If the state can't save us, we need a licence to print our own money

It bypasses greedy banks. It recharges local economies. It's time to think seriously about an alternative currency

In Russell Hoban's novel Riddley Walker, the descendants of nuclear holocaust survivors seek amid the rubble the key to recovering their lost civilisation. They end up believing that the answer is to re-invent the atom bomb. I was reminded of this when I read the government's new plans to save us from the credit crunch. It intends - at gobsmacking public expense - to persuade the banks to start lending again, at levels similar to those of 2007. Isn't this what caused the problem in the first place? Are insane levels of lending really the solution to a crisis caused by insane levels of lending?

Yes, I know that without money there's no business, and without business there are no jobs. I also know that most of the money in circulation is issued, through fractional reserve banking, in the form of debt. This means that you can't solve one problem (a lack of money) without causing another (a mountain of debt). There must be a better way than this.

This isn't my subject and I am venturing way beyond my pay grade. But I want to introduce you to another way of negotiating a credit crunch, which requires no moral hazard, no hair of the dog and no public spending. I'm relying, in explaining it, on the former currency trader and central banker Bernard Lietaer.

In his book The Future of Money, Lietaer points out - as the government did yesterday - that in situations like ours everything grinds to a halt for want of money. But he also explains that there is no reason why this money should take the form of sterling or be issued by the banks. Money consists only of "an agreement within a community to use something as a medium of exchange". The medium of exchange could be anything, as long as everyone who uses it trusts that everyone else will recognise its value. During the Great Depression, businesses in the United States issued rabbit tails, seashells and wooden discs as currency, as well as all manner of papers and metal tokens. In 1971, Jaime Lerner, the mayor of Curitiba in Brazil, kick-started the economy of the city and solved two major social problems by issuing currency in the form of bus tokens. People earned them by picking and sorting litter: thus cleaning the streets and acquiring the means to commute to work. Schemes like this helped Curitiba become one of the most prosperous cities in Brazil.

But the projects that have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer's doomed Bavarian republic. He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency. To discourage people from hoarding it, they should impose a fee (called demurrage), which has the same effect as negative interest. The back of each banknote would contain 12 boxes. For the note to remain valid, the owner had to buy a stamp every month and stick it in one of the boxes. It would be withdrawn from circulation after a year. Money of this kind is called stamp scrip: a privately issued currency that becomes less valuable the longer you hold on to it.

One of the first places to experiment with this scheme was the small German town of Schwanenkirchen. In 1923, hyperinflation had caused a credit crunch of a different kind. A Dr Hebecker, owner of a coalmine in Schwanenkirchen, told his workers that if they wouldn't accept the coal-backed stamp scrip he had invented - the Wara - he would have to close the mine. He promised to exchange it, in the first instance, for food. The scheme immediately took off. It saved both the mine and the town. It was soon adopted by 2,000 corporations across Germany. But in 1931, under pressure from the central bank, the ministry of finance closed the project down, with catastrophic consequences for the communities that had come to depend on it. Lietaer points out that the only remaining option for the German economy was ruthless centralised economic planning. Would Hitler have come to power if the Wara and similar schemes had been allowed to survive?

The Austrian town of Wörgl also tried out Gessell's idea, in 1932. Like most communities in Europe at the time, it suffered from mass unemployment and a shortage of money for public works. Instead of spending the town's meagre funds on new works, the mayor put them on deposit as a guarantee for the stamp scrip he issued. By paying workers in the new currency, he paved the streets, restored the water system and built a bridge, new houses and a ski jump. Because they would soon lose their value, Wörgl's own schillings circulated much faster than the official money, with the result that each unit of currency generated 12 to 14 times more employment. Scores of other towns sought to copy the scheme, at which point - in 1933 - the central bank stamped it out. Wörgl's workers were thrown out of work again.

Similar projects took off at the same time in dozens of countries. Almost all of them were closed down (just one, Switzerland's WIR system, still exists) as the central banks panicked about losing their monopoly over the control of money. Roosevelt prohibited complementary currencies by executive decree, though they might have offered a faster, cheaper and more effective means of pulling the US out of the Depression than his New Deal.

No one is suggesting that we replace official currencies with local scrip: this is a complementary system, not an alternative. Nor does Lietaer propose this as a solution to all economic ills. But even before you consider how it could be improved through modern information technology, several features of Gessell's system grab your attention. We need not wait for the government or the central bank to save us: we can set this system up ourselves. It costs taxpayers nothing. It bypasses the greedy banks. It recharges local economies and gives local businesses an advantage over multinationals. It can be tailored to the needs of the community. It does not require - as Eddie George, the former governor of the Bank of England, insisted - that one part of the country be squeezed so that another can prosper.

Perhaps most importantly, a demurrage system reverses the ecological problem of discount rates. If you have to pay to keep your money, the later you receive your income, the more valuable it will be. So it makes economic sense, under this system, to invest long term. As resources in the ground are a better store of value than money in the bank, the system encourages their conservation.

I make no claim to expertise. I'm not qualified to identify the flaws in this scheme, nor am I confident that I have made the best case for it. All I ask is that, if you haven't come across it before, you don't dismiss it before learning more. As we confront the failure of the government's first bailout and the astonishing costs of the second, isn't it time we considered the alternatives?

Poverty of Imagination

Venturing out each day into this land of strip malls, freeways, office parks, and McHousing pods, one can't help but be impressed at how America looks the same as it did a few years ago, while seemingly overnight we have become another country. All the old mechanisms that enabled our way of life are broken, especially endless revolving credit, at every level, from household to business to the banks to the US Treasury.

Peak energy has combined with the diminishing returns of over-investments in complexity to pull the "kill switch" on our vaunted "way of life" -- the set of arrangements that we won't apologize for or negotiate. So, the big question before the nation is: do we try to re-start the whole smoking, creaking hopeless, futureless machine? Or do we start behaving differently?

The attempted re-start of revolving debt consumerism is an exercise in futility. We've reached the limit of being able to create additional debt at any level without causing further damage, additional distortions, and new perversities of economy (and of society, too). We can't raise credit card ceilings for people with no ability make monthly payments. We can't promote more mortgages for people with no income. We can't crank up a home-building industry with our massive inventory of unsold, and over-priced houses built in the wrong places. We can't ramp back up the blue light special shopping fiesta. We can't return to the heyday of Happy Motoring, no matter how many bridges we fix or how many additional ring highways we build around our already-overblown and over-sprawled metroplexes. Mostly, we can't return to the now-complete "growth" cycle of "economic expansion." We're done with all that. History is done with our doing that, for now.

So far -- after two weeks in office -- the Obama team seems bent on a campaign to sustain the unsustainable at all costs, to attempt to do all the impossible things listed above. Mr. Obama is not the only one, of course, who is invoking the quest for renewed "growth." This is a tragic error in collective thinking. What we really face is a comprehensive contraction in our activities, especially the scale of our activities, and the pressing need to readjust the systems of everyday life to a level of decreased complexity.

For instance, the myth that we can become "energy independent and yet remain car-dependent is absurd. In terms of liquid fuels, we're simply trapped. We import two-thirds of the oil we use and there is absolutely no chance that drill-drill-drilling (or any other scheme) will change that. The public and our leaders can not face the reality of this. The great wish for "alternative" liquid fuels (bio fuels, algae excreta) will never be anything more than a wish at the scales required, and the parallel wish to keep all our cars running by other means -- hydrogen fuel cells, electric motors -- is equally idle and foolish. We cannot face the mandate of reality, which is to do everything possible to make our living places walkable, and connect them with public transit. The stimulus bills in congress clearly illustrate our failure to understand the situation.

The attempt to restart "consumerism" will be equally disappointing. It was a manifestation of the short peak energy decades of history, and now that we're past peak energy, it's over. That seventy percent of the economy is over, especially the part that allowed people to buy stuff with no money. From now on people will have to buy stuff with money they earn and save, and they will be buying a lot less stuff. For a while, a lot of stuff will circulate through the yard sales and Craigslist, and some resourceful people will get busy fixing broken stuff that still has value. But the other infrastructure of shopping is toast, especially the malls, the strip malls, the real estate investment trusts that own it all, many of the banks that lent money to the REITs, the chain-stores and chain eateries, of course, and, alas, the non-chain mom-and-pop boutiques in these highway-oriented venues.

Washington is evidently seized by panic right now. I don't know anyone who works in the White House, but I must suppose that they have learned in two weeks that these systems are absolutely tanking, that the previous way of life that everybody was so set on not apologizing for has reached the end of the line. We seem to be learning a new and interesting lesson: that even a team that promises change is actually petrified of too much change, especially change that they can't really control.

The argument about "change" during the election was sufficiently vague that no one was really challenged to articulate a future that wasn't, materially, more-of-the-same. I suppose the Obama team may have thought they would only administer it differently than the Bush team -- but basically life in the USA would continue being about all those trips to the mall, and the cubicle jobs to support that, and the family safaris to visit Grandma in Lansing, and the vacations at Sea World, and Skipper's $20,000 college loan, and Dad's yearly junket to Las Vegas, and refinancing the house, and rolling over this loan and that loan... and that has all led to a very dead end in a dark place.

If this nation wants to survive without an intense political convulsion, there's a lot we can do, but none of it is being voiced in any corner of Washington at this time. We have to get off of petro-agriculture and grow our food locally, at a smaller scale, with more people working on it and fewer machines. This is an enormous project, which implies change in everything from property allocation to farming methods to new social relations. But if we don't focus on it right away, a lot of Americans will end up starving, and rather soon. We have to rebuild the railroad system in the US, and electrify it, and make it every bit as good as the system we once had that was the envy of the world. If we don't get started on this right away, we're screwed. We will have tremendous trouble moving people and goods around this continent-sized nation. We have to reactivate our small towns and cities because the metroplexes are going to fail at their current scale of operation. We have to prepare for manufacturing at a much smaller (and local) scale than the scale represented by General Motors.

The political theater of the moment in Washington is not focused on any of this, but on the illusion that we can find new ways of keeping the old ways going. Many observers have noted lately how passive the American public is in the face of their dreadful accelerating losses. It's a tragic mistake to tell them that they can have it all back again. We'll see a striking illustration of "phase change" as the public mood goes from cow-like incomprehension to grizzly bear-like rage. Not only will they discover the impossibility of getting back to where they were, but they will see the panicked actions of Washington drive what remains of our capital resources down a rat hole.

A consensus is firming up on each side of the "stimulus" question, largely along party lines -- simply those who are for it and those who are against it, mostly by degrees. Nobody in either party -- including supposed independents such as Bernie Sanders or John McCain, not to mention President Obama -- has a position for directing public resources and effort at any of the things I mentioned above: future food security, future travel-and-transport security, or the future security of livable, walkable dwelling places based on local networks of economic interdependency. This striking poverty of imagination may lead to change that will tear the nation to pieces.

Jobless in America: Stories from the Frontlines of the Economic Crisis

Some among America's millions of newly unemployed vent their frustrations -- and wonder what government can do to help.

On January 27, at the end of a grim week of headlines announcing mass layoffs across the country, Nicholas von Hoffman posted a piece on the Nation website titled "Lost Your Job? Tell Your Story." By turns sad and scathing, frustrated and furious, the testimonials poured in -- what follows is only a sample. Inspired by this approach, AlterNet invites readers to send in their stories of how the recent decline in the economy has affected their lives. Email to: Crisis@alternet.org.

"I had just come back from attending the inauguration in Washington the day before I was told they were letting me go," a salesman named Robert Hinckley writes to The Nation. "My supervisor called me into his office and asked me if I believed in change. Before I could answer, he said he knew I did, since I was a big Obama supporter. Then he told me that the company thought I needed a change, since I didn't seem to be able to 'make my numbers' anymore."

In Maine there are skilled carpenters knocking on doors, asking for any kind of work, shoveling snow or stacking firewood. In Arizona Roger Barthelson, who has a PhD in biochemistry, says, "I am worried about losing my job, which pays about half of what the bottom-level salary is for someone with my experience--if I had a real job. Underemployment is bad enough. Now my little McJob may go away. Maybe I should retrain?"

Add that question to the one e-mailed to The Nation from "Anonymous" in Miami, who cries out, "Where are other people's stories? I have been looking online and, beyond this forum, they are nowhere to be found. Perhaps without an Internet connection, the worst stories will never be heard. Is that the reason for the silence?"

Every business day brings announcements of new layoffs at the big corporations. Layoffs in the small businesses, which comprise hundreds of thousands of jobs, do not get the publicity, but the consequences are the same--panic, worry, want and family disintegration. Animal shelters report that jobless people are bringing in the pets they no longer can afford to keep.

At the current accelerating rate of layoffs, we will be called on to deal with a catastrophe by the end of June. And at this time next year, the nation could be suffering 6, 7, even 8 million more Americans without jobs in a society singularly ill equipped to take on a disaster that many of the people in power thought could never happen.

Past recessions hit blue-collar workers and farmers the hardest and schooled them psychologically, if not financially, in alternating good times and bad. The white-collar wipeout is something new. We have no experience in handling the huge numbers of college-educated, technically trained unemployed.

Not only does unemployment ruin the lives of the people enduring it; it kick-starts home foreclosure rates and stimulates bankruptcies. The people who still have jobs, fearing that they could be next, stop spending money on cars, houses, clothes or anything else.

The past century of depressions, recessions, slumps, panics, dips, slowdowns, busted bubbles and crashes shows that jobs are the last thing to come back, that employment is the slowest to recover. Every job lost postpones the return of prosperity.

This is the moment for a tourniquet on the job hemorrhage. News of the millionaire class using public bailout money for their bonuses and private airplanes has left people feeling stranded and furious. They are demanding that something be done for them.

Washington should get money out to the states so they don't have to cut payrolls. As the bill stands now, it does that in part with education and health, but it ought to go further and make up the billions in deficits that at least forty-six states are looking at and save the thousands of state and local jobs that otherwise will soon be lost. California is already requiring state employees to take two unpaid days a month; before we can turn our attention to job creation, we need to stop the layoffs.

Appropriation of money that cannot be spent immediately should be put off for another day. Transportation money ought to go into running more trains and buses now. Construction on new infrastructure should be postponed, and work crews should be sent out to do repairs now. If a project is ready to start instantly--be it a research proposal, childcare or a theater group--put money into it now.

There are also some tax schemes that might have an immediate effect on job retention, such as Martin Feldstein's proposals to offer tax credits on the down payments on houses and automobiles. This is the time to make employing people as inexpensive as possible--a temporary suspension of the FICA payroll tax would save employers huge sums and put more money into paychecks. Another step might be to allow employers to double their tax deductions on nonexecutive salaries.

The operative word is "now." We must save the jobs we have and then go on to create new ones. Please send your stories and those of your friends so that the faces of the people whose way of life is collapsing are known and their voices are heard. The talking heads, professors, passing celebrities, politicians, experts, analysts and the barking seals of talk-radio and all-news television must not be the only ones who are heard.

* * *

'People no longer had credit cards that worked'

I lost my job a week ago. I was working for a software company here in Southern California, selling educational programs and expecting people to come up with $170 over the phone and give out a credit card number. My manager assured me every day that our business was recession-proof. He said that people will always want to help their children, especially where their education was involved.

Unfortunately, the people I was calling no longer had credit cards that worked. It was sad to listen to some of the stories from people who had just lost their jobs, were expecting to or were worried about losing their homes to foreclosure. When I told them this was a very important purchase, they'd tell me they were more concerned with keeping their home or putting food on the table. Every day I went to work it became more difficult to make the sale. Then I was fired--for not getting enough sales each week. My partner is retired and on Social Security. He also gets a small pension. My income, however, was necessary. We do not know how we are going to pay the bills now.

James Kavanagh
San Diego

'Is the George W. Bush Library hiring?'

My original career choice was to be a history professor. After a few years in graduate school, I decided that a career as a librarian or archivist would be more sensible, considering how long it takes to get a PhD and the student loan debt I was racking up. I graduated from library school in the summer of 2007 with $80,000 in debt and had begun my job search months earlier. I moved from Iowa to Oregon to live with my family while I continued to search for a job. Because my mother is also a librarian, she was able to get me a temporary part-time job at her library for five months.

In April 2008, I finally landed what seemed to be a really great job as a corporate archivist in the suburbs of Washington. I knew that this job was risky, as the company provided archival services for corporate clients, and the economy was already faltering. I remember the CEO of the company announcing in a meeting that we always did well during economic downturns due to the fact that we outsourced archives and were cheaper for a company than hiring a full-time archivist. A co-worker also told me not to worry about the economy because we had a financial backer who supported us whether we were profitable or not. I didn't really believe either of these statements because we were rapidly losing clients and not gaining any new ones.

On January 14 I was told that because I was the last one hired in my department, I was to be laid off. I had heard about the procedures for layoffs, but still I was surprised by how I was treated: I had to clear my desk immediately (my computer was already locked), and my co-workers could not even look me in the eye, nor did my boss say goodbye. I have not heard from any of them since that day, and I don't expect to.

It saddens me that so many people of my generation are in the same boat: overeducated, underemployed and in over our heads in student loan debt. It is hard not to be angry at my parents' generation for their years of out-of-control consumerism and lax regulations. Fortunately, a lot of us are ready and willing to work hard to right so many wrongs.

What I need most from the government is health insurance (my coverage ends today) and extended unemployment benefits if I don't find a job within three months. It also wouldn't hurt if libraries and archives received more funding. By the way, is the George W. Bush Library hiring yet? I'll be the first in line.

States' Jobless Funds Run Low

Seven Are Already Borrowing From Washington to Pay Unemployment Benefits

A growing number of states are running out of cash to pay unemployment benefits, a sign of how far social-welfare systems are being stretched by the swelling ranks of the jobless in the deteriorating U.S. economy.

Unemployment filings have soared so high in recent months that seven states have already emptied their unemployment-insurance trust funds, which were supposed to see them through recessionary periods. Another 11 states are in jeopardy of depleting reserves by year's end, according to the National Conference of State Legislatures, which published a January report entitled "The Crisis in State Unemployment Trust Funds." So far, states have borrowed more than $2.3 billion in emergency funds from the federal government, money they are required to pay back.

Employment Rates

• Map: How is your state faring?
• Sortable Chart: City-by-city unemployment

The national unemployment rate is expected to hit 7.5% when January job data are released Friday, and rates are approaching double digits in some hard-hit industrial states. Nearly 4.8 million people collected unemployment insurance last week, the most since federal officials began tracking such data 40 years ago.

New York has already borrowed more than $330 million to pay unemployment claims, according to the U.S. Department of Labor. In the past, New Jersey borrowed from its trust fund to pay for other expenses, and now it has only a few months of payments in reserve.

Even states with relatively flush trust funds such as Tennessee are warning that they could go broke in the next year if unemployment levels stay high. Although West Virginia has relatively high reserves, business leaders already warn they will push for cuts in unemployment benefits to forestall tax increases. Some states like Kentucky have automatic triggers raising employer contributions when the insurance fund falls, but many states do not.

The crisis is most stark in South Carolina, where unemployment has approached 20% in some poor counties, and where the state of the unemployment trust fund, little noticed in boom times, has sparked a standoff involving the governor.

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Layoffs Pile Up

See recent major job cuts in selected industries.

• Sortable Chart: First-Quarter Layoffs

At the same time, proposals to raise payroll taxes to alleviate the crisis are going over like a lead balloon in state legislative sessions that started last month. While the economic-stimulus package being debated in Congress would pump billions of dollars into the unemployment system, it would also increase the amount of benefits paid. It wouldn't solve the core problem of the state trust funds' depleted reserves and balances outstanding.

"You collect money when times are good and pay it out when times are bad, but no one anticipated such bad times," said Diana Hinton Noel, labor analyst for the National Conference of State Legislatures.

Employers argue that raising payroll taxes isn't an option, as they cannot afford to pay more taxes in the midst of an economic crisis. Worker advocates worry that officials will impose some type of shared-sacrifice solution, in which benefits for the unemployed could be cut to lessen a payroll-tax increase.

Like many other states, South Carolina's unemployment trust fund was flush a decade ago. In what was deemed a tax break for businesses, the state lowered the rate that employers paid in payroll taxes for unemployment insurance.

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Job seekers wait to speak with prospective employers at a fair in Chicago Thursday, the day U.S. initial unemployment claims jumped to a 26-year high.

In 2001, the fund had a balance of more than $600 million, according to the governor's office. But the fund balance began to drop precipitously three years ago, as the state began paying out more for jobless benefits. The trust fund went broke last fall.

At the request of the state's Employment Security Commission, Gov. Mark Sanford sought an emergency loan in September from the federal government. But Mr. Sanford balked at signing a second request in December, demanding that the state agency agree to an outside audit and prove the authenticity of its data, which he routinely questions. He relented hours before the New Year's Eve deadline in what became a well-publicized standoff.

"You got 77,000 individuals out of work, and the unemployment check is the only lifeline they have," said Roosevelt T. Halley, executive director of the state agency. "There was this mental anguish that there wouldn't be a check for them."

Gov. Sanford said he is using the only leverage he has to make the agency and its legislatively appointed leaders better stewards of public money. "Who held the unemployed of South Carolina hostage? The agency," he said. "If you watch $600 million disappear over six years, and you have zero elbow room except to ask for an emergency loan, you put them as hostages."

So far, the state has borrowed more than $110 million in emergency funds from the federal government, according to the Department of Labor. But unemployment filings are rising so rapidly that the amount requested just weeks ago for this quarter won't meet the growing need, Mr. Halley said. The amount the state paid in benefits per week reached $20 million in January, compared with $14 million in December, Mr. Halley said.

The impasse continues as Gov. Sanford threatens to fire agency officials unless they provide data by Feb. 9 proving the legitimacy of each unemployment filing, and more details about employers.

While the proposed U.S. stimulus package will likely bulk up unemployment benefits, the focus is on extending benefits to the long-term unemployed and expanding jobless insurance to part-time employees. The package is likely to extend the grace period for interest on federal money loaned to states like South Carolina, but they would probably need to pay it back.

Options include raising the payroll tax, pulling money from other state funds or potentially restricting eligibility, said Ms. Noel of the National Conference of State Legislatures, adding, "Unfortunately, they're all difficult choices to make."

Fewer job openings, more layoffs

Layoffs are up 58% from last year, as quitting rates fall to record low.

NEW YORK (CNNMoney.com) -- Job openings have plummeted and layoffs have accelerated rapidly during a downward trend in employment that continues to spiral, according to a government report released Tuesday.

December 2008 saw 2.7 million job openings, down 35% from July 2007, the starting point of the downward trend, according to the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey.

The report also showed that layoffs in December were up 58% from a year earlier, and the percentage of workers quitting jobs dropped to only 40% of total separations in December.

That's a record-low number: a sign that people are nervous about changing jobs in the current labor market.

Job openings rate: The report included a job openings rate, an indicator that compares the nation's job openings to the total number of jobs plus the number of openings.

In December it fell to 1.9%, the first time it has been below the 2% mark since the report began in 2000. That's a sharp decline from the opening rate of 2.8% the previous year.

The retail trade sector was particularly hard-hit, as job openings fell to 305,000 in December from 386,000 in November. Education and health services openings fell to 553,000, down from 604,000 the previous month.

Hiring rate: New hires were down 900,000, or 19%, from the previous year. The report said no industry or region experienced a significant change in the hires rate in December, as the grim economic outlook continues to weigh on the job market.

Ground zero for rising unemployment

Elkhart, Ind., has one of the highest jobless rates in the country. Now the president is hoping to sell his stimulus package there.

New York (Fortune) -- President Obama spoke at Concord Community High School in Elkhart, Ind., on Monday, trying to make a case for his $827 billion economic stimulus package.

"I am calling on Congress to pass this bill immediately," the president said in a town hall meeting. "Folks here in Elkhart and across America need help right now, and they can't afford to keep on waiting for folks in Washington to get this done."

Why Elkhart? Not because they like him there - they don't really. Obama took Indiana, barely, in November but McCain beat him soundly in Elkhart with 56% of the vote. While a majority of Americans support the economic stimulus bill that Congress is debating, it might be a tough sell in Elkhart.

But if ever a town could use a little help from the federal government right now, it's Elkhart.

According to the latest numbers from the Bureau of Labor Statistics, the Elkhart-Goshen Metropolitan Statistical Area suffered the sharpest unemployment increase in America in 2008. The jobless rate jumped from 4.7% when the year began to a stunning 15.3% when it ended. That leaves Elkhart-Goshen with the third-highest U.S. unemployment rate overall, and the highest outside California.

Elkhart is one of those "traditional manufacturing economies" - a phrase that used to imply stability, but is now code for economic disaster. It's not a place where real estate speculators piled up bad loans, but people are losing their homes anyway.

Elkhart, on the Michigan border, with a population just over 50,000, was once home to the Dr. Miles Medical Company, which brought us Alka-Seltzer and Flintstone Vitamins. Conn-Selmer still makes trumpets for high-school bands there. Elkhart Brass makes firefighting equipment. And many companies in and around Elkhart make RVs and mobile homes (the Recreational Vehicle and Manufactured Housing Hall of Fame is there).

What happened to this "quiet masterpiece of the Midwest," as the Chamber of Commerce calls Elkhart? Higher gas prices led to layoffs in the RV industry, producing widespread devastation. Tax revenues are down. Foreclosures and food stamps, up. Job placement services, swamped.

The scope is hinted at in this scary collection of recent local headlines: "Plastics Manufacturing Company Fortis to Shut Down Elkhart, Indiana Plant." "Dexter Axle to close plant in Elkhart." "Elkhart County to cut back on plowing, paving, filling potholes." "Elkhart Jazz Festival shortchanged in city budget crunch."

Elkhart Mayor Dick Moore went to Washington the day after the inauguration to beg for $92.4 million for infrastructure projects that he says will put 2,300 people back to work. Looks like he may get his wish.

General Motors axes 10,000 jobs on sales fall

General Motors (GM) will 10,000 jobs and slash pay for US executives by 10 per cent as sales at America's largest automaker plummet.

GM said that it would reduce its global workforce from 73,000 to 63,000, with about 3,400 of its 29,500 US staff to go. Most of the redundancies will be completed by May 1.

The number of jobs to disappear in each region will depending on current staffing levels and local market conditions, the Detroit company said.

At the same time, temporary pay cuts of 10 per cent will be introduced for US white-collar employees, while other workers at the automaker will see their pay packets shrink by between 3 per cent and 7 per cent.

The salary reductions will start in May and are likely to continue for the rest of the year.

The cuts are part of a plan to slash costs as worldwide demand for vehicles is hit by the recession.

GM and its smaller rival, Chrysler, must submit restructuring plans to the US Government by February 17 under ther terms of a $17.4 billion bailout provided to the companies by taxpayers.

Its economic meltdown, and the violent reaction of its people, may be echoed worldwide

In December, reports surfaced that then-Treasury Secretary Henry M. Paulson was nervous. Without a Wall Street bailout package, he reportedly warned members of Congress, civil unrest might become so widespread that martial law would have to be imposed. That same month, International Monetary Fund Managing Director Dominique Strauss-Kahn warned of the risk of worldwide riots in connection with the economic collapse.

What really worried them, I suspect, was not that people would throng the streets, or even that those people might demand radical social and political change. The real concern was that the rioters might achieve some of their demands.

Take the example of Iceland, the first but surely not the last country to go bankrupt.

While the United States was inaugurating its first African American president, Icelanders were besieging their Parliament, demanding change in the wake of economic meltdown. Dramatic video of the scene shows drummers pounding out a tribal beat, the flare and boom of tear-gas canisters being fired, scores of helmeted police behind transparent plastic shields, a huge bonfire in front of the stone building, its hot light flickering on the gray walls through the long winter night. People, silhouetted against the blaze, beat pots and pans in what was dubbed the "Saucepan Revolution." Five days later, the government dominated by the neoliberal Independent Party collapsed.

Iceland's interim government, built from a coalition of the Left-Green Movement and the Social Democratic Alliance, is at least as different from the old one as the Obama administration is from the Bush administration. In power only until the April 25 elections, the caretaker government, headed by Johanna Sigurdardottir, takes on the formidable task of stabilizing and steering a country that has the dubious honor of being the first to fall in the current global crash.

A changed people

Iceland's currency, the krona, has collapsed. The debt incurred by its banks, deregulated in the mid-1990s, is 10 times larger than the country's gross domestic product. Iceland's citizens have lost most of their savings and face unpayable debts and mortgages; inflation and unemployment are skyrocketing. But just as the new government is different than the old, the Icelandic people have changed too, becoming furious and engaged where they were once acquiescent and uninvolved.

Iceland is a harsh, beautiful rock dangling from the Arctic Circle like a jewel on a pendant. Bereft of mineral resources, too far north for much in the way of agriculture, it had some fish, some sheep and, of late, some geothermal and hydropower energy and a few small industries, along with a highly literate populace whose fierceness was apparently only temporarily dormant during the era of borrowing to spend. The people I've talked to since the troubles are both exultant that they have reclaimed their country and terrified about the stark poverty facing them.

Once a fairly egalitarian nation, Iceland's boom created a new class of the super-wealthy whose private jets landed at the airport in downtown Reykjavik and whose yachts, mansions and other excesses sometimes made the news, as did charges of corruption in business and in the government that countenanced that business. It wasn't corruption, however, that did in the Icelandic economy. It was government-led recklessness and deregulation. The public tolerated privatization and giveaways of everything from their medical histories and DNA to their fishing industry and wilderness, and a host of subsidiary indignities.

Take, for example, the once-enormously wealthy Baugur Group run by the father-and-son team of Jon Asgeir Johannesson and Johannes Jonsson. Their Bonus stores (with the distinctive hot-pink piggy-bank logo) had managed to create a near-monopoly on supermarkets in Iceland. They provided cheap avocados from South Africa and mangoes from Brazil, but they'd apparently decided that selling fresh fish was impractical, so in the fishing capital of the Atlantic, most of the people outside the center of the capital had no choice but to eat frozen fish.

Icelanders also ate a lot of American-style arguments in favor of deregulation and privatization, or looked the other way while their leaders did. Fortune magazine blamed one man, David Oddsson, prime minister from 1991 to 2004, for much of this privatization: "It was Oddsson who engineered Iceland's biggest move since [joining] NATO: its 1994 membership in a free-trade zone called the European Economic Area. Oddsson then put in place a comprehensive economic transformation program that included tax cuts, large-scale privatization and a big leap into international finance. He deregulated the state-dominated banking sector in the mid- 1990s, and in 2001, he changed currency policy to allow the krona to float freely rather than have it fixed against a basket of currencies including the dollar. In 2002, he privatized the banks."

By the mid-1990s, Iceland had, through dicey finance and lots of debt, launched its journey to becoming one of the world's most affluent societies. Fortune continues: "But the principal fuel for Iceland's boom was finance and, above all, leverage. The country became a giant hedge fund, and once-restrained Icelandic households amassed debts exceeding 220% of disposable income -- almost twice the proportion of American consumers."

The first of the hedge-fund-cum-nation's three main banks, Glitnir, fell on Sept. 29 of last year. A week later the value of the krona fell by nearly a third. Two large banks, Landsbanki and Kaupthing, collapsed later that week. Britain snarled when Landsbanki froze British citizens' Internet savings accounts and used anti-terrorism laws to seize the bank's assets, incidentally reclassifying Iceland as a terrorist nation and pushing its economy into a faster tailspin.

What now?

That's the point at which Icelanders began to get angry -- at Britain, but even more at their own government. The crashing country developed one growth industry: bodyguards for politicians, in a country where every pop star and prime minister had once roamed freely in public. An Icelandic friend wrote me: "Eggs were being thrown at the Central Bank. Such emotional protests have not been seen since the early part of the 20th century, although then people were too poor to throw eggs."

Soon they were also being thrown at Prime Minister Geir Haarde, whose policies were very much an extension of Oddsson's.

Where Iceland goes from here is hard to foresee. But as Icelandic writer Haukar Mar Helgason put it in the London Review of Books last November: "There is an enormous sense of relief. After a claustrophobic decade, anger and resentment are possible again. It's official: capitalism is monstrous. Try talking about the benefits of free markets and you will be treated like someone promoting the benefits of rape. Honest resentment opens a space for the hope that one day language might regain some of its critical capacity, that it could even begin to describe social realities again."

The big question may be whether the rest of us, in our own potential Icelands, picking up the check for the captains of industry's decade of recklessness, will be resentful enough and hopeful enough to say that unfettered capitalism has been monstrous, not just when it failed but when it succeeded. Let's hope that we're imaginative enough to concoct real alternatives. Iceland has no choice but to lead the way.

Writer Rebecca Solnit spent several months in Iceland last year. Her book on disaster and civil society, "A Paradise Built in Hell," will be out later this year. A longer version of this article appears at tomdispatch.com.

Americans rich and poor pawn more to pay bills

By Sue Zeidler and Tim Gaynor

BEVERLY HILLS, Calif./PHOENIX (Reuters) - Whether it's a Tiffany diamond or a three-year-old lawnmower, more and more Americans from all social classes are pawning their possessions to make ends meet.

Pawn shop owners see strong business across the country, even in unexpected locales like Beverly Hills, the mecca of luxury living and shopping.

"Banks aren't lending so people are coming here for short-term loans against collateral like diamonds, watches and other jewellery," said Jordan Tabach-Bank, CEO of Beverly Loan Co, self-described "pawnbroker to the stars."

"I do see my share of actors, writers, producers and directors," he said, but also cited more visits from white-collar professionals and especially business owners struggling to meet payroll obligations.

"We still do the five-, six-figure loans to Beverly Hills socialites who want to get plastic surgery, but never have we seen so many people in desperate need of funds to finance business enterprises," he added.

In the 70 years of the family business, Beverly Loan, which usually charges 4 percent monthly interest on loans, has never loaned so much as it has in the past few months, he said.

"We're a lot easier to deal with than a bank," he said from his office on the third floor of a Bank of America building near Rodeo Drive. An armed security guard watches over the reception, where case after case is filled with precious gems.

It's less glamorous at Mo Money Pawn, located in the grimy area of central Phoenix, where struggling building contractor Robert Lane waited for the shop to open its doors so he could pawn a table saw he bought for $900 (598 pounds).

"It's to get ahead and pay off some of the bills," he says standing outside the store, where he hoped to get $300 for a cherished workshop tool he now rarely uses as work dries up.

MORTGAGE BROKERS AT PAWNBROKERS

There are as many as 15,000 pawnbrokers across the United States. As the U.S. recession deepens, pawnbrokers -- long seen as a lender of last resort -- are noting a rise in business.

No national body keeps statistics for the sector, but proprietors across the spectrum say they are thriving as home foreclosures spiral and bank credit remains scarce.

"Business is good," Mo Money owner Eric Baker said. The store, which makes loans on anything from a motor home to guns to lawnmowers and jewellery, says turnover is up by around 20 percent over a year ago on a broader range of clients.

"You are seeing some bigger stuff, you're seeing some people you probably wouldn't have seen," he said.

Newer clients include struggling contractors like Lane, as well as cash-strapped real estate, land and mortgage brokers, seeking loans, which are pegged by state law at 22 percent over 90 days.

"They are coming in with the houseboats, the quads, the Harleys... The toys they can live without, sitting in the garage," Baker said, sitting in his office at the store, where several of the staff have pistols holstered in their belts.

Across town, William Jachimek, a 25-year veteran of the trade, said cash-strapped mortgage brokers started coming in about a year ago and now account for 10 percent of business.

"We had one mortgage broker who pawned his wife's jewellery and their Viking oven," says the owner of five pawn shops who takes "everything that can be sold on E-bay" as collateral.

Business is up 20 percent on last year at Mo Money Pawn, and seven percent at Pawn Central, Jachimek's flagship store. Nevertheless, a growing number of customers are defaulting on loans, creating some uncertainty.

"It's really good from the aspect that we're taking stuff in and your money is making money while it's out there. But, on the other side, a lot of people are not picking stuff up," Baker said.

Pawnbrokers said it was getting harder to turn over items and unsold merchandise is mounting. Back in Beverly Hills, Tabach-Bank said defaults were up a bit, but still only about 5 percent. "Unlike banks, we are able to work with our customers," Tabach-Bank said. "We're not the kind of pawn shop that cuts you off the day your loan comes due."

Losses Mount on Credit Cards for Retailers

Though only a small corner of the credit card market, cards that can be used only at a single retailer are quickly turning into a big headache for their issuers.

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The cards, known in the industry as private label credit cards, tend to be held by riskier borrowers with fewer credit options. Losses on the cards are rising at a faster pace than the broader credit card market — reaching a three-year high of 10.51 percent in January, according to Fitch Ratings, up 44 percent from a year ago. That compares with general credit card losses of 7.5 percent, up 40 percent from the year before.

While private label cards account for only about 11 percent of all credit card loans outstanding, their troubles offer a window into the deteriorating finances of some of the most distressed Americans. And the losses may prove to be a warning of deeper problems ahead for general cards as the economy weakens and unemployment climbs.

“The higher rate of charge-offs on private label reflects the impact that the economic downturn is having on all customer classes, with a particular strain on lower and middle-class income households,” said John Grund, a partner at First Annapolis, an advisory firm focused on the payments industry. “The next 12 months, 2009 into 2010, just doesn’t look real pretty as the jobless figures escalate.”

Perhaps the best indication of the strains on the market is that the largest issuer of private label cards, General Electric, has indicated that it would like to quit the business altogether.

G.E., which has a $32 billion portfolio of cards for companies like Wal-Mart and Lowe’s, put its unit up for sale in December 2007 but abandoned the effort in September after it failed to find a buyer.

The second-biggest issuer, Citigroup, which lends on behalf of retailers like Macy’s and Sears, listed its unit as one of its noncore businesses in an announcement last month that it would split the company in two.

The troubles in the private label card business may also further affect sales at retailers, which have already been reeling as consumers have cut back. Mr. Grund estimated that 30 to 40 percent of department store sales went on private label cards.

“Credit-tightening will shrink the amount of private label credit outstanding over time, but it will have an immediate impact on retail sales,” he added. “Consumers need financing to buy merchandise, especially big-ticket items, and issuers can cut too far to reduce loss exposure, making the recession even more problematic.”

Of course, some retailers, especially those that cater to more affluent consumers, are experiencing fewer losses, Nordstrom among them. And while some retailers continue to offer the cards at their registers in exchange for a same-day discount, the lenders have made it more difficult to qualify, much as they have done with traditional credit cards.

Fitch, which tracks $72 billion in receivables issued by banks on behalf of retailers, expects private label card losses to surpass 12 percent by midyear and losses on general cardholders with solid credit to reach 8 percent.

“Credit quality will continue to deteriorate for general-purpose cards, and at a rapid, more urgent pace for retail cards,” said Michael Dean, managing director at Fitch.

Though there are exceptions, private label cardholders tend to have less robust credit histories, and thus fewer pieces of plastic to choose from than the general population. They tend to use private label cards to finance bigger-ticket items like appliances and jewelry, experts said.

In contrast, traditional credit cards are typically held by consumers with stronger credit histories who seek rewards, like airline miles, or simply prefer the convenience of cards.

Delinquent payments on private label cards tend to be about 2 to 3 percentage points higher than on more widely used cards, card experts said.

“If you have a compromised economy, who do you pay last?” Robert Hammer, president of R. K. Hammer, a credit card advisory firm, said. “You pay the private label card and maybe your dentist” after all the other bills.

To balance their increased risks, private label issuers charge higher interest rates — from 21 to 24 percent on average, compared with an average of 14 to 17 percent on traditional credit cards, experts said.

Private card issuers build in other protections, too. “Limits tend to be lower,” said Steven Jacowitz, a director at Auriemma Consulting Group, and “you can’t get a cash advance, you can’t do a balance transfer and you can’t use it outside of the store.”

For Citigroup, private label and co-branded cards represent about 37 percent of its $149 billion card business. Losses on those cards totaled 9.86 percent at the end of the fourth quarter. And 3.26 percent of its loans were more than 90 days past due.

Two of the larger retailers that still operate their own card businesses, the Target Corporation and Nordstrom, have changed their policies, in part to deal with the deepening recession.

Target, which sold a 47 percent stake in its loans to JPMorgan Chase in May, has about $9.27 billion in loans outstanding. About 6 percent, or roughly $500 million, of the loans are on store-only cards; the rest of the loans are on Target Visa cards.

For December, Target said it had annualized losses of 12.28 percent. About 8.44 percent of loans were more than 30 days past due. From the end of 2007 through September, Target had cut total credit lines by 14.6 percent.

Target’s biggest losses first came in areas with the largest drop in home values, according to its third-quarter earnings conference call transcript. Now, those problems are in wider swaths.

Because most of Nordstrom’s customers have top-notch credit, losses in its $1.9 billion portfolio, which includes Nordstrom private label and Nordstrom Visa cards, have not been as severe as those of other private labels. Its losses were about 5.7 percent of its portfolio for the quarter ended Nov. 1, and 3.2 percent of loans were more than 30 days past due.

Whether their credit lines are shrinking or not, many consumers are choosing to keep a tighter grip on their wallets.

“When everyone is fearful about whether they will have a job in the next year or so,” said Marc G. Sczesnak, president of TD Retail Card Services, which issues cards for small and midsize retailers, “they are managing their personal balance sheets and reining in spending that is not absolutely necessary.”

Associated Press: If Barack's Plan Doesn't Work, the Ensuing Run on the Banks Will Make "It's a Wonderful Life" Look Like a Walk in the Park

These days, you can roll up to an ATM at the grocery, the pharmacy, the

gas station, the hardware store, the office, even the ballpark. You can

check your Bank of America balance on your iPhone. You can text Chase,

and Chase will text you back. That's banking today: It has grown from an

almost quaint relationship between teller and customer into a massive,

dizzyingly interconnected network that touches almost every adult in this

country. And right now, the federal government — working without a road

map, and without a net — is putting together a plan to keep U.S. banks

from collapsing. Not just to get the banks lending again. To keep them

alive. The government is expected to announce Monday a plan analysts

expect will include lifting soured mortgage assets off selected banks' books,

possibly along with guarantees against other losses and maybe more direct

injections of cash. Getting it wrong could trigger a replay of what happened

after Lehman Brothers collapsed last fall — the stock market in free fall,

seizure of the credit markets, ripples of layoffs. Perhaps even a run on the

banks — so many customers rushing to pull out their cash that it would

make the bank run in "It's a Wonderful Life" look like, well, a feel-good

holiday movie. "The banks are at a terrible junction," says Robert Reich, a

labor secretary under President Bill Clinton. "The bottom is falling out . . ."

Revenge of the whistleblower: HBOS executive sacked and gagged for warning of disaster reveals truth to MPs

One of Gordon Brown's top advisers was accused last night of sacking a whistleblower who warned that banks were heading for disaster.

Sir James Crosby, currently deputy chairman of the Financial Services Authority, was the chief executive of HBOS at the time.

The man he sacked, Paul Moore, took his revenge in evidence to a Commons committee.

He said Sir James was the 'original architect' of the strategy that led HBOS into near-collapse.

'Sacked and gagged': Former HBOS risk chief Paul Moore (left) claims he was dismissed by Sir James Crosby (right) after warning the bank was out of control

Mr Moore, who held a senior post at the bank between 2002 and 2005, said anyone 'not blinded by money, power and pride' knew there was something wrong.

He warned the HBOS board but was 'summarily dismissed' by Sir James and subjected to a ' gagging' order.

In a dramatic session of the Treasury select committee, four other former bankers expressed 'profound' apologies for the failure of their banks.

Bank workers protest over "greed" of bosses

By Matt Scuffham

LONDON (Reuters) - Workers from high street banks demonstrated outside parliament on Tuesday, saying jobs were put in jeopardy while banking executives reaped massive bonuses in recent years.

The Unite union condemned what it called the "greed of banking bosses" while a committee of parliamentarians grilled four ousted banking executives over the events that brought Royal Bank of Scotland and HBOS to the brink of collapse.

British-based banks have announced some 14,000 job cuts since the global financial crisis intensified last August and international banks with UK operations have announced tens of thousands more.

"They (the executives) earned very substantial bonuses over the last five or six years. They're not going to be signing on for job seekers' allowance any time soon," Cath Speight, Unite's national officer for the banking sector told Reuters.

"Our members are going to be the ones that suffer. They are going to want to know how they pay their mortgage when they've lost their job through no fault of their own," she added.

Unite is concerned that low paid financial services workers could have their bonuses removed while executives are still awarded generous payouts.

Speight said a growing public backlash against the awards for the highly paid were justified.

"There should be public anger. These bonuses are being paid to the people responsible (for failure). Some of our members earn 15,000 pounds a year and rely on the small annual bonuses that they are entitled to contractually," she said.

The four ousted executives apologised for mistakes they had made and said changes should be made to the industry's lavish pay system.

The union also wants the government to ensure that no British jobs are outsourced abroad by the banks who have become part-nationalised in the fall-out from the crisis.

"If any of these newly-funded institutions come anywhere near government with plans to offshore jobs, we want the government to say 'absolutely no way'," said Speight.

Credit Suisse records worse than expected loss

Credit Suisse has reported worse-than-expected full-year results after volatility in financial markets in December left its investment banking division with a SwFr7.8 billion (£4.7 billion) quarterly loss.

Switzerland’s second-biggest bank posted a record net loss for 2008 of SwFr8.2 billion, against forecasts of a SwFr6.3 billion deficit.

The fourth-quarter loss alone was SwFr6 billion, about 50 per cent more than expected

The culprit was investment banking, where Credit Suisse was wrong-footed by a faulty hedging strategy and credit market volatility in December, two months after the most extreme price swings in the capital markets.

The bank said that it incurred “significant losses” because of index-hedge positions rising and cash market positions falling, which made its efforts to protect its trading book ineffective.

It was also hit by adverse movements in credit markets and writedowns of leveraged loans and other instruments.

But the Swiss bank said that it had a made a strong start to 2009 and was profitable across all divisions in the year to date.

“While our full-year results are clearly disappointing, we entered 2009 with a very strong capital position, a robust business model, a clear strategy and well-positioned businesses,” Brady Dougan, the chief executive of Credit Suisse, said.

“We have positioned our businesses to be less susceptible to negative market trends if they persist in the coming months and to prosper when markets recover.”

Credit Suisse’s results come a day after UBS, its compatriot, announced a full-year net loss of nearly SwFr20 billion, the biggest in Swiss corporate history.

Unlike UBS, Credit Suisse has not sought a bailout from the Swiss Government.

Credit Suisse said in December that it would eliminate 5,300 jobs after making a net loss of about SwFr3 billion in October and November.

It confirmed today that it had achieved about half of its targeted job cuts to bring staff numbers down to 47,800 by year end.

It repeated its target of paring its investment bank to 17,500 staff by the end of 2009 from 19,700 at the end of 2008.

It said that it had cut its exposure to commercial mortgage-backed securities to SwFr8.8 billion.

Its exposure to leveraged finance had been reduced to less than SwFr1 billion.