The fruit of hypocrisy

Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out

Joseph Stiglitz
The Guardian, September 16 2008

Houses of cards, chickens coming home to roost - pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.

Eventually, however, we were always going to learn how big the safety net was. And a sign of the limits of the US Federal Reserve and treasury's willingness to rescue comes with the collapse of the investment bank Lehman Brothers, one of the most famous Wall Street names.

The big question always centres on systemic risk: to what extent does the collapse of an institution imperil the financial system as a whole? Wall Street has always been quick to overstate systemic risk - take, for example, the 1994 Mexican financial crisis - but loth to allow examination of their own dealings. Last week the US treasury secretary, Henry Paulson, judged there was sufficient systemic risk to warrant a government rescue of mortgage giants Fannie Mae and Freddie Mac; but there was not sufficient systemic risk seen in Lehman.

The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets. In this game there are winners and losers. And it's not a zero-sum game, it's a negative-sum game: as people wake up to the smoke and mirrors in the financial system, as people grow averse to risk, losses occur; the market as a whole plummets and everyone loses.

Financial markets hinge on trust, and that trust has eroded. Lehman's collapse marks at the very least a powerful symbol of a new low in confidence, and the reverberations will continue.

The crisis in trust extends beyond banks. In the global context, there is dwindling confidence in US policymakers. At July's G8 meeting in Hokkaido the US delivered assurances that things were turning around at last. The weeks since have done nothing but confirm any global mistrust of government experts.

How seriously, then, should we take comparisons with the crash of 1929? Most economists believe we have the monetary and fiscal instruments and understanding to avoid collapse on that scale. And yet the IMF and the US treasury, together with central banks and finance ministers from many other countries, are capable of supporting the sort of "rescue" policies that led Indonesia to economic disaster in 1998. Moreover, it is difficult to have faith in the policy wherewithal of a government that oversaw the utter mismanagement of the war in Iraq and the response to Hurricane Katrina. If any administration can turn this crisis into another depression, it is the Bush administration.

America's financial system failed in its two crucial responsibilities: managing risk and allocating capital. The industry as a whole has not been doing what it should be doing - for instance creating products that help Americans manage critical risks, such as staying in their homes when interest rates rise or house prices fall - and it must now face change in its regulatory structures. Regrettably, many of the worst elements of the US financial system - toxic mortgages and the practices that led to them - were exported to the rest of the world.

It was all done in the name of innovation, and any regulatory initiative was fought away with claims that it would suppress that innovation. They were innovating, all right, but not in ways that made the economy stronger. Some of America's best and brightest were devoting their talents to getting around standards and regulations designed to ensure the efficiency of the economy and the safety of the banking system. Unfortunately, they were far too successful, and we are all - homeowners, workers, investors, taxpayers - paying the price.

Joseph E Stiglitz is university professor at Columbia University and recipient of the 2001 Nobel prize in economics josephstiglitz.com

Société Générale: French Inquiry: Bank’s Inaction Grows as Issue

NICOLA CLARK and KATRIN BENNHOLD
NYT, January 29, 2008

PARIS — The credibility of Société Générale’s management came under fresh scrutiny Monday after Jérôme Kerviel told French prosecutors that his fictitious trading started as far back as 2005 — a year earlier than the bank had acknowledged.

At the same time, the prosecutors said Mr. Kerviel disclosed that at least one of his trades raised a red flag about two months ago at Eurex, the pan-European derivatives market, but that he headed off concerns at the bank by producing a false document.

Mr. Kerviel’s account is almost certain to raise fresh questions about why Société Générale’s auditors did not notice anything amiss sooner. It could also put additional pressure on the bank’s chief executive, Daniel Bouton, to step down.

“When there is an event of this nature, it cannot remain without consequences as far as responsibilities are concerned,” the French president, Nicolas Sarkozy, told reporters while on a visit to a University of Paris campus.

But even as French politicians stepped up their pressure on the bank, they sought to head off any efforts by foreign banks to acquire Société Générale while it is under duress.

Finance Minister Christine Lagarde said the bank was under “no constraints” to merge with another financial institution.

Henri Guaino, a top adviser to Mr. Sarkozy, went further, warning that the government would intervene if any company made a hostile move against Société Générale. “I don’t think the state would remain with its arms crossed if someone, whoever the predator, tried to take advantage of the situation,” he said Sunday night on French television.

France has a long record of protecting its landmark companies, or national champions, from takeovers and bankruptcy.

These fixtures of the French political landscape — “economic patriotism,” as it is known here — have included the bailout of another large bank, Crédit Lyonnais, at a cost of $20 billion to taxpayers in the 1990s and a series of defensive industrial mergers to stave off foreign bids in recent years.

Talk of a possible offer to take over all or part of Société Générale has proliferated since the bank disclosed that it lost 4.82 billion euros, or some $7.1 billion, by unwinding the positions taken by Mr. Kerviel.

On Monday, the speculation intensified. Analysts at Citigroup, in a note to clients, said that HSBC and Barclays might be among bidders for Société Générale.

Citigroup said the bank’s franchise had been “severely impaired,” and it cut Société Générale shares to a sell rating from buy, and its price outlook to 65 euros from 130.

In trading here Monday, Société Générale stock slid 3.8 percent, to 71.05 euros, the lowest level since August 2004. It is down more than 6 percent since Thursday, when the bank announced its losses.

Even Mr. Bouton, who traveled to London on Monday to gain support for a special share issue totaling 5.5 billion euros, has acknowledged that Société Générale could be the object of a takeover bid. “This would not be the first time,” he noted in the newspaper Le Figaro.

Mr. Bouton also said Monday that his offer to resign, which the board rejected last week, remained on the table.

If necessary, the most likely way to keep Société Générale in French hands would be for the government to engineer a merger with another French bank. Its larger rival, BNP Paribas, may be interested in renewing a bid after coveting Société Générale for years, perhaps with the help of another French bank, Crédit Agricole.

A senior government official, speaking on condition of anonymity, denied that the finance ministry had already been in contact with BNP and Crédit Agricole over the weekend. But he acknowledged that those two banks were the most likely ones in France to have an interest in and enough cash to buy Société Générale.

Mr. Kerviel was released Monday after having been questioned by the prosecutors for 48 hours. They have requested that he be charged with forgery, breach of trust and unauthorized access to a computer system.

In France, before formal charges can be brought, a judge must complete an investigation. The Paris prosecutor, Jean-Claude Marin, requested that Mr. Kerviel remain in custody, in part he said because he feared Mr. Kerviel might become suicidal. But a spokeswoman for Mr. Marin’s office, Isabelle Montagne, said defense lawyers persuaded the investigating judges to release Mr. Kerviel under judicial supervision, provided he surrendered his passport.

As an arbitrageur, Mr. Kerviel was entrusted to purchase one portfolio of stock index futures and at the same time sell a similar mixture of index futures with a slightly different value, as a hedge. But while Mr. Kerviel, according to the bank, put sizable, real purchases in one portfolio, he created fictitious sales transactions in the second, offsetting portfolio. This gave the impression to risk managers that the risks in the first portfolio had been hedged when in fact they had not been.

According to Mr. Marin, Mr. Kerviel said he made his first fictitious transactions at Société Générale late in 2005, not long after moving to the trading desk from the risk-management department.

These initial false trades “were certainly not of the same size of those at the start of 2008,” Mr. Marin said. “But through the end 2005 and over the course of 2006 and 2007, he little by little took positions that were purely speculative.”

“This was not a new activity for him,” Mr. Marin added.

Late Monday, one of Mr. Kerviel’s lawyers, Christian Charrière-Bournazel, told reporters that his client had been released from custody while the investigation continued. He did not disclose Mr. Kerviel’s whereabouts.

According to Mr. Marin, Mr. Kerviel also said it was “not exceptional” for traders at the bank to exceed their authorized trading limits. Mr. Marin emphasized that this did not imply that other bank employees engaged in any fictitious trading.

Mr. Kerviel’s account to prosecutors differs from a timeline provided Sunday by the chief executive of Société Générale’s investment banking division, Jean-Pierre Mustier, who said a review of the trader’s records indicated that the fictitious transactions dated to late 2006 or early 2007.

A bank spokeswoman, Laura Schalk, declined to comment on Mr. Kerviel’s account, which, if true, could raise additional questions about the quality of the bank’s risk-management controls.

Mr. Mustier did not return telephone messages seeking comment. But in a phone briefing with reporters on Sunday, he said the bank had already made “extensive checks” of other traders’ portfolios, which did not turn up any activity resembling Mr. Kerviel’s trading.

With regard to Eurex, the pan-European derivatives market operated by Deutsche Börse, the German stock exchange, Mr. Marin said Mr. Kerviel contended that at least one of his trades had prompted a phone call about two months ago. “Eurex alerted Société Générale in November 2007 about the positions taken by Jérôme Kerviel,” Mr. Marin said. “Questioned by the bank, he produced a fake document to justify the risk cover.”

A spokesman for Eurex in Frankfurt, Rainer Seidel, declined to comment, citing confidentiality agreements with bank customers.

Surveillance of Eurex trading activity falls under the responsibility of an independent watchdog, the Market Surveillance Office, which would ordinarily be the first authority to make contact with a bank about suspicious trading.

Ms. Lagarde, the finance minister, is scheduled to deliver a report this week to Prime Minister François Fillon detailing how Société Générale suffered the trading loss. The French central bank is also carrying out an investigation.

Ms. Lagarde said her inquiry would focus on why the bank’s internal controls failed and whether financial companies should be required to institute tighter controls on their businesses.

In another development, reported by Reuters, a French lawyer acting for 100 small shareholders said he had sued Société Générale over the way it unwound Mr. Kerviel’s share deals last week.

The lawyer, Frederik-Karel Canoy, said the bank should have informed the markets about its pending losses before embarking on a selling spree Jan. 21-23 to unwind the 50 billion euros of risk exposure built up by Mr. Kerviel.

James Kanter contributed reporting.

Société Générale: A Quest for Glory and a Bonus Ends in Disgrace

DOREEN CARVAJAL and JAMES KANTER
NYT, January 29, 2008

PARIS — When Daniel Bouton, the chief executive of Société Générale, announced that the venerable bank had lost more than $7 billion in unwinding the positions of a rogue trader, he called the culprit “a terrorist.”

But Jérôme Kerviel, nicknamed “the mad trader” by the French press, told investigators that all he wanted was to be respected, and to earn a big bonus.

Mr. Kerviel, the son of a hairdresser and a metal shop teacher from the provinces — a contrast to his pedigreed superiors — reported to work early, stayed late, and took only four days off in 2007, in a nation where six weeks of vacation is de rigueur. Starting in early 2005, he made small unauthorized trades, a strategy that ultimately wound out of control.

At a news conference, Jean-Claude Marin, Paris’s chief prosecutor, said, “When you have been performing these operations for months without being discovered, there is a kind of spiral, where you ultimately think yourself much stronger than the rest of the world.”

In 48 hours of intense questioning, Mr. Kerviel described growing increasingly daring after no one at the bank detected a series of small, unauthorized trades that he had placed. And Monday, pressure mounted on Société Générale and Mr. Bouton to explain how the bank had missed the illicit trades, and the red flags Mr. Kerviel set off, for so long. French authorities began to snap at one another Monday, even as they closed ranks, promising to repel any hostile takeover bid by a foreign company.

Mr. Kerviel told prosecutors that other traders at Société Générale had used similar tactics but with smaller bets.

He said that he eventually built up a lucrative position that would have earned the bank 1.4 billion euros, or a little more than $2 billion, if it had been cashed out by the end of last year. And he told prosecutors that he thought he deserved a bonus last year of 300,000 euros. Instead, he received 1,500 euros.

Initially, his bets did pay off. The bank’s head of asset management, Philippe Collas, told Bloomberg News last week that Mr. Kerviel was “massively in the money” by the end of December. But then the European market turned down and his losses mounted.

Over time, Mr. Kerviel had increased the size of his bets — he hedged his positions on paper with falsified documents and e-mail messages — but he remained convinced that success was just around the corner.

“He bet on the return of the markets that were extremely low and he imagined that there would be a return of the markets just as large as the losses,” Mr. Marin, the prosecutor, said. “There is an addiction. There is a dependency on this complicated game of betting on the markets, and there is a sort of spiral into which it’s difficult to exit.”

If he is found guilty of abuse of confidence, the charge carrying the most severe penalty, Mr. Kerviel faces a seven-year jail term and a 750,000 euro fine. Mr. Kerviel is also accused of forgery and unauthorized use of someone else’s password to access a computer system.

He said he did not seek to keep any of the bank’s money.

The prosecutor recommended keeping Mr. Kerviel in protective custody, in part because of the danger of suicide once Mr. Kerviel realizes what penalties he is facing.

“One of our concerns is that he needs protection,” Mr. Marin said, adding that Mr. Kerviel had not received any threats. “He’s not depressed at the moment. But once the full measure of behavior hits home you know that the way that human nature operates means that he could take some kind of action.”

Later Monday, Mr. Kerviel surrendered his passport and was released by a judge, who decides such matters separately from the prosecutor. Prosecutors immediately appealed the decision.

Over the course of his interrogation by prosecutors, Mr. Kerviel admitted making deceptive trades. The trades were part of his ambition to succeed in the business and impress his bosses, and to lead them to recognize his “financial genius,” Mr. Marin said.

Mr. Kerviel was striving to break free from his lowly beginnings in the bank hierarchy. He graduated with a degree in finance from a university in Lyon that specialized in training bank employees, and in 2000 he began work in the unglamorous back office and middle office, where trades are monitored.

And once he became a junior trader, his salary of 100,000 euros was paltry in comparison with the bank’s stars.

“He wanted to prove his competence,” Mr. Marin said, “and his capacity to act on the market. He was also seeking a bonus from his results.”

Indeed, when Jean-Pierre Mustier, chief executive of Société Générale’s corporate and investment banking division, called in Mr. Kerviel for questioning on Jan. 19, the day after the trader’s faulty positions were discovered, Mr. Kerviel insisted for several hours that rather than engaging in wrongdoing, he had instead invented a new kind of trade that would make the bank money.

The pressure to perform apparently took its toll on Mr. Kerviel. His family said they had detected signs that he was suffering under pressure from his job and that they had grown increasingly worried.

During an interview with the French radio network Europe 1, Sylviane Le Goff, one of Mr. Kerviel’s two aunts, said he had suffered health problems because of his job. The family, she said, had urged him to quit, but Mr. Kerviel told them he did not know what else he could do.

“He is a boy who is serious, honest and hardworking and is incapable of doing anything wrong,” Ms. Le Goff said, declaring that her nephew had been manipulated and that authorities should examine the actions of his managers.

Mr. Kerviel still remains convinced that the positions he took would not necessarily have harmed the bank in such a drastic fashion if the company had not moved to unwind his actions into a volatile market that was already falling.

“In waiting a little while,” he told the prosecutors, “there could have been fewer losses.”

What does a recession look like, Dad?

Andrew Martin

World markets plunge! Newspapers full of down-pointing graphs and traders with their heads in their hands. In the United Kingdom, some of us have been here before, specifically from 1989 to 1992, but for those who are in their 20s and unsure of what to expect, here’s a beginner’s guide to recession ...

Those weekly shopping sessions will seem like a distant memory, and the merits or otherwise of organic food will suddenly appear less pressing. The empty shop on your high street will no longer be automatically taken over by bouffant-haired real estate agents who install a latte-making machine and a 2m-wide TV as a matter of priority. Instead, nothing will happen to it.

That voice on your mobile answer phone that says, “You have . . . no new messages” will begin to sound rather sadistic, and your boss will suddenly seem less like David Brent, and more like the angel of death. You won’t know where he’ll strike next with the fatal words, “Could you just step into my office, I’d like a quick word ...”

Pop-ups won’t pop-up so often; newspapers will become thinner. The “50 different ways to brighten up your garden this spring” by a star horticulturalist will become a small article on daffodils written by a subeditor. Your property begins to seem less like a lifeboat and more like a millstone, and a lot of chickens come home to roost. That mate of yours who played guitar in a band — but not very well — suddenly takes up teacher training.

On the brighter side, though, you will no longer be welcomed into people’s houses with the dreaded words, “Do you want the guided tour?” and if you are, you can simply ask, “And how much less is it worth now than when you bought it?”

In a recession, it won’t be the people who have got the latest “must-have” gadget who do all the talking. Rather, people who know about root vegetables will come into their own; people who know what to do with a scrag end of lamb or how to fix a broken toaster. Triumphalism will be quelled. Interviewers might cut Victoria Beckham off when she starts talking about the latest additions to her wardrobe, and ask instead whether she leaves the bath water in for David.

Recessions encourage imaginative business ideas, novel-reading, cinema-going, and foster music more akin to the blues than the stridency of Madonna.

The last one gave us Wagamama, loft living and Every Day is Like Sunday by Morrissey. Fear not, kids. You have nothing to lose but your credit cards.

— ©Guardian Newspapers Limited, 2008

How to Stop the Downturn

JOSEPH E. STIGLITZ
NYT, January 23

AMERICA’S economy is headed for a major slowdown. Whether there is a recession (two quarters of negative growth) is less important than the fact that the economy will operate well below its potential, and unemployment will grow. The country needs a stimulus, but anything we do will add to our soaring deficit, so it is important to get as much bang for the buck as possible. The optimal package would contain one fast-acting measure along with others that could lead to increased spending if and only if the economy goes into a steep downturn.

We should begin by strengthening the unemployment insurance system, because money received by the unemployed would be spent immediately.

The federal government should also provide some assistance to states and localities, which are already beginning to feel the pinch, as property values have fallen. Typically, they respond by cutting spending, and this acts as an automatic destabilizer. Federal assistance should come in the form of support for rebuilding crucial infrastructure.

More federal support for state education budgets would also strengthen the economy in the short run and promote growth in the long run, as would spending to promote energy conservation and lower emissions. It may take some time to put these kinds of well-designed expenditure programs into place, but this slowdown looks as if it will last longer than some of the other downturns in recent memory. Housing prices have a long way to fall to return to more normal levels, and if Americans start saving more than they have been, consumption could remain low for some time.

The Bush administration has long taken the view that tax cuts (especially permanent tax cuts for the rich) are the solution to every problem. This is wrong. Tax cuts in general perpetuate the excessive consumption that has marked the American economy. But middle- and lower-income Americans have been suffering for the last seven years — median family income is lower today than it was in 2000. A tax rebate aimed at lower- and middle-income households makes sense, especially since it would be fast-acting.

Something should be done about foreclosures, and appropriately designed legislation allowing those who have been victims of predatory lending to stay in their homes would stimulate the economy. But we should not spend too much on this. If we do, we’ll wind up bailing out investors, and they are not the ones who need help from taxpayers.

In 2001, the Bush administration used the impending recession as an excuse to cut taxes for upper-income Americans — the very group that had done so well over the preceding quarter-century. The cuts were not intended to stimulate the economy, and they did so only to a limited extent. To keep the economy going, the Federal Reserve was forced to lower interest rates to an unprecedented extent and then look the other way as America engaged in reckless lending. The economy was sustained on borrowed money and borrowed time.

The day of reckoning has come. This time we need a stimulus that stimulates. The question is, will the president and Congress put aside politics to get the job done?

Joseph E. Stiglitz, a professor of economics at Columbia and the author, most recently, of “Making Globalization Work,” was awarded the Nobel in economic science in 2001.

If Everyone’s Finger-Pointing, Who’s to Blame?

By VIKAS BAJAJ
NYT, January 22

Everyone wants to know who is to blame for the losses paining Wall Street and homeowners.

The answer, it seems, is someone else.

A wave of lawsuits is beginning to wash over the troubled mortgage market and the rest of the financial world. Homeowners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing everyone.

The legal and regulatory wrangles could dwarf the ones that followed the technology stock bust and the Enron and WorldCom debacles. But the size and complexity of the modern mortgage market will make untangling the latest mess even trickier. Some cases stretch across continents. Others are likely to involve state and federal regulators.

“It will be a multiring circus,” said Joseph A. Grundfest, a professor of law and business and co-director of the Rock Center for Corporate Governance at Stanford. “This particular species of litigation will be manifest in many different types of lawsuits in many different jurisdictions.”

The legal battles stretch from Main Street to Wall Street and beyond. Homeowners and subprime mortgage lenders are squaring off in scores of cases that claim some lenders engaged in predatory lending practices and other wrongdoing. Cleveland and Baltimore are pursuing cases against Wall Street banks, saying local residents are suffering because the banks fostered the proliferation of high-risk home loans.

Two questions lie at the heart of many of the cases. The first is whether lenders and investment banks alerted borrowers and investors to the risks posed by subprime loans or securities backed by them. The second is how much they were legally obliged to disclose. “Those are the two issues that are frequently raised,” said Jayant W. Tambe, a partner at the law firm Jones Day.

As defaults and foreclosures rise, the various players in the housing market are all pointing fingers at each other. State prosecutors like Andrew M. Cuomo, the attorney general of New York, are investigating whether investment banks that packaged mortgages into securities disclosed the risks to investors and credit ratings agencies. Investment banks, in turn, are accusing lenders and mortgage brokers of shoddy business practices.

“What strikes me here is that this a tainted system from A to Z,” said Tamar Frankel, a law professor at Boston University. “Everybody blames everybody else. If you look at what is being said, there isn’t one who doesn’t blame another and there is half-truth in everything.”

Wall Street banks that sold mortgage investments around the world face legal complaints from as far away as Australia and Norway. Lehman Brothers, the Wall Street bank with the biggest mortgage business, is being sued by towns in Australia that say a division of the firm improperly sold them risky mortgage-linked investments. Lehman has denied the charges and has said the unit, formerly known as Grange Securities, acted properly.

Closer to home, members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell, Bloomberg News reported Friday. Lehman denied the accusations.

In the United States, Lehman is suing at least six mortgage lenders and brokers like Fremont Investment and Loan and the Fieldstone Investment Corporation, claiming they sold Lehman dubious loans. Lehman claims that borrowers’ incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman’s demand that they buy back defaulted or otherwise problematic loans.

In another case, the PMI Group, a mortgage insurer, sued WMC Mortgage, a subprime lender that has stopped making loans, and its corporate parent, General Electric, in California Superior Court. PMI is trying to force the companies to buy back or replace loans that the firm was hired to insure and that it says were made fraudulently or in violation of the standards that the lender said it was using.

According to the lawsuit, a review of loans found “a systemic failure by WMC to apply sound underwriting standards and practices.” Reviewing a sample of the nearly 5,000 loans in the pool, Clayton, a consultant that reviews mortgage loans, identified 120 “defective” loans for which borrowers’ incomes and employment were incorrect or where the borrower’s intention to live in the home was incorrect. WMC offered to buy back 14 loans, according to the lawsuit.

Some of the loans have defaulted, and a trustee’s report on the pool of loans packaged and underwritten by UBS, the Swiss investment bank, shows that losses on some defaulted mortgages are as high as 100 percent. As of November, about 27 percent of the loans in the pool were either delinquent 60 days or more, in foreclosure or had resulted in a repossessed home.

PMI is on the hook for losses on defaulted loans, lost interest and principal payments to investors who own a $29.6 million slice of bonds backed by the mortgages. A senior vice president at PMI, Glenn Corso, said he was unsure how much the company had paid out so far.

A spokesman for G.E., Robert Rendine, declined to comment, citing the pending litigation.

Securities lawyers say cases involving mortgage-backed securities, which were generally sold privately to sophisticated institutional investors, are far more complicated than those involving stocks, which were sold publicly to everyday investors. Class-action lawsuits, a favorite tool of plaintiffs’ attorneys, will be employed less than they were after the plunge in technology stocks a few years ago because mortgage securities tend to vary in composition and disclosure.

“This is going to be much more complicated to prove, and it’s going to be case by case as opposed to class-actions,” said David J. Grais, who is a partner at the Grais & Ellsworth law firm in New York and an author of a recent paper on the legal liabilities of credit ratings firms. “This resembles the S&L crisis in the ’80s much more than it does the tech bubble in the ’90s.”

Class-action filings spiked earlier this decade, jumping to 497 in 2001, from 215 the year before, according to Cornerstone Research, which compiles the figures in cooperation with the Stanford Law School. As those suits were resolved, new filings fell to a low of 118 in 2006. But as of mid-December, filings had jumped to 169, with about 32 of the cases related to the mortgage crisis.

Through the end of 2006, settlements in technology- and telecommunications-related class-action suits brought by shareholders totaled $15.4 billion, with more than a third of that coming from one company, WorldCom, according to Cornerstone. Settlements in Enron-related cases have totaled about $7.2 billion so far; the figure does not include Securities and Exchange Commission fines and settlements.

Bringing securities fraud cases has been made harder by recent Supreme Court decisions that favored Wall Street, companies and professionals like accountants. The court ruled earlier this month that two technology vendors could not be held liable for taking part in a scheme designed by a cable company to inflate its revenue. Last summer, in a ruling favoring the company, Tellabs, the court said that securities cases could be dismissed if investors did not show “cogent and compelling” evidence of intent to defraud.

Some plaintiffs are using other legal avenues like the pension law, the Employment Retirement Income Security Act. Under that law, managers who handle pension funds must act in the fiduciary interest of their clients. State Street Global Advisors, which manages pension money, has set aside $618 million to settle claims that the firm invested in risky mortgage-related securities.

Some legal experts say that the recent Supreme Court decisions, which are largely based on cases bought by shareholders, may not have much bearing on the more complex cases that stem from securitization of mortgages.

“There will be a whole new set of claims that deal with the unique nature of the securitization market,” Mr. Tambe of Jones Day said. “There will have to be new decisions that deal with those claims and a learning process for the bar and judiciary in those cases.”

In Asia, Global Market Decline Accelerates

MARK LANDLER and HEATHER TIMMONS
NYT, January 22,

Amid fears that the United States may be in a recession, the decline in stock markets accelerated Tuesday across Asia.

Markets in Tokyo, Hong Kong and Sydney all fell farther in late trading Tuesday than they had all day on Monday. The Hong Kong market plunged another 8 percent by late afternoon after tumbling 5.49 percent on Monday. In Tokyo, the Nikkei dropped 5 percent, hitting a low not seen since September 2005 and facing its worst two-day drop in 17 years on concern global growth is faltering.

The fears of a recession have roiled markets from Mumbai to Frankfurt on Monday, puncturing the hopes of many investors that Europe and Asia would be able to sidestep an American downturn. Until now, overseas markets had largely avoided the sell-off that has caused steep declines recently in the United States, whose markets were closed in observance of Martin Luther King’s Birthday. But investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy.

And in a sign that the United States could join the sell-off on Tuesday, trading in stock index futures pointed to a substantial decline when markets reopen on Wall Street.

The angst about the United States belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were, in part because they trade more with each other. The theory, known as decoupling, has been used to explain why economies like China and Germany have kept growing robustly, even as the United States has slowed.

“The market is not at all convinced about decoupling, and I think the market is probably right,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “When you look at it more closely, we’re suffering from the same issues.”

Monday’s sell-off was evenly distributed from east to west. The DAX index of the Frankfurt Stock Exchange plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in the Sensex index in Mumbai was the second-worst single-day tumble in its history.

Stocks followed suit when markets opened in the Western Hemisphere. Canadian stocks were down nearly 5 percent, and a key market index in Brazil was off 6.6 percent.

Shares of banks led the decline Monday in many countries, underscoring that the subprime mortgage crisis continues to hobble the global financial system. On Monday, a German state bank, WestLB, said it would report a loss of $1.44 billion in 2007 because of its exposure to deteriorating mortgage assets.

“There is indeed some panic,” Mr. Mayer said. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”

Investors were scarcely comforted by President Bush’s announcement on Friday of an economic stimulus package of as much as $145 billion. Mr. Bush’s “shot in the arm,” economists said, did not persuade the rest of the world that the United States will escape a recession, or that it will either.

In reference to the global stock sell-off, Jeanie Mamo, a spokeswoman for the White House, said: “We don’t comment on daily market moves. We’re confident that the global economy will continue to grow and that the U.S. economy will return to stronger growth with the economic policies the president called for.”

The turmoil will put even more pressure on the European Central Bank, which has charted a different course from the Federal Reserve by warning that it might raise interest rates to curb inflation, rather than cut them, as the Fed has, to ward off a recession. Mr. Mayer and others predict the bank will be forced into an about-face in coming months.

While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write-down the value of its American mortgage holdings.

Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan’s chief strategist in Asia. But now, he said, many believe “there’s no debate about it.” The only question, he added, is “how long and deep” a recession might be.

In Japan, which may be facing a new recession of its own, most indexes were off Monday by more than 3 percent .

In Europe, the housing market, after a long boom, is cooling, especially in Britain, Spain and Ireland. That will depress the growth rate in those countries, which are among the region’s economic pace-setters.

European banks continue to make unwelcome disclosures about write-downs of mortgage assets, even if the losses are not as dire as those reported by Citigroup or Merrill Lynch. Bank loans across Europe are being constrained, according to a recent survey by the European Central Bank.

German banks, in particular, are haunted by the American subprime crisis. The troubles of WestLB came a week after a German property lender, Hypo Real Estate, lost a third of its market value after it disclosed higher-than-expected losses from the credit crisis. WestLB, after warning that its 2007 losses would be more than twice its earlier estimate, said its biggest shareholders, the state of North Rhine-Westphalia and regional savings bank, had agreed to inject up to 2 billion euros ($2.9 billion) of capital into the bank to stabilize it.

Also on Monday, Commerzbank warned it would make additional write-downs in the fourth quarter of 2007. This caught analysts off guard.

“The amounts are not so significant,” said Simon Adamson, an analyst at CreditSights, an independent research firm in London. “It was more the way the market was caught by surprise.”

Shares of Commerzbank fell 10 percent Monday, Deutsche Bank declined 6.7 percent, Société Générale of France dropped 8 percent, BNP Paribas decreased 9.6 percent and the ING Group of the Netherlands fell 10.5 percent.

But the damage extended to the shares of energy companies like BP and Royal Dutch Shell, which dropped on worries that a global economic slowdown would crimp the demand for oil and gas.

“The problem is more deeply rooted in anxiety about the global economy than it is in Germany,” said Boris Boehm, an asset manager at Nordinvest in Hamburg. “People are really afraid. But it’s a good thing because fear, along with action, gets the market to its proper level quickly.”

Those jitters extended to fast-growing markets, like China and India, that are thought to be relatively insulated from the United States. The Shanghai composite index, which had risen nearly 88 percent in the year through Friday, closed down 5.1 percent on Monday, while Hong Kong’s Hang Seng fell 5.5 percent, also the most since Sept. 11, 2001. It had been up 24 percent in the year through Friday.

While emerging markets may have been poised for a drop after their run-up, the rout on Monday may also signal a basic shift in sentiment, analysts said. Mr. Mowat of JPMorgan said that it did not matter whether markets were separated by geography or asset class because, he said, “we trade together in corrections.”

No matter how many bridges, roads, and power plants China builds, or how many new cars India sells, a downturn in the United States will ripple across the economies of Asia, experts said.

“If the United States consumer quits buying things, it is going to hurt in Asia,” said Deborah Schuller, an Asia regional credit officer for Moody’s Investors Service. She said most rated corporations there would be able to withstand a nine-month recession in America, but if it were to stretch to 12 months or more, there could be serious problems.

Worries about China are adding to Asia’s uneasiness. Its private property market is in the midst of a shakeout, and scores of small developers have gone out of business.

In both Asia and Europe, there may be further shocks as banks tally the fallout from their investments in the American mortgage market.

“There’s an old saying in the market that banks lead us into recession and banks lead us out,” Mr. Boehm of Nordinvest said.

Mark Landler reported from Frankfurt and Heather Timmons from New Delhi. Gardiner Harris contributed reporting from Washington and Keith Bradsher from Hong Kong.

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Uncle Sam and the merchant of Arabia

ND Batra
The Statesman, 5 December

With the rise of crude oil to $90-100 a barrel, the camel is overloaded with the greenback. And there is no better place for the Arab merchant to unload his petrodollars than to lend it Americans who juggle their daily lives between credit cards and debit cards, home equity loans and foreclosures. But it is not only the Joe Six-pack who is in trouble. His lenders too are sleepless.

Like other American financial institutions, Citigroup, the global financial giant, has been reeling under billions of dollars mortgage-and-subprime related losses. The Citigroup board, instead of responding to merger overtures from other financial institutions, went in search of Arab petrodollars and obtained $7.5 billion cash flow from the Abu Dhabi Investment Authority, the government’s sovereign wealth fund, for a 4.9 per cent equity stake plus 11 per cent annual interest rate, making it one of the biggest investors in the bank.

In this age of globalisation, you might say, so what? Not everyone seems to be happy about the Citigroup deal with the Arab merchant. In an editorial titled “Citi of Arabia”, The Wall Street Journal wrote: “We hate to spoil the party, but it strikes us as unfortunate, if not a tragedy, that America’s largest bank had to go hat in hand to the Arab sheikhs because of bad management and blundering US monetary policy.” Many transnational corporations and international businesses try to develop an early awareness system, which picks up weak signals that might become a raging storm later. An early awareness system helps prepare a company to nip the evil in the bud. But American financial institutions did not foresee any sign of trouble.

Nobody understood what havoc subprime lending might create.
Nor does anybody fully understand how the global wealth is shifting to other regions. Irwin Stelzer, director of economic policy studies at the Hudson Institute wrote in Times Online: “The world has changed. Wealth has moved into new hands. Morgan Stanley estimates that the world’s sovereign wealth funds hold some $2.5 trillion in assets, more than the global hedge-fund industry.

And they are adding about $500 billion to their assets every year. One Goldman Sachs banker told me that until recently he had never been to West Asia; now he makes several trips each month.” The widespread hostility against globalisation is unfortunately prevalent in the USA. In the Internet age, there is a tremendous mobility of factors from foreign direct investment to job outsourcing to state-controlled sovereign wealth funds equity investment. In this sense the world, instead of becoming flat as The New York Times columnist Tom Friedman believes, is rather developing peaks and valleys, dungeons and dragons. The fear of “MacDonaldisation” is being replaced by the fear of secretive Arab and Chinese sovereign wealth funds and state-controlled companies nibbling at American assets, which are becoming cheaper to acquire, thanks to the fall of the dollar.

The Arabs own 10 per cent of Citigroup and their voice will eventually be heard in the boardroom. Recently, Dubai and Abu Dhabi made significant investments in Advanced Micro Devices, a leading semiconductor company that handles many defence contracts. Globalisation is a dynamic process of creating interdependencies in economics, international trade and culture, and is likely to create instabilities. It is much more than bilateralism because a country has to be opened to the flow of influences from all around.

Transnational corporations stride the world like a colossus. Their business depends upon their reputation, which makes them extremely vulnerable not only to the government of the host country but also to the news over which the government has no control, especially in a democratic society.

In authoritarian countries, where the news media is controlled by the government, transnational corporations have a much easier time doing business. That is one of the most important reasons transnational corporations find it easy to do business in China.

They have to deal with one authority, that of the central government. They don’t have to deal with environmental degradation, oil spills and uprooting of people without compensation to build new buildings. The news media plays no part and international NGOs have no say. And for the same reason, when a state-controlled Chinese company or an Arab sovereign wealth fund buys American assets, Americans become paranoid because of the lack of transparency.

The government’s impact upon economic activities is limited because in the global village there are so many actors, and the government cannot control all of them. Government has limited control over the mobility of capital. Key instruments of monetary and fiscal policy, exchange rates and import barriers are not totally under government control.
Globalisation creates comparative choices and highlights inefficiencies both in the government and corporations. But just as governments are constrained by forces beyond their control, so are transnational corporations.

Microsoft had to face anti-trust regulations both in the USA and the European Union. Similar controls might have to be applied to secretive sovereign wealth funds if they seek to buy assets in the USA and other open societies. A case in point is the Bank of Credit and Commerce International (BCCI), which explains why Americans are worried about the merchant of Arabia. In 1991, BCCI was found by regulators in the USA and the UK to have been involved in arms dealing, money laundering, bribery, support of terrorism, tax evasion, smuggling, illegal immigration and the sale of nuclear technologies. The Emir of Abu Dhabi, Sheikh Zayed bin Sultan Al Nahyan, the father of the present ruler, controlled the bank, which was closed after the investigation.
In this environment, corporate diplomacy is imperative. International corporations and sovereign wealth funds must become culturally attractive to host country publics. Unless sovereign wealth funds from West Asia and state-controlled global companies from the Middle Kingdom become transparent and publicly accountable, they must be watched and scrutinised.

The income divide

Jonathan Power
The Statesman, 7 December

National income figures give us only the bare bones of a society’s progress. They neither reveal the real beneficiaries nor the composition of that income. Neither do they value the things that human beings consider important for themselves but have little or no market value for other people or for those beholden to statistical aggregates ~ better nutrition and health services, greater access to knowledge, more secure livelihoods, better working conditions, security against crime and physical violence, satisfying leisure hours and a sense of participating in the economic, cultural, religious and political activities of their communities.

Of course, people also want higher incomes. But income is never the sum total of human life. For most people, health, security and love are the three important things in life and how many people can put their hand on their heart and say they are sure that in their own lives these three things are eternally spoken for?

This debate reaches back in European thought at least to the time of Aristotle. “Wealth is evidently not the good we are seeking, for it is merely useful for the sake of something else,” he wrote. Even the 19th century philosophers never were gross national product absolutists after the fashion of today. Adam Smith, David Ricardo, Karl Marx and John Stuart Mill, from very different perspectives, all saw the creation of wealth as only one part of a complicated whole. How marvellous it is then at the gloomy end of a gloomy year to be presented with a report by the UN Development Programme that makes the reader feel good about human progress.

In its just released human development report there are long, sophisticated tables encompassing all the world’s countries in which countries are not ranked by income per head but by yardsticks considered more telling ~ longevity, knowledge and a decent standard of living. Cold and wintry though it is, Iceland comes out top, followed closely by Norway, Australia, Canada, Ireland, Sweden, Switzerland and Japan in that order. (The weather obviously is not a factor.)

Hong Kong is higher up the table than Germany or Israel and Barbados is the top of the developing countries with, surprise, surprise, Argentina, yesterday’s basket case, not far behind, which goes to show how with dynamic leadership, sound economic policies and a social will, how quickly a country can be turned around.

The report also presents another way of looking at progress ~ countries with a relatively crime-free environment. If you want to live in a country with a high standard of living, low violence and a miniscule murder rate one would choose Japan first, with Hong Kong as a close second, or perhaps Jordan (though poorer) where I am now.

Indeed all the Muslim countries, in particular the Arab ones, have murder rates. Then come Norway, Austria, and Greece. The countries best to avoid are Colombia, South Africa, Venezuela, Jamaica, El Salvador and Russia. Surprisingly, the USA, though much worse than the European average, compared with these six countries is only moderately violent. But then, as is true with all these statistics, if you exclude the urban slum parts of the USA, its status improves remarkably: it is not only fairly low in crime but also high on the human development index. Today, many governments are finding, after many decades of stressing the pursuit of high growth rates, that they have failed to reduce the social and economic deprivation of a substantial number of their people.

At the same time, we have become aware that a number of low-income countries have achieved high rates of human development by a judicious use of their scarce resources to ensure a basic level of wellbeing throughout their societies ~ Costa Rica, Uruguay, Cuba, and the ex-British Caribbean islands are good examples. Few outsiders looked at China, Taiwan and South Korea 30 years ago and anticipated their present fast growth rate. The present income of a country may offer little guidance to its growth prospect if is nurturing its resources by investing in its people, as these countries did in the early years of their decision to modernise and develop economically.

Not least, we should be aware of how misleading aggregate figures can be. Income is a means, not an end.

It may be used for essential medicines or narcotics, for sitting in a luxury car in a traffic jam or for a high-speed train link. For green spaces or multistoreyed car parks. Everyone in any country that has experienced rapid economic growth, whether it be a mature economy like the USA and Denmark or an up and coming one like Malaysia and Brazil, knows from their own firsthand experience that it doesn’t tell you that much about a society. It gives a kind of useful benchmark of aggregate economic momentum. But, beyond that, the more one looks at it the more misleading it can become.

A new East Asian focus on India

P.S. Suryanarayana
The Hindu, 26 November

The atmospherics of the East Asia Summit last week propelled India to the regional centre stage again.

Is India really central to the East Asia Summit (EAS) — an exclusive regional forum which is expected to play a key role in shaping the next big theatre in world politics? Surely, the latest EAS meeting in Singapore, which brought India and China, as also Japan, into sharp focus, was not designed to provide clues to such a long-term proposition. However, the atmospherics of the third annual summit of the EAS last week propelled India to the centre stage of Greater Ea st Asia in several ways.

The larger geopolitical region covers all the 10 countries of the Association of South East Asian Nations (ASEAN), China, Japan, the Republic of Korea, India, Australia, and New Zealand. The United States, for long the dominant military power in this wider region, is not a member of the two-year-old EAS, which remains wary of letting the Americans on to its diversified but rather very Asian stage.

Interestingly, it was in an overarching cultural setting that the importance of being India in Greater East Asia was dramatically illustrated. The occasion was the dedication of an exhibition, titled “On the Nalanda Trail,” as an EAS project. The exhibition — tracing the trail of Buddhism in India, China, and Southeast Asia — is being organised by Singapore at the Asian Civilisations Museum in the City-State. The unusual show is aimed at promoting the establishment of an international university, through a multilateral treaty, at the old Nalanda site in India. The proposed university will offer a number of courses, including peace and security studies.

India’s centrality to the current process of inter-state engagement in Greater East Asia was best put across by EAS Chairman and Singapore Prime Minister Lee Hsien Loong. At a reception hosted by him for the EAS leaders, Mr. Lee said: “The ancient university in Nalanda was not just devoted to Buddhist studies. It was also a first-class educational institution and the most global university of its time. ... The new Nalanda (university) should strive to perform a role consistent with this original ethos and vision. It should be a great intellectual centre, an icon of the (current) Asian renaissance. ... It should also be a centre of civilisational dialogue and inter-faith understanding as the original Nalanda once was. In this way, the (EAS) Nalanda project can be an inspiration for the future of Asia.”

Piloting the EAS and other ASEAN-related summits with diplomatic skill, clear from the way he warded off a Myanmar-related crisis that could have affected these events, Mr. Lee saw India’s relevance to planet-issues as well.

The East Asia Summit is the only pan-regional platform, as different from sub-regional groups, where India and China share the high table. Significantly, China had earlier joined Japan, the global eco-guru, and the U.S., a reluctant “leader” on green issues, in issuing a declaration on climate change. The occasion was the Asia Pacific Economic Cooperation (APEC) forum’s summit in Sydney in September. The APEC had then endorsed a set of “aspirational goals” as non-binding commitments to reduce the worldwide emissions of greenhouse gases. So, a general expectation ahead of last week’s EAS meeting was that India, not an APEC member, could perhaps now be brought into this emerging circle of key state-players as eco-friendly protagonists of economic growth.

Greenhouse gas emissions

What happened at the EAS was a different story though. Japan, taking off from its earlier platform of “Cool Earth 50,” now proposed a new package of measures to ensure “a sustainable East Asia.” The idea was that Japan could help its other East Asian partners in adopting eco-friendly but growth-protective technologies to ensure the reduction of worldwide emissions of greenhouse gases by half by 2050. Japanese Prime Minister Yasuo Fukuda’s EAS partners did not reject his offer. However, Prime Minister Manmohan Singh said India would be willing to place a “cap” on greenhouse gas emissions at a level equivalent only to the “cap” that the developed bloc might be ready to apply to itself. And, Chinese Premier Wen Jiabao made common cause with Dr. Singh in emphasising how growth would remain a priority for both their countries and how they could consider eco-targets only within the ambit of priorities. In the event, while the APEC consensus was not repudiated, the EAS could not create any fresh consensus that might have covered India as yet another example for the U.S. to follow.

If Mr. Wen and Dr. Singh were able to advance the cause of the developing countries, through their mutually reinforcing presentations at the EAS meeting, there was a political reason too for their bonhomie. Shortly before the EAS convened, they met for the first time after a political crisis rocked New Delhi over India’s civil nuclear energy deal with the U.S. Even as that crisis spiralled, it was seen in the U.S.-friendly circles in East Asia as a new reality check for assessing, over time, India’s credibility as a serious negotiator in sensitive matters. Against this background, it is understood, on good authority, that Mr. Wen was willing to consider cooperation with India on matters relating to peaceful uses of atomic energy within an overall framework of non-proliferation. Later, the Indian side even went public with a formulation that Mr. Wen was “forthcoming and supportive of international civil nuclear energy cooperation with India.”

This China-India meeting and the coincidental commencement of talks between New Delhi and the International Atomic Energy Agency set the stage for the EAS deliberations. And, Mr. Lee’s commendation of India and China for their “eloquent presentations” on their shared concerns about economic growth as “a priority” virtually put India back on the East Asian stage as a serious player.

Dollar’s Skid Puts a Glow on the Euro

JEREMY W. PETERS
NYT, January 3

The dollar slumped yesterday and the euro climbed to a three-week high against the currency.

A steady slide in the value of the dollar since late 2005, primarily against the euro and the British pound, has steepened over the last month amid indications that interest rates will rise in Europe, while the Federal Reserve is expected to cut rates this year.

At the same time, countries with large dollar holdings are showing a new willingness to dump the dollar in favor of the rising euro, though the current activity is seen as posing little long-term risk to the dollar.

Late last month, the United Arab Emirates became the latest country to shift more of its currency reserves away from the dollar, joining Russia, Switzerland, Venezuela and others.

Those moves coincide with ambiguous signals from China about possibly pulling back from the dollar, and recent word from Iran, the world’s fourth-largest oil producer, that it would prefer euros as payment for oil, which is typically priced in dollars.

But currency experts say that this turn away from the dollar is not likely to do any long-term damage to the currency’s value for a number of reasons. First, the motives of central banks that are adding other currencies to their reserves do not appear to be driven by the belief that the euro will eventually supplant the dollar as the world’s key currency.

Rather, these central banks are doing what investors do to cut risk: diversifying their portfolios.

Moreover, the amount of currency moved so far has been relatively small in a global market that trades trillions of dollars a day — only about $2 billion in the case of the United Arab Emirates, for example.

“There is some indication that central banks are moving to diversify reserves, but it’s at a very slow pace,” said David Powell, a currency analyst with IDEAglobal. “Is it the start of a massive shift out of the dollar? I would say no.”

Yesterday, the euro traded at $1.3272, up from $1.3198 late Friday in New York. The British pound was at $1.9721, up from $1.9586. The United States dollar index, a measure of the dollar’s strength against a basket of currencies, fell to 83.23 from 83.65 on Friday. In February 2002, the index was at 120.

But trading was thinner than usual yesterday as financial markets were closed in the United States, as were markets in Tokyo and Singapore.

In 2006, the euro appreciated more than 11 percent against the dollar, while the British pound rose nearly 14 percent against the dollar.

But the dollar is not likely to start flowing with great speed out of central banks because foreign countries risk devaluing their investments if they do so. Even the slightest suggestion that a country is thinking about swapping dollars for euros risks sending the value of the dollar falling, and in turn hurts all foreign investors in American securities.

The case of China, which holds more Treasury securities than any other foreign nation except Japan, offers an example of why countries would be reluctant to dump their dollar reserves. In October, the most recent month for which figures are available from the Treasury Department, China held $345 billion in Treasury securities. That was up from $301 billion a year earlier. Its currency holdings total $1 trillion. About $700 billion of that, economists estimate, is in dollars.

So in many ways, it is in China’s best interest not to let the dollar’s value slip. Heavy sales of the dollar could make it harder for the People’s Bank of China to manage its gradual appreciation of the yuan against the dollar. Anything more abrupt, Beijing fears, would make Chinese goods less competitive in the United States and pose problems domestically for some of the loans from its state banks. And if the dollar drops too much, the value of China’s holdings would decrease, limiting the lending ability of its banks.

Nonetheless, the rising euro is not something the United States or foreign investors can afford to ignore.

“You have to start to thinking that the euro can be of some risk to the dollar,” said Shaun Osbourne, chief currency strategist at TD Securities in Toronto. “Over the course of the next 5 or 10 years, I don’t think there’s any danger that the dollar’s pre-eminence is threatened. But in the long run, there is certainly the risk that does happen.”

One issue driving investors from the dollar is the possibility that interest rates in the United States and Europe may move farther apart.

Financial markets are currently expecting at least one interest rate cut by the Federal Reserve sometime next year. That contrasts with predictions of further rate increases by the European Central Bank.

“A lot of foreign investors think the Fed is going to cut rates in 2007, and that’s a rather dollar-bearish thing,” said Julia Coronado, senior economist with Barclays Capital.

Some economists predict the dollar will fall further in 2007. The euro finished 2006 at $1.31, and some economists see it climbing near $1.40 — a high in its seven-year history.

“We believe that the dollar’s decline versus the euro has further to run, with $1.38 a possible destination for the pair over the next six months,” said Tom Levinson, a foreign exchange strategist with ING Wholesale Banking in London.

Still, many economists are unwilling to predict that the dollar faces an inevitable demise. “The dollar is still the world’s No. 1 currency, and it’s going to stay that way,” said Nigel Gault, chief United States economist for Global Insight. “The euro is gradually going to become more important, but I don’t see it becoming more important than the dollar.”

Keith Bradsher contributed reporting from Hong Kong.

Inequality in India and China: Is Globalization to Blame?

Pranab Bardhan
YaleGlobal, 15 October

BERKELEY: Economic inequality is on the rise around the world, and many analysts point their fingers at globalization. Are they right?

Economic inequality has even hit Asia, a region long characterized by relatively low inequality. A report from the Asian Development Bank states that economic inequality now nears the levels of Latin America, a region long characterized by high inequality.

In particular, China, which two decades back was one of the most equal countries in the world, is now among the most unequal countries. Its Gini coefficient – a standard measure of inequality, with zero indicating no inequality and one extreme inequality – for income inequality has now surpassed that of the US. If current trends continue, China may soon reach that of high-inequality countries like Brazil, Mexico and Chile. Bear in mind, such measurements are based on household survey data – therefore most surely underestimate true inequality as there is often large and increasing non-response to surveys from richer households.

The standard reaction in many circles to this phenomenon is that all this must be due to globalization, as Asian countries in general and China in particular have had major global integration during the last two decades. Yes, it is true that when new opportunities open up, the already better-endowed may often be in a better position to utilize them, as well as better-equipped to cope with the cold blasts of increased market competition.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

The other reaction, usually on the opposite side, puts aside the issue of inequality and points to the wonders that globalization has done to eliminate extreme poverty, once massive in the two Asian giants, China and India. With global integration of these two economies, it is pointed out that poverty has declined substantially in India and dramatically in China over the last quarter century.

This reaction is also not well-founded. While expansion of exports of labor-intensive manufacturing lifted many people out of poverty in China during the last decade (but not in India, where exports are still mainly skill- and capital-intensive), the more important reason for the dramatic decline of poverty over the last three decades may actually lie elsewhere.

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

The Indian pace of poverty reduction has been slower than China’s, not just because growth has been much faster in China, but also because the same 1 percent growth rate reduces poverty in India by much less, largely on account of inequalities in wealth – particularly, land and education. Contrary to common perception, these inequalities are much higher in India than in China: The Gini coefficient of land distribution in rural India was 0.74 in 2003; the corresponding figure in China was 0.49 in 2002. India’s educational inequality is one of the worst in the world: According to the World Development Report 2006, published by the World Bank, the Gini coefficient of the distribution of adult schooling years in the population around 2000 was 0.56 in India, which is not just higher than 0.37 in China , but higher than that of almost all Latin American countries.

Another part of the conventional wisdom in the media as well as in academia is how the rising inequality and the inequality-induced grievances, particularly in the left-behind rural areas, cloud the horizon for the future of the Chinese polity and hence economic stability.

Frequently cited evidence of instability comes from Chinese police records, which suggest that incidents of social unrest have multiplied nearly nine-fold between 1994 and 2005. While the Chinese leadership is right to be concerned about the inequalities, the conventional wisdom in this matter is somewhat askew, as Harvard sociologist Martin Whyte has pointed out. Data from a 2004 national representative survey in China by his team show that the presumably disadvantaged people in the rural or remote areas are not particularly upset by the rising inequality. This may be because of the familiar “tunnel effect” in the inequality literature: Those who see other people prospering remain hopeful that their chance will come soon, much like drivers in a tunnel, whose hopes rise when blocked traffic in the next lane starts moving. This is particularly so with the relaxation of restrictions on mobility from villages and improvement in roads and transportation.

More than inequality, farmers are incensed by forcible land acquisitions or toxic pollution, but these disturbances are as yet localized. The Chinese leaders have succeeded in deflecting the wrath towards corrupt local officials and in localizing and containing the rural unrest. Opinion surveys suggest that the central leadership is still quite popular, while local officials are not.

Paradoxically, the potential for unrest may be greater in the currently-booming urban areas, where the real-estate bubble could break. Global recession could ripple through the excess-capacity industries and financially-shaky public banks. With more internet-connected and vocal middle classes, a history of massive worker layoffs and a large underclass of migrants, urban unrest may be more difficult to contain.

Issues like globalization, inequality, poverty and social discontent are thus much more complicated than are allowed in the standard accounts about China and India.

Pranab Bardhan is professor of economics at the University of California, Berkeley, and co-chair of the Network on the Effects of Inequality on Economic Performance, funded by the MacArthur Foundation. He was the editor of the “Journal of Development Economics” for many years.

Steep decline in oil output may cause war

Ashley Seager
The Hindu, 23 October

Production peaked in 2006 and will fall 7 per cent a year, says new study

World oil production has already peaked and will fall by half as soon as 2030, according to a report which also warns that extreme shortages of fossil fuels will lead to wars and social breakdown.

The German-based Energy Watch Group (EWG) said global oil production peaked in 2006, much earlier than most experts had expected. The report, which predicts that production will now fall by seven per cent a year, comes after world oil prices set new records almost every day last week and finished above $90 a barrel.

“The world soon will not be able to produce all the oil it needs as demand is rising while supply is falling. This is a huge problem for the world economy,” said Hans-Josef Fell, EWG’s founder and the German MP behind the country’s successful support system for renewable energy.

The report’s author, Joerg Schindler, said its most alarming finding was the steep decline in oil production after its peak, which he says is now behind us. The results are in contrast to projections from the International Energy Agency, which says there is little reason to worry about oil supplies at the moment.

However, the EWG study relies more on actual oil production data which, it says, are more reliable than estimates of reserves still in the ground. The group says official industry estimates put global reserves at about 1.255 gigabarrels, equivalent to 42 years’ supply at current consumption rates. But it thinks the figure is only about two-thirds of that.

Global oil production is currently about 81 million barrels a day. EWG expects that to fall to 39 million by 2030. It also predicts significant falls in gas, coal and uranium production as those energy sources are used up.

Britain’s oil production peaked in 1999 and has already dropped by half to about 1.6 million barrels a day.

The report presents a bleak view of the future unless a radically different approach is adopted. It quotes the British energy economist, David Fleming, as saying: “Anticipated supply shortages could lead easily to disturbing scenes of mass unrest as witnessed in Burma this month. For government, industry and the wider public, just muddling through is not an option any more as this situation could spin out of control and turn into a complete meltdown of society.”

Mr. Schindler comes to a similar conclusion. “The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life.”

Jeremy Leggett, one of Britain’s leading environmentalists and the author of Half Gone, a book about “peak oil,” defined as the moment when maximum production is reached, said that both the U.K. government and the energy industry were in “institutionalised denial” and that action should have been taken sooner.

“When I was an adviser to the government, I proposed that we set up a taskforce to look at how fast the U.K. could mobilise alternative energy technologies in extremis, come the peak,” he said. “Other industry advisers supported that. But the government prefers to sleep on without even doing a contingency study.”

Mr. Fell said that the world had to move quickly towards the massive deployment of renewable energy and to a dramatic increase in energy efficiency, both as a way to combat climate change and to ensure that the lights stayed on. “If we did all this we may not have an energy crisis.”

He accused the British government of hypocrisy. “Tony Blair and Gordon Brown have talked a lot about climate change but have not brought in proper policies to drive up the use of renewables,” he said.

On Sunday, a spokesman for the Department of Business and Enterprise said: “Over the next few years global oil production and refining capacity is expected to increase faster than demand. The world’s oil resources are sufficient to sustain economic growth for the foreseeable future. The challenge will be to bring these resources to market in a way that ensures sustainable, reliable and affordable supplies of energy.”

The German policy, which guarantees above-market payments to producers of renewable power, is being adopted in many countries but not Britain, where renewables generate about 4% of the country’s electricity and 2% of its overall energy needs.

— © Guardian Newspapers Limited, 2007

Bleakonomics

NYT, September 30, 2007
By JOSEPH E. STIGLITZ

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Book Review
THE SHOCK DOCTRINE - The Rise of Disaster Capitalism.
By Naomi Klein.
(558 pp. Metropolitan Books. $28.)
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There are no accidents in the world as seen by Naomi Klein. The destruction of New Orleans by Hurricane Katrina expelled many poor black residents and allowed most of the city’s public schools to be replaced by privately run charter schools. The torture and killings under Gen. Augusto Pinochet in Chile and during Argentina’s military dictatorship were a way of breaking down resistance to the free market. The instability in Poland and Russia after the collapse of Communism and in Bolivia after the hyperinflation of the 1980s allowed the governments there to foist unpopular economic “shock therapy” on a resistant population. And then there is “Washington’s game plan for Iraq”: “Shock and terrorize the entire country, deliberately ruin its infrastructure, do nothing while its culture and history are ransacked, then make it all O.K. with an unlimited supply of cheap household appliances and imported junk food,” not to mention a strong stock market and private sector.

“The Shock Doctrine” is Klein’s ambitious look at the economic history of the last 50 years and the rise of free-market fundamentalism around the world. “Disaster capitalism,” as she calls it, is a violent system that sometimes requires terror to do its job. Like Pol Pot proclaiming that Cambodia under the Khmer Rouge was in Year Zero, extreme capitalism loves a blank slate, often finding its opening after crises or “shocks.” For example, Klein argues, the Asian crisis of 1997 paved the way for the International Monetary Fund to establish programs in the region and for a sell-off of many state-owned enterprises to Western banks and multinationals. The 2004 tsunami enabled the government of Sri Lanka to force the fishermen off beachfront property so it could be sold to hotel developers. The destruction of 9/11 allowed George W. Bush to launch a war aimed at producing a free-market Iraq.

In an early chapter, Klein compares radical capitalist economic policy to shock therapy administered by psychiatrists. She interviews Gail Kastner, a victim of covert C.I.A. experiments in interrogation techniques that were carried out by the scientist Ewen Cameron in the 1950s. His idea was to use electroshock therapy to break down patients. Once “complete depatterning” had been achieved, the patients could be reprogrammed. But after breaking down his “patients,” Cameron was never able to build them back up again. The connection with a rogue C.I.A. scientist is overdramatic and unconvincing, but for Klein the larger lessons are clear: “Countries are shocked — by wars, terror attacks, coups d’état and natural disasters.” Then “they are shocked again — by corporations and politicians who exploit the fear and disorientation of this first shock to push through economic shock therapy.” People who “dare to resist” are shocked for a third time, “by police, soldiers and prison interrogators.”

In another introductory chapter, Klein offers an account of Milton Friedman — she calls him “the other doctor shock” — and his battle for the hearts and minds of Latin American economists and economies. In the 1950s, as Cameron was conducting his experiments, the Chicago School was developing the ideas that would eclipse the theories of Raul Prebisch, an advocate of what today would be called the third way, and of other economists fashionable in Latin America at the time. She quotes the Chilean economist Orlando Letelier on the “inner harmony” between the terror of the Pinochet regime and its free-market policies. Letelier said that Milton Friedman shared responsibility for the regime’s crimes, rejecting his argument that he was only offering “technical” advice. Letelier was killed in 1976 by a car bomb planted in Washington by Pinochet’s secret police. For Klein, he was another victim of the “Chicago Boys” who wanted to impose free-market capitalism on the region. “In the Southern Cone, where contemporary capitalism was born, the ‘war on terror’ was a war against all obstacles to the new order,” she writes.

One of the world’s most famous antiglobalization activists and the author of the best seller “No Logo: Taking Aim at the Brand Bullies,” Klein provides a rich description of the political machinations required to force unsavory economic policies on resisting countries, and of the human toll. She paints a disturbing portrait of hubris, not only on the part of Friedman but also of those who adopted his doctrines, sometimes to pursue more corporatist objectives. It is striking to be reminded how many of the people involved in the Iraq war were involved earlier in other shameful episodes in United States foreign policy history. She draws a clear line from the torture in Latin America in the 1970s to that at Abu Ghraib and Guantánamo Bay.

Klein is not an academic and cannot be judged as one. There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger than the one Klein makes. They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets — for instance, whenever information is imperfect, which is to say always.

Klein isn’t an economist but a journalist, and she travels the world to find out firsthand what really happened on the ground during the privatization of Iraq, the aftermath of the Asian tsunami, the continuing Polish transition to capitalism and the years after the African National Congress took power in South Africa, when it failed to pursue the redistributionist policies enshrined in the Freedom Charter, its statement of core principles. These chapters are the least exciting parts of the book, but they are also the most convincing. In the case of South Africa, she interviews activists and others, only to find there is no one answer. Busy trying to stave off civil war in the early years after the end of apartheid, the A.N.C. didn’t fully understand how important economic policy was. Afraid of scaring off foreign investors, it took the advice of the I.M.F. and the World Bank and instituted a policy of privatization, spending cutbacks, labor flexibility and so on. This didn’t stop two of South Africa’s own major companies, South African Breweries and Anglo-American, from relocating their global headquarters to London. The average growth rate has been a disappointing 5 percent (much lower than in countries in East Asia, which followed a different route); unemployment for the black majority is 48 percent; and the number of people living on less than $1 a day has doubled to four million from two million since 1994, the year the A.N.C. took over.

Some readers may see Klein’s findings as evidence of a giant conspiracy, a conclusion she explicitly disavows. It’s not the conspiracies that wreck the world but the series of wrong turns, failed policies, and little and big unfairnesses that add up. Still, those decisions are guided by larger mind-sets. Market fundamentalists never really appreciated the institutions required to make an economy function well, let alone the broader social fabric that civilizations require to prosper and flourish. Klein ends on a hopeful note, describing nongovernmental organizations and activists around the world who are trying to make a difference. After 500 pages of “The Shock Doctrine,” it’s clear they have their work cut out for them.

Joseph E. Stiglitz, a university professor at Columbia, was awarded the Nobel in economic science in 2001. His latest book is “Making Globalization Work.”

Connect The Dots

September 25, 2003
By THOMAS L. FRIEDMAN

The U.S. war on terrorism suffered a huge blow last week -- not in Baghdad or Kabul, but on the beaches of Cancún.

Cancún was the site of the latest world trade talks, which fell apart largely because the U.S., the E.U. and Japan refused to give up the lavish subsidies they bestow on their farmers, making the prices of their cotton and agriculture so cheap that developing countries can't compete. This is a disaster because exporting food and textiles is the only way for most developing countries to grow. The Economist quoted a World Bank study that said a Cancún agreement, reducing tariffs and agrisubsidies, could have raised global income by $500 billion a year by 2015 -- over 60 percent of which would go to poor countries and pull 144 million people out of poverty.

Sure, poverty doesn't cause terrorism -- no one is killing for a raise. But poverty is great for the terrorism business because poverty creates humiliation and stifled aspirations and forces many people to leave their traditional farms to join the alienated urban poor in the cities -- all conditions that spawn terrorists.

I would bet any amount of money, though, that when it came to deciding the Bush team's position at Cancún, no thought was given to its impact on the war on terrorism. Wouldn't it have been wise for the U.S. to take the initiative at Cancún, and offer to reduce our farm subsidies and textile tariffs, so some of the poorest countries, like Pakistan and Egypt, could raise their standards of living and sense of dignity, and also become better customers for U.S. goods? Yes, but that would be bad politics. It would mean asking U.S. farmers to sacrifice the ridiculous subsidies they get from our federal government ($3 billion a year for 25,000 cotton farmers) that make it impossible for foreign farmers to sell here.

And one thing we know about this Bush war on terrorism: sacrifice is only for Army reservists and full-time soldiers. For the rest of us, it's guns and butter. When it comes to the police and military sides of the war on terrorism, the Bushies behave like Viking warriors. But when it comes to the political and economic sacrifices and strategies that are also required to fight this war successfully, they are cowardly wimps. That is why our war on terrorism is so one-dimensional and Pentagon-centric. It's more like a hobby -- something we do only until it runs into the Bush re-election agenda.

''If the sons of American janitors can go die in Iraq to keep us safe,'' says Robert Wright, author of ''Nonzero,'' a book on global interdependence, ''then American cotton farmers, whose average net worth is nearly $1 million, can give up their subsidies to keep us safe. Opening our markets to farm products and textiles would be critical to drawing many nations -- including Muslim ones -- more deeply into the interdependent web of global capitalism and ultimately democracy.''

The U.S. and Europe, argues Clyde Prestowitz, the trade expert and author of ''Rogue Nation,'' should actually shrink their farm subsidies unilaterally, even if developing countries don't immediately reciprocate.

''Such a move is essential,'' wrote Mr. Prestowitz on the YaleGlobal Web site, ''not only as a matter of providing a badly needed boost to developing countries, but also because the failure [of Cancún] poses a serious threat to the main hope of generating the economic growth necessary to lift developing countries out of poverty.''

If only the Bush team connected the dots, it would see what a nutty war on terrorism it is fighting, explains Mr. Prestowitz. Here, he says, is the Bush war on terrorism: Preach free trade, but don't deliver on it, so Pakistani farmers become more impoverished. Then ask Congress to give a tax break for any American who wants to buy a gas-guzzling Humvee for business use and also ask Congress to resist any efforts to make Detroit increase gasoline mileage in new cars. All this means more U.S. oil imports from Saudi Arabia.

So then the Saudis have more dollars to give to their Wahhabi fundamentalist evangelists, who spend it by building religious schools in Pakistan. The Pakistani farmer we've put out of business with our farm subsidies then sends his sons to the Wahhabi school because it is tuition-free and offers a hot lunch. His sons grow up getting only a Koranic education, so they are totally unprepared for modernity, but they are taught one thing: that America is the source of all their troubles. One of the farmer's sons joins Al Qaeda and is killed in Afghanistan by U.S. Special Forces, and we think we're winning the war on terrorism.

Fat chance.

Record Price of Oil Raises New Fears

JAD MOUAWAD
NYT, October 17

The price of oil jumped to yet another record yesterday, sparking predictions that motorists would see sharply higher gasoline prices by Thanksgiving — and fears that $100-a-barrel oil is no longer such a distant prospect.

Crude oil for November delivery settled at a new nominal high of $87.61 a barrel, up $1.48. Futures touched $88.20 a barrel during the day yesterday, after jumping nearly 3 percent on Monday.

In recent years the economy has seemed immune to rising energy prices, but some analysts fear that as they spiral higher they will undermine growth, already strained because of the downturn in the housing market. Such concerns contributed to a stock sell-off yesterday, with broad market indexes closing down about a half-percent.

Oil traders, discussing the latest rise, cited a potential conflict on the border between Turkey and Iraq that could heighten Middle East tensions and possibly affect oil supplies from the region.

“Markets hate uncertainty,” said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation. “The fundamentals are very supportive of high oil prices. But the latest run-up has nothing to do with market fundamentals, but has to do with fear.”

Since the American invasion of Iraq in 2003, oil exports from northern Iraq through Turkey have been sporadic at best because of frequent bombings of Iraq’s northern pipeline. But as oil producers worldwide are straining to meet demand, commodity investors are focused on anything that might hurt supplies.

Turkey is an important corridor for oil exports from Iraq and the Caspian Sea. The Turkish military has threatened in recent days to cross the Iraqi border to root out Kurdish separatists who have mounted attacks inside Turkey.

Oil prices have more than quadrupled since 2001 as strong demand for oil from Asia, the Middle East and the United States has outpaced the ability of producers to bring on new supplies. With little spare production capacity, the oil markets have become more volatile.

After adjusting for inflation, oil prices are getting closer to historic levels reached in the early 1980s, when an energy crisis, the Iranian revolution, and the outbreak of the Iran-Iraq war sent prices spiraling to about $100 a barrel in today’s dollars.

Energy analysts generally believe the market is overreacting to a possible Turkish incursion into northern Iraq. Antoine Halff, an analyst at Fimat, an oil brokerage, said he expected prices to ease once the market realized supplies would not be affected.

“The rally seems bound to run out of steam,” he said.

In the meantime, though, higher crude will translate into more costly gasoline, according to AAA, the automobile club. Gasoline has declined in recent weeks after demand dropped with the end of the summer driving season. But that is likely to change as refiners begin passing on higher oil costs to consumers, according to AAA’s spokesman, Geoff Sundstrom.

Gasoline averaged $2.76 a gallon nationwide yesterday, according to AAA. Gasoline exceeded $3 a gallon this summer.

Reacting to the rally of the last week, the Organization of the Petroleum Exporting Countries ruled out an emergency release of oil supplies. When it met in Vienna last month, the oil cartel agreed to a modest production increase of 500,000 barrels a day.

OPEC’s secretary general, Abdalla Salem El-Badri, said in a statement yesterday that OPEC was concerned with rising prices. But he pointedly added that “there has been no interruption in crude supplies.”

“While the organization does not favor oil prices at this level, it strongly believes that fundamentals are not supporting current high prices and that the market is very well supplied,” Mr. El-Badri said. “The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators.”

Most analysts say the reasons behind the price increases are complex. They include refinery bottlenecks in the United States, a weak dollar, geopolitical threats in the Middle East, the war in Iraq, violence in oil-producing Nigeria, and resource nationalism in Venezuela and Russia that is driving away foreign oil investment.

They also include strong growth in demand from China and the Middle East, where fuel prices are kept artificially low through government subsidies.

The International Energy Agency, an energy adviser to industrialized countries, said last week that it expected global oil demand to jump by 2.4 percent next year, to 88 million barrels a day. Some traders cited that prediction as one cause of the rally, although several analysts said the figure was unrealistically high given the slowing global economy.

“There is a perception that fundamentals are more bullish than they actually are,” said Roger Diwan, an analyst at PFC Energy, an oil consulting firm.

Investors and hedge funds have also contributed to the run-up. Commodity investors seem to have shrugged off the risk of a recession in the United States after the Federal Reserve cut interest rates last month. As a result, they have returned to commodity markets in force recently, analysts said.

Some investors are buying oil to hedge against the decline in the value of the dollar. Since the beginning of the year, the dollar has declined nearly 8 percent against the euro.