, it becomes obvious."

The growing backlash against biofuels is a product of the law of unintended consequences. It may seem obvious now that when biofuels increase demand for crops, prices will rise and farms will expand into nature. But biofuel technology began on a small scale, and grain surpluses were common. Any ripples were inconsequential. When the scale becomes global, the outcome is entirely different, which is causing cheerleaders for biofuels to recalibrate. "We're all looking at the numbers in an entirely new way," says the Natural Resources Defense Council's Nathanael Greene, whose optimistic "Growing Energy" report in 2004 helped galvanize support for biofuels among green groups.

Several of the most widely cited experts on the environmental benefits of biofuels are warning about the environmental costs now that they've recognized the deforestation effect. "The situation is a lot more challenging than a lot of us thought," says University of California, Berkeley, professor Alexander Farrell, whose 2006 Science article calculating the emissions reductions of various ethanols used to be considered the definitive analysis. The experts haven't given up on biofuels; they're calling for better biofuels that won't trigger massive carbon releases by displacing wildland. Robert Watson, the top scientist at the U.K.'s Department for the Environment, recently warned that mandating more biofuel usage--as the European Union is proposing--would be "insane" if it increases greenhouse gases. But the forces that biofuels have unleashed--political, economic, social--may now be too powerful to constrain.

America the Bio-Foolish

The best place to see this is America's biofuel mecca: Iowa. Last year fewer than 2% of U.S. gas stations offered ethanol, and the country produced 7 billion gal. (26.5 billion L) of biofuel, which cost taxpayers at least $8 billion in subsidies. But on Nov. 6, at a biodiesel plant in Newton, Iowa, Hillary Rodham Clinton unveiled an eye-popping plan that would require all stations to offer ethanol by 2017 while mandating 60 billion gal. (227 billion L) by 2030. "This is the fuel for a much brighter future!" she declared. Barack Obama immediately criticized her--not for proposing such an expansive plan but for failing to support ethanol before she started trolling for votes in Iowa's caucuses.

If biofuels are the new dotcoms, Iowa is Silicon Valley, with 53,000 jobs and $1.8 billion in income dependent on the industry. The state has so many ethanol distilleries under construction that it's poised to become a net importer of corn. That's why biofuel-pandering has become virtually mandatory for presidential contenders. John McCain was the rare candidate who vehemently opposed ethanol as an outrageous agribusiness boondoggle, which is why he skipped Iowa in 2000. But McCain learned his lesson in time for this year's caucuses. By 2006 he was calling ethanol a "vital alternative energy source."

Members of Congress love biofuels too, not only because so many dream about future Iowa caucuses but also because so few want to offend the farm lobby, the most powerful force behind biofuels on Capitol Hill. Ethanol isn't about just Iowa or even the Midwest anymore. Plants are under construction in New York, Georgia, Oregon and Texas, and the ethanol boom's effect on prices has helped lift farm incomes to record levels nationwide.

Someone is paying to support these environmentally questionable industries: you. In December, President Bush signed a bipartisan energy bill that will dramatically increase support to the industry while mandating 36 billion gal. (136 billion L) of biofuel by 2022. This will provide a huge boost to grain markets.

Why is so much money still being poured into such a misguided enterprise? Like the scientists and environmentalists, many politicians genuinely believe biofuels can help decrease global warming. It makes intuitive sense: cars emit carbon no matter what fuel they burn, but the process of growing plants for fuel sucks some of that carbon out of the atmosphere. For years, the big question was whether those reductions from carbon sequestration outweighed the "life cycle" of carbon emissions from farming, converting the crops to fuel and transporting the fuel to market. Researchers eventually concluded that yes, biofuels were greener than gasoline. The improvements were only about 20% for corn ethanol because tractors, petroleum-based fertilizers and distilleries emitted lots of carbon. But the gains approached 90% for more efficient fuels, and advocates were confident that technology would progressively increase benefits.

There was just one flaw in the calculation: the studies all credited fuel crops for sequestering carbon, but no one checked whether the crops would ultimately replace vegetation and soils that sucked up even more carbon. It was as if the science world assumed biofuels would be grown in parking lots. The deforestation of Indonesia has shown that's not the case. It turns out that the carbon lost when wilderness is razed overwhelms the gains from cleaner-burning fuels. A study by University of Minnesota ecologist David Tilman concluded that it will take more than 400 years of biodiesel use to "pay back" the carbon emitted by directly clearing peat lands to grow palm oil; clearing grasslands to grow corn for ethanol has a payback period of 93 years. The result is that biofuels increase demand for crops, which boosts prices, which drives agricultural expansion, which eats forests. Searchinger's study concluded that overall, corn ethanol has a payback period of about 167 years because of the deforestation it triggers.

Not every kernel of corn diverted to fuel will be replaced. Diversions raise food prices, so the poor will eat less. That's the reason a U.N. food expert recently called agrofuels a "crime against humanity." Lester Brown of the Earth Policy Institute says that biofuels pit the 800 million people with cars against the 800 million people with hunger problems. Four years ago, two University of Minnesota researchers predicted the ranks of the hungry would drop to 625 million by 2025; last year, after adjusting for the inflationary effects of biofuels, they increased their prediction to 1.2 billion.

Industry advocates say that as farms increase crop yields, as has happened throughout history, they won't need as much land. They'll use less energy, and they'll use farm waste to generate electricity. To which Searchinger says: Wonderful! But growing fuel is still an inefficient use of good cropland. Strange as it sounds, we're better off growing food and drilling for oil. Sure, we should conserve fuel and buy efficient cars, but we should keep filling them with gas if the alternatives are dirtier.

The lesson behind the math is that on a warming planet, land is an incredibly precious commodity, and every acre used to generate fuel is an acre that can't be used to generate the food needed to feed us or the carbon storage needed to save us. Searchinger acknowledges that biofuels can be a godsend if they don't use arable land. Possible feedstocks include municipal trash, agricultural waste, algae and even carbon dioxide, although none of the technologies are yet economical on a large scale. Tilman even holds out hope for fuel crops--he's been experimenting with Midwestern prairie grasses--as long as they're grown on "degraded lands" that can no longer support food crops or cattle.

Changing the Incentives

That's certainly not what's going on in Brazil. There's a frontier feel to the southern Amazon right now. Gunmen go by names like Lizard and Messiah, and Carter tells harrowing stories about decapitations and castrations and hostages. Brazil has remarkably strict environmental laws--in the Amazon, landholders are permitted to deforest only 20% of their property--but there's not much law enforcement. I left Kotok to see Blairo Maggi, who is not only the soybean king of the world, with nearly half a million acres (200,000 hectares) in the province of Mato Grosso, but also the region's governor. "It's like your Wild West right now," Maggi says. "There's no money for enforcement, so people do what they want."

Maggi has been a leading pioneer on the Brazilian frontier, and it irks him that critics in the U.S.--which cleared its forests and settled its frontier 125 years ago but still provides generous subsidies to its farmers--attack him for doing the same thing except without subsidies and with severe restrictions on deforestation. Imagine Iowa farmers agreeing to keep 80%--or even 20%--of their land in native prairie grass. "You make us sound like bandits," Maggi tells me. "But we want to achieve what you achieved in America. We have the same dreams for our families. Are you afraid of the competition?"

Maggi got in trouble recently for saying he'd rather feed a child than save a tree, but he's come to recognize the importance of the forest. "Now I want to feed a child and save a tree," he says with a grin. But can he do all that and grow fuel for the world as well? "Ah, now you've hit the nail on the head." Maggi says the biofuel boom is making him richer, but it's also making it harder to feed children and save trees. "There are many mouths to feed, and nobody's invented a chip to create protein without growing crops," says his pal Homero Pereira, a congressman who is also the head of Mato Grosso's farm bureau. "If you don't want us to tear down the forest, you better pay us to leave it up!"

Everyone I interviewed in Brazil agreed: the market drives behavior, so without incentives to prevent deforestation, the Amazon is doomed. It's unfair to ask developing countries not to develop natural areas without compensation. Anyway, laws aren't enough. Carter tried confronting ranchers who didn't obey deforestation laws and nearly got killed; now his nonprofit is developing certification programs to reward eco-sensitive ranchers. "People see the forest as junk," he says. "If you want to save it, you better open your pocketbook. Plus, you might not get shot."

The trouble is that even if there were enough financial incentives to keep the Amazon intact, high commodity prices would encourage deforestation elsewhere. And government mandates to increase biofuel production are going to boost commodity prices, which will only attract more investment. Until someone invents that protein chip, it's going to mean the worst of everything: higher food prices, more deforestation and more emissions.

Advocates are always careful to point out that biofuels are only part of the solution to global warming, that the world also needs more energy-efficient lightbulbs and homes and factories and lifestyles. And the world does need all those things. But the world is still going to be fighting an uphill battle until it realizes that right now, biofuels aren't part of the solution at all. They're part of the problem.

Saturday, March 29, 2008


Evil On Earth

ACRES U.S.A. Let’s start with subprime lenders, 182 of which have filed bankruptcy, causing Merrill-Lynch to write off $8 billion, Citibank for another $11 billion, and others reporting rising losses. What happened?

MH. Subprime lenders were selling homes without a credit check, inflating prices, and now their managers are walking away with golden parachutes. They set up their clients for a scam and acted in unethical ways. My basic judgement is good riddance — not only to them, but also to their parent banks and to the money managers that bought their debt, knowing full well that these debts would go bad, yet not caring, just so they could show higher three-month earnings premiums on their high-yield “junk” mortgages.

ACRES U.S.A. That’s for the companies, but what will be the impact on all these people losing their homes?

MH. You’re right that the problem of people losing their homes is a separate problem from the survival of junk-mortgage companies and their Wall Street parents or managers and the institutional investors who went along. The fact that the mortgage companies are being folded means that it is harder to have recourse against loans that were unethical to begin with. The solution has to be political in character, but so far the Democrats in Congress are supporting the creditors, not the people who are losing their homes. When the Democrats say they want to pass a law to bail out homeowners and keep troubled mortgage debtors in their homes, they mean they want to use these mortgage debtors as passthrough vehicles to give money to the big financial institutions that contribute to their political campaigns. If the government pays these bad mortgages to keep insolvent mortgagees in their homes, the holders of these junk mortgages will not have to take a loss; taxpayers will. The homeowners who are losing their homes are being squeezed both by Democratic and Republican politicians, who pretend that these debts should be paid with all the high interest charges, and should be subsidized by the government. In fact, the subsidy is going to the holders of these mortgages, and to the financial institutions that have bought hundreds of billions of dollars’ worth of these bad mortgages. If you really want to help homeowners, you should renegotiate the mortgage down to something that is affordable with their current income.

ACRES U.S.A. Down here in southern Missouri we have the historical home of Laura Ingalls Wilder, who wrote the Little House on the Prairie books. She was a lender in the agricultural arena, and she said there was no such thing as a bad loan, only bad loan managers.

MH. Bad loan managers were facilitated by repeal of the Glass-Steagall Act. Bad management has been built into the conflict of interest that goes hand in hand with vertical integration of the banks, brokerage houses, Wall Street and mortgage lenders. You find this particularly in Citibank and Countrywide Financial. The October 2007 Columbia Journalism Review includes an article, “A Tale of Two Citis,” that describes how Sandy Weill built his empire on subprime lending. Much of the research was done by Michael Hudson of the Wall Street Journal (not me, a different Michael Hudson). In his article “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” he describes how the banks found it in their interest to have affiliates that wrote mortgages way beyond the ability of borrowers to pay, because they knew they could turn around and sell these mortgages to someone else and avoid liability. Nobody knows who is liable for the defaults. Is it the current mortgage holder? Is it the mortgage originator? Is it the mortgage brokers who are now going out of business and therefore can’t be held liable? All of this is going to take a long time in the courts.

ACRES U.S.A. Is there a remedy for this situation?

MH. I’ll describe one solution I think is a good one. This approach was prevalent in New York State, where I live, before the American Revolution, and it’s a law that is still on the books here — the law of fraudulent conveyance. Around the time of the Revolution, a lot of New York farmers borrowed from British lenders who would come over, make a loan to a farmer far in excess of the normal ability to pay, and then, just before the crop was harvested, just before the farmer had liquidity, they would call in the loan, that is, demand that it be paid. The farmer couldn’t pay because he hadn’t sold his crop yet or because the loan was too big to begin with, and the British creditor would foreclose. To stop this practice, New York State passed the law of fraudulent conveyance, which said that if a creditor makes a loan to a borrower without having any idea how the borrower can repay the loan, then that loan is nullified. That law is still on the books, as I mentioned, and it was often brought up in court in the 1980s, when corporate raiders would load down companies with corporate debt. If this law were implemented nationwide, it would apply to subprime borrowers and other borrowers who signed loan agreements far in excess of what they could pay, once the teaser interest rates adjusted to much higher levels.

ACRES U.S.A. Isn’t this exactly what the government was doing with its farm lending system, literally entrapping farmers into getting bigger and buying more machinery in order to feed the world so they could close them down and bankrupt them?

MH. I’m not sure that the intention of the farm lending system was to bankrupt farmers, but that was often the effect. What they depicted as economic growth and output and capital investment in machinery was so heavily financed by debt that its carrying charges absorbed the increased revenue. The beneficiary of all this investment turned out to be the banks and the creditors, not the actual producers — the farmers.

ACRES U.S.A. With the farm crops being somewhat up and down, especially when there were imports involved, the practical effect in many cases was to take some 5 million family farms out of agriculture over a 40-year period.

MH. Much of this is a result of rising farm productivity. The increase in farm productivity has been far in excess of that in manufacturing, contrary to what most people believe. That means more and more output can be produced with fewer and fewer people because of the substitution of capital and fertilizer in place of labor.

ACRES U.S.A. In terms of bins and bushels, perhaps. In terms of quality, our legacy would be our doubt. But let’s move on. We now have a situation in which a great many dollars are going into foreign climes and then coming back to us. We’d like to have you explain to us, how is this working? How did we make the transition from a creditor nation to a debtor nation and still continue to mount a war that’s costing us 2 billion dollars a week?

MH. I’ve described this process in my book Super-Imperialism: The Economic Strategy of American Empire. A new edition came out in 2003 from Pluto Press. In 1951 the United States turned from a balance of payment surplus country to a deficit country. This deficit was caused by the war in Korea. Throughout the 1960s and ’70s the entire balance of payments deficit stemmed from U.S. overseas military spending. The private sector was exactly in balance, and the government — apart from military — actually was running a balance-of-payment surplus on its foreign aid. The deficit stemmed from U.S. military spending. The United States became a true deficit country after August 1971, when President Nixon took the country off gold. Once European and Asian countries and their central banks could no longer turn in their surplus dollars for gold, they had only one choice, and that was to invest their international monetary reserves in the form of U.S. Treasury bonds. Central banks don’t invest in the stock market, they don’t buy real estate, and they don’t buy companies — at least not until recently. They buy government securities because those are the most secure. So the United States found that the larger the balance of payments deficit became, the more dollars it would pump into foreign economies. The recipients of these dollars, either exporters or sellers of companies, would turn the surplus dollars over to their central banks in exchange for domestic currency, and then the central banks had a problem — what do they do with these dollars? The only thing they could do was to buy U.S. Treasury bonds.

ACRES U.S.A. That would add up to a lot of bonds.

MH. Yes, the balance of payments was so large and pumped so many dollars into the hands of foreign central banks, when they turned around and bought U.S. Treasury bonds, they bought enough to finance most of the domestic U.S. federal budget deficit. Thus, the balance of payments deficit turned out to be the means of financing the government’s federal budget deficit. This gave America a free ride, and enabled it to make war with other countries’ savings instead of giving up its own gold reserves or ownership of companies and resources. Foreign countries had a narrow choice: either their central banks would accept the excess dollars and recycle them into U.S. Treasury bonds, or they wouldn’t buy these dollars — they would let them be sold on the market, and their currency would appreciate against the dollar. This would have raised the price of their exports to foreign countries, causing unemployment in their export industries. When they complained about the U.S. payments deficit, the U.S. government said “That’s your problem, not ours.” The United States found that it could run a balance of payments deficit without ever having to pay for it — and today, the U.S. Treasury owes $2.5 trillion to foreign central banks.

ACRES U.S.A. That’s an astronomical debt!

MH. There is no way in which the U.S. economy can repay $2.5 trillion. Of this amount, about half is owed to China, and all the while dollars continue to be pumped into the global economy. In effect, the United States is exporting paper dollars, or paper bonds, and other countries are exporting goods and services and selling their corporate stocks and natural resources in exchange. The dollar is getting a free ride from this. As far as it is concerned, the debts owed to foreign central banks are never going to be repaid.

ACRES U.S.A. Don’t these nations know this?

(Pay close attention here, because MH is either unaware or unwilling to speak of the control of the various governments by the same bankers who own the Federal Reserve. This is, after all, a forbidden subject, even for someone in his position.)

MH. Yes, but as yet they have no political response. That would require changing how the overall international payments system works and also break the U.S. economy out of the global orbit, isolating it until it can give a quid pro quo for what it buys. A change would also require restructuring European and Asian domestic economies to replace dollar-export markets with their own domestic market. So foreign countries could indeed refuse to accept more excess dollars, refusing to sell out to Americans, and try to develop their internal market. But the German government is so anti-labor that it refuses to build the internal market, and the Chinese — like the Germans — continue to produce chiefly for export.

ACRES U.S.A. Why did they do this? Why does Germany with its high unemployment rely on this world trade, and the same with China, when they have their own internal economies they might service?

MH. Because they don’t seem to care about their internal economies, except to go on waging the old class war. That is how mainstream economics is taught these days — and why I stopped teaching academic economics for many years. Many people have tried to explain why European central bankers are so idiotic when it comes to this system. One suggestion is the “Stockholm Syndrome”: When somebody is kidnapped, the victim tends to identify with the kidnapper, the victimizer — and there is an idea in Germany, in England, and other countries that no matter what, they have to do whatever the U.S. government recommends. It’s a passive mentality. But for Europe and Asia to behave in this way violates every theory of how international relations are supposed to work. In theory, every nation is supposed to act in its own self-interest. But in today’s world it seems that only the U.S. government is acting in this way. It is understandable why the United States would love to pay paper dollars and get foreign resources for nothing. It’s not understandable why foreign countries go along.

ACRES U.S.A. How could these nations protect their own economies?

MH. Well, Europe could have a dual exchange rate, for instance — one exchange rate for capital account, one for trade account. It could do what the United States did and levy an interest equalization charge to equalize interest rates between Europe and the United States. It could put a floating tariff against appreciated currencies, as the U.S. Congress did in 1921 when the German mark was appreciating. Or it could use its dollars to buy out, to nationalize U.S. assets there. This would settle the U.S. payments deficit in tangible assets rather than paper dollars. But Europe seems to be a continent acting purely on inertia without seeming to care much about the lessons of history, or else it simply is acting shamefully, which is why Donald Rumsfeld refers to it so contemptuously as “Old Europe.” Europe is senile from the vantage point of how to conduct international diplomacy and domestic economic growth. It imagines that it is getting a benefit by exporting goods to American buyers rather than providing for its own population.

ACRES U.S.A. Why this disregard for their own internal economies?

MH. The only reason I can think of is that the one thing central bankers feel passionate about is class warfare. They are trained as financial planners to hate labor so much that they will give everything to America for free if it will hurt their own labor force. That anti-labor ideology is a precondition for getting a job at the central bank in today’s world.

ACRES U.S.A. But we give that whole system an assist because of this pseudoreligious mantra about free international trade and the World Bank and the International Monetary Fund.

MH. The United States has always been the most protectionist nation in the world. That’s how it built up its industry, by protectionism. It’s how it built up its agriculture, by protectionism. However absurd much of its agricultural protectionism may appear, the fact is that it has achieved the largest productivity of any industry in world history over the last hundred years. America has always put its own interests above those of foreign interests. This is natural. What is unnatural is that other countries don’t act in a symmetrical way to protect their own economic interests. They don’t confront the degree to which the IMF and World Bank promote foreign dependence on U.S. food exports and Treasury IOUs.

ACRES U.S.A. We don’t think the farmers feel that they’re being protected very well, though, because after having put the land into a few strong hands, most of the big operations are really technically bankrupt and are getting subsidies, so the subsidy can in turn pay the bank for the loan that kept them going last year.

MH. If that is the case, then the U.S. government is treating farmers just like it wants to treat subprime debtors — the real beneficiaries are the creditors, not the debtors. Under historically normal conditions the debts would be written down.

ACRES U.S.A. Are you familiar with Joe Stiglitz?

MH. Yes.

ACRES U.S.A. What’s your assessment of his book?

MH. He’s done some good exposés. He is still largely a neoclassical economist, but now he’s begun to see the light, and his new books have been helpful in exposing the system that he was once a part of.

ACRES U.S.A. But basically is he correct in describing disciplines for these various nations and the United States in effect bullying them?

MH. Yes.

ACRES U.S.A. Can you explain to us why we entered Panama? What was that all about?

MH. There are a number of countries that are in the character of anticountries — Panama is not really a country. A country has its own currency, and its own foreign policy, and its own tax system. But America wanted to incorporate Panama to control the canal as a choke-hold on world commerce. It wanted to own the toll booth on the seaway, so to speak. There was an attempt to keep control of the Panama Canal away from then-President Noriega, and there was the belief that he was not a dependable American puppet.

ACRES U.S.A. Just that simple?

MH. Yes. They called it national security.

ACRES U.S.A. Why is Panama so important to international oil and banking?

MH. The oil industry doesn’t want to pay taxes. It created Panama and Liberia as anti-countries where oil companies could incorporate their international shipping. This is called “flags of convenience,” meaning in effect a corporate bubble out of view of the domestic tax authorities. As Exxon’s treasurer once explained to me, the oil companies will sell the crude oil they produce in the OPEC countries and other suppliers to their shipping affiliates in Panama or other “just pretend” countries at so low a price that they don’t have to report any net income to the tax collectors in OPEC. The shipping companies registered in Panama will then turn around and sell this crude oil to their refineries in Europe or island quasi-nations such as Trinidad at so high a price that there is no room for these “downstream” operations to make any money. So all the profit is taken in Panama, Liberia or other tax-avoidance centers that don’t impose any income tax.

ACRES U.S.A. How did this come about?

MH. During the Vietnam War, Robert McNamara at the Defense Department went to Chase Manhattan and other banks and said that he wanted to attract more foreign funds to the dollar so as to stabilize the war-induced balance-of-payments deficit. He and the banks calculated that the most liquid industry in the world was the drug and crime industry — the Mafia, the Colombian drug cartel, etc. — and of course the dictators that America was keeping in power to fight the class war throughout Latin America, Africa and the rest of the Third World. At that time, however, their money was going largely into numbered Swiss bank accounts, pushing up that country’s currency. So Chase and other banks set up branches throughout the Caribbean and other island quasi-nations to attract this money. The Cayman Islands, for instance, had declared independence from Britain, but then renounced it and joined the empire once again so that it could act as a money laundering center. The U.S. banks that established branches in these countries found an inexpensive source of deposits, and also a way of helping their customers avoid taxation by arranging dummy companies locally — “a veil of tiers,” it was called at the time. But the big picture was clear every three months from the U.S. Treasury Bulletin and the Federal Reserve Bulletin, which reported the deposits recycled from these tax-avoidance branches to the head offices in New York and other money-center cities. Criminal money thus became a mainstay of the U.S. balance of payments, along with the grain exports that in turn required foreign food dependency on the United States.

ACRES U.S.A. Was it “national security” when Allende was deposed in Chile?

MH. No. That was pure ideology. Kissinger said that if the Chileans were stupid enough to vote into power someone who was not pro-U.S., then they deserved to be overthrown. The University of Chicago economists came in and said that there’s only one way to make a free market and that is to close down every economic department in the country except for the Catholic University in Santiago (which had a tie with Chicago), and to either drive into exile, torture, or murder everyone who had a different idea than the ideas we espoused. So the free market was introduced at gunpoint. The economy was privatized at gunpoint, given away to the junta’s insiders. This became the dress rehearsal for George W. Bush’s attempt to privatize U.S. Social Security, pretending that it was a success instead of the national disaster it was. Nearly every privatized social security fund in Chile was wiped out by the end of the 1970s as companies running their “labor capitalism” savings simply looted the pension funds and turned them over to the banks that were part of the grupo conglomerates that supported the military junta. ACRES U.S.A. Who was pointing the guns that enabled this scheme?

MH. It was an international assassination force mobilized out of Chile by Kissinger to murder people in Argentina and the rest of Latin America, and in the United States itself. There was no real American national security involved at all. In fact, over the broader timeframe you can see Latin America, Brazil, Chile, Venezuela all turning away in abhorrence against the murderous policies pursued by the United States. An entire generation of professors and social commentators was killed or driven abroad. The intention was to make dictatorship irreversible — and also provide an object lesson for other countries that might seek economic independence from the United States.

(Please re-read the above paragraph a couple of times to really grasp the natures of the men in charge in Washington, DC.)

ACRES U.S.A. Where did the Pinochetistas come in?

MH. The idea in the Democratic Party under Bob Rubin, Secretary of the Treasury under Bill Clinton, was to do in Russia and other countries basically what they did in Chile. Chile served as the dress rehearsal for the big neoliberal ripoffs of the 1980s and ’90s. The architect of the murders in Chile was a University of Chicago professor — Arnold Harberger, who had married a Chilean wife and went down to advise the Pinochet dictatorship. He was so successful in destroying socialism and democracy in Chile and then privatizing the public domain in the largest asset grab since the enclosure movements of Britain, they wanted to bring him to Harvard and make him the head of the Harvard Institute for International Development. The students at Harvard, much to their credit, protested. They accused Harberger of sitting in his hotel fingering the professors to be murdered by the Pinochet regime — professors who disagreed with Harberger’s approach. That’s a sure way of imposing your approach on academia — you just kill everyone who doesn’t believe in your ideas! The upshot was that Harberger was not given the job — Harvard gave it to someone who was less well-known, much less notorious, Jeffrey Sachs. At that time people did not know how Sachs had destroyed the Yugoslav economy with his austerity plan and shock treatment under the IMF rule, so Sachs became head of the HIID and went to Russia and essentially repeated the Chilean experience there, without the bloodshed but with millions of people dying of poverty, alcoholism, drug addiction and general loss of the will to live.

ACRES U.S.A. And the Pinochetistas?

MH. The Russian criminals who became oligarchs or kleptocrats created what they called the Union of Right Forces — in other words, a united right-wing party, and they explicitly called themselves the Pinochetistas. They admired Pinochet. They wanted to “privatize” the Russian economy — meaning give it to themselves for absolutely nothing. The idea was the same as what had happened in Chile, where the backers of the military junta would start a bank, the government would put its deposits in the private bank, and they would then put domestic firms up for auction. The banks would use the government deposits to write a check to the government for the company being privatized. The government would take the check and redeposit it in the bank. So, in effect, it was a cost-free takeover of private enterprise.

ACRES U.S.A. And it was limited to the inner circle of the communists, presumably?

MH. Yes. The inner circle were largely old communist youth league graduates, and criminal insiders got in. It was a process of giving away Russia’s public domain for nothing to political insiders, much like America gave away the lands of the West to the Railroad Barons in the mid-19th century and made the railroads the nation’s largest landlord.

ACRES U.S.A. And this is what brought on the Mexican standoff, the standoff between Putin and that oligarch . . .

MH. Mikhail Khodorkovsky.

ACRES U.S.A. Right — he imprisoned him. Was that a sort of running up the flag to tell the rest of them what was going to happen?

MH. Khodorkovsky not only had been the most notorious tax evader in Russia, but having privatized Russian oil, he was then about to turn around and sell his company to Exxon so that he could take the money out of the country in much the same way that Berezovsky and other Russian oligarchs had done. This would have essentially sold out Russia’s natural resources to its major Cold War enemy, the United States. Russia would have been economically destroyed had Khodorkovsky gone through with it. Khodorkovsky also announced that he was going to run for president and be the main funder of the right-wing Pinochetista party there. It actually was called “The Party of Right Forces.” So of course Putin threw him in jail, quite rightly.

ACRES U.S.A. This was de facto seizure of the government by the oligarchs and the big business.

MH. They were the government. It would have been the large kleptocrats, which would have been the most centralized oligarchy in the world. It should be noted that an identical phenomenon happened in almost every former Soviet Republic. They all had fake voucher plans for the workers that were worthless. They all had giveaways of resources and land to Komsomol political insiders. Latvia Lithuania, Kazakhstan, Turkmenistan, the Ukraine, they all had very similar experiences — all promoted by the U.S. Treasury and the World Bank that said this was the way to get rich. There were other, much better plans promoted there, including plans by the groups of people that I worked with. But the World Bank and right-wing think tanks would send people behind us offering huge bribes to local mayors and to local officials not to tax the land, not to keep the land and the natural resources in the public domain. The number one objective of the U.S. government was to destroy Russian agriculture to make sure there was no funding for agricultural machinery or seeds — to make Russia dependent on food imports from the United States. Other sectors came under fire, too, especially manufacturing. The U.S. idea was to dismantle post-Soviet industry on the grounds that a country whose industry was dismantled would not be able to support a military complex.

ACRES U.S.A. Was this the scheme during the Cold War?

MH. No, the plan was put forth in 1990 in Houston, in a meeting convened by the World Bank and the International Monetary Fund and other international agencies for Russia. The Communist leadership of Gorbachev and others was so dispirited that it imagined the United States and other countries would help it develop — presumably in the same way that the United States itself had developed. They didn’t realize that the United States didn’t want rivals or even partners; it wanted client states and dependencies. The neoliberal plan was already outlined clearly before the Soviet Union broke up. The Houston report explained that it was necessary to wipe out everybody’s savings, which it called the “savings overhang,” in order to stop inflation, in this case referring to inflation of stock market prices for the industries being privatized. The idea, then, was first of all to wipe out everybody’s savings in hyperinflation, and then, when the economy had zero purchasing power, to privatize the entire economy. Now, if you sell off all of the government assets in an economy without any domestic savings available, obviously the only people who can buy them are foreigners — except for what the government gives away to its insiders, who will get it basically for free, or maybe for one cent on the dollar. If they sell it for two cents on the dollar to Americans or other foreign investors, they’ll become billionaires. Meanwhile, for an investment of a billion dollars, America would get a hundred billion dollars’ worth of assets and gain control of Russia’s raw materials, agriculture, land, real estate and manufacturing.

ACRES U.S.A. This goes quite a ways beyond R.H. Tawney’s statement that people always seek to have perpetual revenue independent of a further expenditure of energy. There’s a little power play involved, too, is there not?

MH. That’s correct. America has broken almost every treaty it made with Russia, starting with its promise that if it dissolved the Soviet Union, the United States would not push NATO up into the countries that were being separated from Russia. The United States almost immediately broke that promise, as Putin pointed out recently. The United States promised a mutual atomic disarmament and has now done just the opposite. Russia is now being driven into an alliance with China and possibly with India in what’s called the Shanghai Cooperation Organization. Thus, the nightmare of Robert McNamara and other U.S. officials in the 1960s, the thought of a Russian/Chinese coalition, has now been realized by the underhanded dealings of the Clinton and Bush administrations, pushing Europe and Asia into a common group. The one buffer area between them, now being turned into a boundary, is western Europe. It looks like Europe may be following a suicidal statecraft that is going to lead to Russia shipping its gas and oil to China and the rest of Asia, leaving Europe to freeze in the dark.

(What you are reading here is the lead-in to WWIII, and how it is being created.)

ACRES U.S.A. And all this is happening while our dollar is sinking and the Chinese are funding a war for us by buying our paper.

MH. That’s right.

ACRES U.S.A. Should the Chinese stop buying our paper, what would happen?

MH. We wouldn’t be able to make war in Iraq or anywhere else, for starters.

ACRES U.S.A. Which brings up the question, how long will the world put up with the United States dollar as a reserve currency under Bretton Woods?

MH. You can never tell how long something will go until somebody pushes back. I speak frequently with foreign political leaders and there is no sign at all of their pushing back, certainly not in the former countries of the Soviet Union. Even in the popular press there is very little talk of pushing back. So the answer is, from America’s point of view, you just keep pushing whatever you want until there is a counter-reaction. I guess you could call this Newton’s Third Law of political motion — every action has an equal and opposite reaction. But America hasn’t seen any reaction yet, so it’s going to keep on pushing without limit until countries devise some way of calling a halt to America’s free lunch.

ACRES U.S.A. Why these wars?

MH. There’s a crude rationale. We want to show that when any country doesn’t do what we want, they get wiped out. We want to control oil, we want to put military and shipping bases everywhere. Basically, these wars support the idea that all the resources of the world should be under effective American control. Anyone who wants to withdraw from the agenda is subject to assassination, sanctions, withholding of oil, even attack.

ACRES U.S.A. In other words, those 737 military bases around the world are intimidating the world to that extent?

MH. I don’t think they’re worried militarily, because to militarily conquer a country you actually have to invade it. You can bomb a country easily enough from the air and the sea, but America has no manpower to invade or control a country from within. In that sense it’s what Mao Zedong called a paper tiger.

ACRES U.S.A. We can’t even handle an occupation, can we?

MH. That’s correct. So no country feels militarily intimidated, because American troops are tied up in a lost cause in Iraq and Afghanistan. It’s a failure of wealth. No one is even thinking of an alternative.

ACRES U.S.A. Doesn’t that in effect say that war is obsolete? The atomic bomb is obsolete?

MH. Yes, because countries with an atomic bomb are musclebound — they can’t use it. The atomic bomb couldn’t win the Korean War for the Americans, it couldn’t win the Vietnam War, and it can’t win the oil war in the Near East. There’s nothing that America can do with its atomic weapons.

ACRES U.S.A. So it’s a matter of will at this point.

MH. Yes. Not only will, but imagination, too. American government agencies such as the National Endowment for Democracy are financing so many pro- American writers and academics around the world that they’ve crowded out any discussion of an alternative international diplomacy that would provide monetary equity and quid pro quo in international finance and international trade. Countries are not even thinking about protecting their own industries, except for Venezuela and a few countries like that.

ACRES U.S.A. In some of your works you’ve suggested that land is probably 75 to 80 percent of the real wealth.

MH. That’s correct.

ACRES U.S.A. Is it the land or is it the production from the land?

MH. It’s the land itself, defined to include land-like subsoil resources, and for that matter the frequencies on the broadcasting spectrum. But basically the land — as site value and “choke point” in cities as well as agricultural soil in the countryside. Even as the Roman Empire sank into feudalism and self-sufficient landed estates, available wealth was put into land as the major means of control. For instance, the value of New York City real estate is larger than the value of all the industrial plant and equipment in the United States. Land as the pure area is itself valuable.

ACRES U.S.A. Does that deliver you right into the camps of Henry George?

MH. Well, this is basically classical economics. I’d prefer to say Thorstein Veblen and Simon Patten rather than Henry George. George talked about rural land, he didn’t talk about urban land, and he had little clear concept of economic rent because he was a journalist, not an economist. The movement of his followers is not an academic movement, it basically lobbies for the construction industry and wants to shift taxes off the large high-rise buildings and utilities and onto labor’s low-rise residential housing. That is not what Henry George himself put forth. Most people think of Henry George as the author of Progress and Poverty, which was a wonderful book that he published in 1879. But after he ran for Mayor of New York in 1886, he was bitten by the political bug and moved from the left wing of the spectrum to the right wing. He started his own newspaper and party and became a sectarian. By the 1890s he had alienated most of his followers by refusing to talk about monetary issues and debt and interest. He had no concept of how rent was used for paying interest once outside buyers came in, borrowed from the banks to buy property, and then pledged the rent to the banks to carry their interest charges. There was no understanding in either George himself or the Georgist movement of that mechanism, which is why his closest followers such as Michael Flurscheim and writers such as Gustavus Myers, who wrote the History of the Great American Fortunes, broke from him. George even expelled Father McGlynn from his movement, on the grounds that the Catholic Church was communist. So George turned into an early McCarthyite, Joe McCarthy, that is.

ACRES U.S.A. You mentioned Thorstein Veblen.

MH. Veblen wrote a wonderful book in 1923 called Absentee Ownership and Business Enterprise in Recent Times. He said that if you want to understand a small town you should look at every town in America like a real estate promotion project, with the idea that most of the mayor’s campaigns and the politics were done by local real estate developers. The aim of civic boosters and publicists is to promote land values so that they can turn around and sell their land and property at a capital gain, meaning a land-price gain. You could say that this is true not only of small towns in Veblen’s day, but also of large cities such as New York. The largest contributors to campaigns today in every city and even at the national level are the real estate interests with the financial interests behind them. Thus, the banks know that a campaign for lower property taxes, ostensibly to help the homeowners — or farmers, for that matter — actually means that everything the tax collector relinquishes becomes available for outside buyers to pledge to the bankers for the money to buy into this property. The lower the property taxes are, the more net economic rent can be pledged to the banker and capitalized into a larger mortgage loan. When the government cuts the property tax, then, it doesn’t actually lower the cost of doing business for real estate owners or homeowners. It merely replaces the tax with an interest payment to the bank. The problem is that now that the cities or counties don’t receive the property tax, they have to shift to an income tax or sales tax. I described most of this in an article in Harper’s with about 12 charts in May 2006.

ACRES U.S.A. We have suggested tongue-in- cheek that they ought to disband the CIA and replace it with one subscription to Harper’s.

MH. That would certainly save a lot of money and probably get better results!

ACRES U.S.A. Some months back, a presidential aspirant, John McCain, said that if Alan Greenspan died, we’d have to put dark glasses on him and send him into battle like the legend of El Cid. When El Cid died, they put a rod down his back and put him in the saddle for the battle against the Moors. In other words, McCain is saying that here was a man so brilliant and so important that we really can’t get along without him. I’d like to have your assessment of this oracle.

MH. The reason Greenspan was put in the Federal Reserve was because he was neither brilliant nor important. I’ll give you a few anecdotes. I used to work at Chase Manhattan Bank, and far above me was Paul Volcker. In the 1970s I had to visit the White House for one reason or another, and met with a member of the Council of Economic Advisers, who said “Michael, you’ve worked with Paul Volcker, you’ve been at meetings with him, what is he like?” I said, “Well, at meetings Volcker would be the person who would say, ‘Mr. X says this and Mr. B says this,’ and he would always be able to restate everybody’s position without ever committing himself, always being the man in the middle.” And the politician said, “That’s the man we want.” Sure enough, a few weeks later, Volcker was appointed as Chairman of the Federal Reserve. When Greenspan was appointed, his role was basically that of a designer of the rhetoric of anti-labor policy. Remember, I said that the role of the central banker is to represent the commercial banking interests, the financial sector, against labor. Greenspan was known as a political hack, but he was a political hack who was a specialist in advertising rhetoric for his clients. He was very much like an expert witness in legal cases. An expert witness will try to frame the issue in a way that will favor his clients. He’s a special pleader, so to speak. Greenspan proved his ability to be a special pleader against labor as head of the Greenspan Commission in 1982 for Social Security — to shift the taxes off the wealthy and onto the bottom 90 percent of the population, people who earned less than $40,000 a year. He passed the litmus test, so it was appropriate to make him head of the Fed. You don’t want someone brilliant as head of the Fed. You want somebody who’s not going to surprise you, who’s just going to mutter the usual truisms. In Greenspan’s case this was the Ayn Rand free market patter that characterized his entire tenure.

ACRES U.S.A. Hasn’t that been pretty much the situation since about the Korean War, to shift the taxes from the high-income people down to the lesserincome people?

MH. Yes. They pretend that the aim is to promote saving, but it doesn’t do this at all. What it does do is shift the use of savings away from financing tangible, capital formation in the form of means of production and toward lending out new credit to the bottom 90 percent of the population. Although gross savings today, the Keynesian rate of overall savings to income, is as high as ever, what happens is that 100 percent of these savings are lent out by the wealthiest 10 percent and the financial institutions to the bottom 90 percent. Thus, one person’s savings now takes the form of another person’s debt. This is basic balance-sheet accounting. You have the assets on the left-hand side of the balance sheet and the liabilities on the right, and the liabilities are the debts plus what’s left over. The bottom line, net worth, is on the right-hand side. Right now, there is almost no net worth for the U.S. economy being built up; it’s all new debt. When you add in America’s runup of foreign debt, you actually have a negative savings rate. Debts are now rising even more than savings.

ACRES U.S.A. What happens to the Social Security savings that people are allegedly making?

MH. A few months ago President Bush quite accurately said there really isn’t any money in Social Security. It’s only a bookkeeping fiction. We say that the Social Security system has been holding U.S. Treasury securities, but the Treasury is no more going to repay the Social Security holdings than it is going to repay the foreign central bank dollar holdings.

ACRES U.S.A. But at the same time it is enlarging the tax burden of the lowerincome people from 30 percent to maybe 45 percent.

MH. That’s correct. That is exactly correct. They pretend it’s a user fee, but it used to be paid out of general tax revenues — progressive taxes that fell mainly on the wealthiest tax brackets. Meanwhile, what Greenspan calls “wealth creation” is his euphemism for debt creation.

ACRES U.S.A. We now have a political campaign going on. What’s your assessment? First of all, what we hear out in the countryside is that nobody is really very happy with the candidates on either side, except you might hear some favorable talk about Dennis Kucinich and Ron Paul. What are we going to do, replace Bush with Hillary and have, in effect, the same public policy?

MH. In every national election, a smaller and smaller percentage of the voting population has turned up, and this will probably continue. It looks like the Democratic Party is basically run by the Clintonites, who call themselves Democratic. It looks like an awful choice is looming. I’m the chief economic adviser to Dennis Kucinich, and I would not work for any other Democratic politician except him. I’m doing this not so much because I expect him to get the Democratic presidential nomination, but because the campaign will give visibility to the policies he’s promoting, and will continue to promote as a congressman from Cleveland. From my point of view, this will be an educational campaign. I cannot imagine who these people are who are allegedly supporting Hillary Clinton. When you look back, if one is really against the war, you’d almost prefer a continued Republican administration to a Democratic administration because the Republicans, the Bush administration, are held in such contempt and distrust by foreign governments that there is no way another Republican President would be able to push the belligerent policy that is pursued by the Clinton Democrats. Can you imagine if Gore and Lieberman had been elected, how much worse the situation in the Near East would be with Lieberman instead of Cheney, awful as Cheney is? Not only that, but Gore would have been finishing his second term, and you would now have Lieberman, who is if anything to the military right of Cheney himself, as the presidential candidate. The world would be in a state of disaster. Hillary is part of the group that promoted Gore and Lieberman. I can’t imagine most people who oppose the war being willing to vote for Hillary or any right-wing counterpart on the Republican ticket. It’s an awful choice.

ACRES U.S.A. At the American Monetary Institute meeting, you made the remark, if we remember correctly, that the Republicans would really like to have something to the effect of Bush continue as President, but since that can’t be, their next choice is Hillary.

(Worth repeating; the Republicans would really like to have something to the effect of Bush continue as President, but since that can’t be, their next choice is Hillary.)

MH. You certainly can see that in the pattern of campaign contributions. The major contributors to Bush in the last two elections are now Hillary’s main contributors. So you can see whose pocket she’s in. Basically what we’re seeing here is a privatization of the political process. Politics has been put up for sale to the campaign contributors. You can look at Hillary and the others, and then look at their contributors, and you’ll see what people expect their policies to be. You also can look at the advisers. Obama’s adviser is the brother of Rahm Emanuel, the head of the Democratic National Committee who refused to back anti-war Democrats in the last election, and was only willing to give Democratic Party funding to the pro-war democrats. I consider Obama as pro-war as Hillary. If you’re going to support the war but you want to get voted in, you say, “I’m against it,” and then once you are in office you say, “Well, of course, this is a just war and this is to protect American security,” just like Wilson did in World War I. I look at Obama as sort of a modern Woodrow Wilson, and I can’t understand anything that he’s really come out in favor of. It’s just bland rhetoric.

ACRES U.S.A. Isn’t that also the case with Hillary?

HUDSON. No. She’s quite explicitly on the right. Like her husband, she’s a Wall Street Republican in Democratic clothing.

ACRES U.S.A. Yes, she’s talking against the war, but her rhetoric is hedged.

MH. I don’t hear her talking against the war. I thought that John Edwards did a wonderful job in the last debate of condemning her for supporting the Lieberman Resolution. She’s against the war in Iraq because she wants to invade and bomb Iran. This is crazy. It would threaten World War III. In supporting the Lieberman Resolution against Iran, she has put herself to the right of some Republicans when it comes to military hawkishness.

ACRES U.S.A. And the campaign?

MH. It’s like Harold Wilson, the British Labour prime minister, is reported to have said, “What’s the point of having a constituency if you can’t sell it out?” Well, Hillary can say the same thing about the Democratic Party constituency. Whenever a Democrat runs for president, you have to ask them where and when they’re going to go to war, because almost every war in American history, until Bush’s Near East war, has been led by a Democrat. Hillary has already told us her answer. She’ll go to war with Iran.

ACRES U.S.A. That’s probably why so many people are dropping out of the voting booth.

MH. Yes. If the choices are between “Yes, please,” and “Yes, thank you,” what’s the point of voting?



Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.

The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.

Friday the Indian government imposed further restrictions on the exports of rice to combat rising local inflation, with traders warning that the new regime would de- facto stop all India’s non-basmati rice sales.

The measures include raising the minimum price for selling abroad non-basmati rice by 53 per cent to $1,000 a tonne. Exports of premium basmati rice are likely to continue, although volumes could also suffer as the government also increased the minimum export price and scrapped export tax incentives.

While prices of wheat, corn and other agricultural commodities have surged since late 2006, the increase in rice prices only started in January.

The Egyptian export ban formalises a previously poorly enforced curb and follows similar restrictions imposed by Vietnam and India, the world’s second- and third-largest exporters. Cambodia, a small seller, also on Thursday announced an export ban.

These foreign sales restrictions have removed about a third of the rice traded in the international market.

“I have no idea how importing countries will get rice,” said Chookiat Ophaswongse, president of the Thai Rice Exporters Association. He forecast that prices would rise further.

The Philippines, the world’s largest buyer of the grain, said on Thursday it wanted to purchase 500,000 tonnes after it failed to buy a similar amount earlier this month. It is struggling to import 1.8m-2.1m tonnes to cover a production shortfall and on Thursday confirmed it would tap emergency stocks maintained by Vietnam and Thailand.

Rice is also a staple in Africa, particularly for small countries such as Cameroon, Burkina Faso and Senegal that have already suffered social unrest because of high food prices.

Thai rice, a global benchmark, was quoted on Thursday at $760 a tonne, up about 30 per cent from the previous daily quote of about $580 a tonne, according to Reuters data. Some traders, however, said the daily jump was not as steep, adding that Thai rice had already traded at about $700 a tonne this week.

Rice prices have doubled since January, when the grain traded at about $380 a tonne, boosted by strong Asian, Middle Eastern and African demand.


Friday, March 28, 2008

Spanish Property Freefall

Spain's once-booming property market is in freefall, official statistics have revealed for the first time.

The announcement that house sales had plunged has dashed government hopes for a "soft landing" in the sector that has driven the Spanish economy for more than a decade.

The buying and selling of homes fell by 27 per cent in January compared with the same period last year, Spain's National Statistical Institute (INE) announced yesterday. The collapse coincided with a 25 per cent fall in the granting of mortgages, the biggest drop since 2004. The size of individual mortgages has also fallen, by nearly 4 per cent, as providers fear for the security of their loans.

The indicators published by the state organisation for the first time confirm the widespread fear that Spain's property sector is not just cooling off, but falling sharply. "We have to accept this is not a gentle correction, but a full-blown crisis. We can only hope it will be sharp and short," says Fernando Encinar, a director of Spain's leading online estate agent,

The news will scare millions of Spaniards – and hundreds of thousands of Britons and other northern Europeans – who stretched themselves to get mortgages on homes they believed were a cast-iron investment.

Miguel Blesa, president of the Caja Madrid savings bank, Spain's second leading mortgage provider, warned that things would get worse. "There will be more problems in the property sector in coming months, since the market in new homes is paralysed," Mr Blesa predicted.

"Many people thought that buying property, especially a second or third home, was an investment to make a profit. Now we'll see cascades of these homes up for sale." Mr Blesa was speaking in Vienna, where his savings bank yesterday inaugurated a new headquarters to handle credit lines for big construction companies operating in central and eastern Europe.

The message seemed clear: leading financiers are forsaking domestic homeowners and shunning Spain's burst bubble to boost property development in livelier markets abroad.

The bulk of the transactions – 52.4 per cent – logged by INE were in second-hand homes, where the decline in activity was sharpest – 35.6 per cent. The drop in sales of the remaining 47.6 per cent of new homes was 14.6 per cent. This milder fall reflected developers' savage price-slashing of up to 30 per cent to shift new properties.

"The problem is that many people refused to face up to the slowdown for more than a year, fearing to produce what they most fear. But now it's clear the sector is in crisis, there's a danger people will make things worse by panicking and predicting disaster. It's a herd mentality," Mr Encinar says.

By region, Murcia – the Mediterranean "Costa Calida", which has become a magnet for British homeowners in Spain – remains reasonably active. But prosperous Catalonia saw a dizzying 42.7 per cent drop in property transactions, and Madrid has virtually ground to a halt.

There is still demand, Mr Encinar insists. "But buyers, not sellers, are fixing the price, forcing owners to negotiate. This has never happened in Spain before. It means we can expect substantial discounts in coming months. It could soon be a good time to buy."

Spain's National Construction Confederation, which represents big companies, has pleaded for improved tax breaks for first-time buyers, to halt the downturn. Several high-profile construction companies have gone bust in recent months: with sales paralysed, they could not repay their massive bank loans.

In The Air


Germany and other industrialized nations are desperately trying to brace themselves against the threat of a collapse of the global financial system. The crisis has now taken its toll on the German economy, where the weak dollar is putting jobs in jeopardy and the credit crunch is paralyzing many businesses.

The Bundesbank, Germany's central bank, doesn't like to see its employees working too late, and it expects even senior staff members to be headed home by 8 p.m. On weekends, employees seeking to escape the confines of their own homes are required to sign in at the front desk and are accompanied to their own desks by a security guard. Sensitive documents are kept in safes in many offices, and a portion of Germany's gold reserves is stored behind meter-thick, reinforced concrete walls in the basement of a nearby building. In this environment, working overtime is considered a security risk.

But the ordinary working day has been in disarray in recent weeks at the Bundesbank headquarters building, a gray, concrete box in Frankfurt's Ginnheim neighborhood, where the crisis on international financial markets has many employees working late, even on weekends.

Last Sunday, most of the atypical activity was taking place on the 12th floor, which houses the senior management offices. Bundesbank President Axel Weber was repeatedly in touch -- both by telephone and via videoconferencing -- with his US counterpart, Federal Reserve ("Fed") Chairman Ben Bernanke, as well as with the heads of the central banks of other key industrialized nations. And, of course, with German Finance Minister Peer Steinbrück.

Bernanke told Weber about his organization's failed attempt that Sunday to orchestrate a last-minute bailout for the battered investment bank Bear Stearns. The venerable New York-based company, Bernanke argued, was simply too big to be allowed to go under, and the consequences of such a failure would be incalculable.

None of these crisis managers had forgotten the images of last September's debacle in England, when customers were lined up in front of the branches of Northern Rock --a bank that had been pushed to the brink of failure by the American subprime mortgage crisis -- to withdraw their savings. As it turned out, the British had taken far too long to guarantee customer deposits.

Political Dynamite

For some time, there has been a tacit agreement among central bankers and the financial ministers of key economies not to allow any bank large enough to jeopardize the system to go under -- no matter what the cost. But, on Sunday, the question arose whether this agreement should be formalized and made public. The central bankers decided against the idea, reasoning that it would practically be an invitation to speculators and large hedge funds to take advantage of this government guarantee.

Everyone involved knows how explosive the agreement is. It essentially means that while the profits of banks are privatized, society bears the cost of their losses. In a world in which the rich are getting richer and the poor poorer, that is political dynamite.

Nevertheless, central bankers are running out of options. They are anxious to avert the nightmare scenario of a financial crisis like the one that rocked Germany in 1931, when the failure of a major Berlin bank prompted a massive run on other banks by a nervous public, which plunged those banks into insolvency. For decades, a repetition of that disaster had seemed unthinkable. But ever since former Fed Chairman Alan Greenspan dubbed the current financial crisis the worst since the end of World War II, old certainties have no longer applied.

A Fair Price to Pay?

So, what does apply? Should the state use taxpayer money to help greedy bankers repair the damage caused by their unscrupulous speculation? Should it invest billions to save ailing financial institutions, thereby engendering new risks and side effects? And should the government, to use the words of a Frankfurt investment banker, "treat a drug addict with cocaine"?

How does one explain to honest taxpayers that they should pony up their hard-earned money for a bank like Bear Stearns, whose long-standing CEO forked out $28 million (€18 million) for a 600-square-meter (6,500 square-foot) duplex apartment on New York's Central Park shortly before the collapse of his company? Or that UBS, the crisis-ridden, major Swiss bank, fired three of its senior executives for poor performance only to turn around and pay them roughly 60 million Swiss francs (€38 million/$59.2 million) in golden parachutes?

The central banks and governments of the major industrialized nations are still dodging the answers to these questions. They see themselves in the role of an emergency room doctor, whose job is to provide acute treatment. Like a dangerous virus, the crisis in the US real estate market has infected large parts of the worldwide financial system. After being burned by scores of bad loans, the banks have become deeply distrustful of each other. They have gambled away their most important asset: trust.

As the weeks progress, the disaster scenarios painted by prophets of doom, such as the American economist Nouriel Roubini, are becoming more and more likely. For months, Roubini, a professor of economics at New York University, has warned of the risks of a "core meltdown" of global financial systems and has summarized his thoughts in an analysis entitled "The Twelve Steps to Financial Disaster." According to an assessment by the International Monetary Fund, the crisis could lead to global losses exceeding $800 billion (€520 billion).

The American economy is presumably already in a recession, which affects the rest of the world. Experts also predict noticeably less growth and fewer new jobs for Germany. If the economic situation worsens, the state could face tax losses in the billions. This could force Berlin's ruling grand coalition of Social Democrats and Christian Democrats to shelve its plan to consolidate public budgets.

Calling Bluffs

In this situation, even the most zealous disciples of the free market are calling for more government intervention. "I no longer have faith in the ability of the markets to heal themselves," Deutsche Bank CEO Josef Ackermann confessed in a speech delivered last Monday in Frankfurt. Ackermann said that the American example shows that governments and central banks must now play a stronger role.

Even his counterpart at Commerzbank, Klaus-Peter Müller, agreed, saying that the current situation has the potential to develop into "the biggest financial crisis in postwar history" as long as "the markets are allowed to continue operating unchecked." According to Müller, "It would make sense to permit the banks -- retroactively to Jan. 1 -- to account for securities differently by eliminating the daily revaluation requirement." He argues that this would stop the downward spiral on the banks' financial statements.

The German Finance Ministry promptly rejected such calls, saying: "We see no need to become active at the national level." But this assertion is far from the truth. The ministry has become a place of nonstop crisis meetings, the chancellery is kept constantly apprised of the latest developments, and the Federal Financial Supervisory Authority (BaFin) has already set up a task force to address the issue. No one in the government has the slightest doubt that it will intervene the minute another bank begins to falter.

Germany's state-owned banks, which have been especially careless in recent years about investing in American securities backed by subprime loans, are considered greatly at risk. One of them, Bayerische Landesbank, is currently considering writing off €1 billion ($1.54 billion) -- or possibly even more -- in bad debt. In the first two months of 2008 alone, the Bavarian bank's troubled securities portfolio has lost €1 billion in value, and it has fallen even further since. "There could be another billion in losses on top of that," says one banker.

At another state-owned bank, Dusseldorf-based WestLB, €5 billion ($7.7 billions) in government bailout funds are apparently not enough. The bank is already losing its next billion.

"The numbers are completely irrelevant," says a senior executive at one state-owned bank, "but it is clear that before a bank goes under, the central bank will push a red button and provide as much money as is needed."

This blatant display of nonchalance irritates Commerzbank CEO Müller, who is also the president of the Association of German Banks. "We must achieve greater transparency," says Müller. "It doesn't help when some banks hide behind outdated accounting regulations. All facts must be on the table and current."

The state-owned banks are not alone. The German economy is also suffering from the effects of the financial crisis. "Germany cannot uncouple itself from the world economy," says Walther Otremba, state secretary in the German Ministry of Economics.

Otremba has kept careful track of what bankers, business owners and the officials of major trade groups have been telling him. German exporting companies are showing the first signs of the coming slump. Orders once considered dependable are being cancelled, costs are on the rise and loans can only be had with markups, even for low-risk projects.

It's like the beginning stage of the flu, when the patient still appears healthy and strong. But the virus is already replicating in the body, and the patient is beginning to feel the effects of joint pain and crippling fatigue.

For years, the German economy benefited from the fact that German sports cars and high-end kitchens were seen as hip in the United States. But now the chain reaction set in motion by declining real estate prices, increasingly scarce credit and recession fears is depressing US demand for such products.

Even worse, because the US Federal Reserve, fearing a nationwide bank crash, is flooding the markets with cheap money, the dollar has plunged to a new record low, with bitter consequences for German producers. Since the beginning of the year, the products sold by their American competitors have become almost 7 percent cheaper, and profits from US sales are melting away as the dollar weakens even further.

The plunge of the US currency has already shaken the core of German industry: machine building, aviation and automobile manufacturing. Together these industries employ more than a million people and play a key role in preserving Germany's status as the world's largest exporter of goods. The weak dollar threatens thousands of jobs. Companies are forced to outsource some of their production to the dollar zone, and they are urging their suppliers to follow them on their trek westward.

BMW serves as an example of the consequences of the weak dollar. According to an analysis requested by CEO Norbert Reithofer, his company loses €80 million ($123 million) for each cent the dollar falls. This led to losses of more than €500 million ($770 million) last year. Now BMW plans to cut 8,100 jobs, most of them in Germany, while at the same time investing $750 million (€487 million) to expand its plant in Spartanburg, South Carolina, where it will add 500 new positions. Reithofer hopes that these steps will enable BMW to reduce its dependency on the dollar exchange rate.

The VW Group has also lost money in North America in recent years because of the weak dollar -- to the tune of about €3.5 billion ($5.4 billion). In an attempt to rectify the situation, Volkswagen CEO Martin Winterkorn plans to build a new assembly plant in the United States with annual production capacity of about 200,000 vehicles.

Aircraft manufacturer Airbus is suffering the most from the dollar's weakness. Aircraft sales worldwide are transacted in dollars, but Airbus incurs a large share of its costs in euros. To respond to the problem, the company plans to drastically reduce costs with its "Power 8" restructuring program. The plan will mean the loss of 10,000 jobs and the sale of seven factories.

But now another side effect of the financial crisis is jeopardizing Airbus's restructuring plan. Because of the weak credit markets, Airbus may not even be able to sell its plants. "Some of the potential buyers are having trouble raising the money for the acquisition," says Louis Gallois, CEO of Airbus parent company EADS. The banks are turning off the money supply. According to a survey by the Bundesbank, "standards for commercial loans are being tightened across the board for all types of companies and loan terms."

The financial managers of construction material giant Heidelberg Cement are already feeling the new ice age. Last year Heidelberg acquired British competitor Hanson, financing a portion of the takeover with two publicly traded bonds. Within four months, rising credit market interest rates led to an additional cost of €7.5 million ($4.9 million). "Market conditions are totally absurd," says one Heidelberg manager.

Hitting Them While They're Down

Even worse off are companies that fell into the hands of corporate raiders like Blackstone, Permira, Carlyle and Fortress during the takeover frenzies of recent years. From frozen fish stick maker Iglu to model train builder Märklin to the media group Kabel Deutschland, well over 600 German companies -- altogether employing about a million people -- are now controlled by the international private equity industry. Hungry for profits, the banks financed their corporate takeovers at exorbitant prices because, until recently, they could quickly sell the carelessly approved loans to greedy investors.

But no one is buying anymore. The market for billions in takeover loans is dead, as are many of the deals that had attracted corporate raiders. In the slump, the investment companies are trying to squeeze what they can out of their new acquisitions.

Last Wednesday, for example, Fortress demonstrated how to milk a German company. The US financial investor owns 80 percent of real estate management giant Gagfah, which was originally owned by the German retirement insurance system. Now that the company has selectively raised rents, laid off personnel and reappraised its inventory of 170,000 apartments, the owners want to see their money and have ordered Gagfah to significantly increase its profit distributions.

Permia and KKR, two other private equity firms, are taking a similarly brazen approach to plundering their television empire, the ProSiebenSat.1 media conglomerate. They are having the company pay out dividends that are three times as high as its 2007 profits. This has resulted in the company's debt growing by more than €3 billion ($4.6 billion), putting it in a position in which any crisis could jeopardize its existence.

And the crises will come, especially now that German economic growth is declining. "It cannot be ruled out that the weak phase in the United States will last the entire current year," says economic guru Bert Rürup, "which means that the climate for the German economy will likely become more difficult next year."

The Coming Paradigm Shift

If the economists are right, there will soon be a fundamental shift in the political agenda. The government and the opposition are still discussing how to distribute the fruits of Germany's economic recovery more broadly among social classes. But soon the focus could shift to keeping growth alive within domestic industry.

For some time German Economics Minister Michael Glos, a member of the conservative Christian Democratic Union (CDU), has had a plan on the back burner (more...) with which he hopes to stimulate the economy with additional tax reductions.

The government is also prepared for a continuation of the bank crisis. If other banks run into trouble, Finance Minister Peer Steinbrück plans to come to their aid with fiscal tools, even if it gets expensive for the government. "Preventing a bank crash," say officials at the finance ministry, "takes precedence over budget consolidation."

In the wake of the financial crisis, a new debate has begun over the role of the state. For years, the prevailing dogma was that the international capital markets ought to be left largely to free market forces. But now even financial investors and top bankers are calling for more government control.

This also revives a government initiative that was a dismal failure last year. In the face of US resistance, Berlin failed in its attempt to introduce tighter regulations for hedge funds. "But now," says an advisor to Chancellor Angela Merkel, "even the Americans see the issue in a new light."