The so-called subprime loans -- to borrowers with poor or nonexistent credit -- may look like mortgage loans, but in reality they are nothing but a modern form of speculation. They are wagers on the future of the lower middle class and on rising real estate prices, and they represent a market already worth more than $1 trillion in America today.
According to recent figures, 20 percent of US mortgages were issued to borrowers with extremely poor credit. In 2001, that number was only 5 percent. The industry's motto today might as well read: "My home is my house of cards."
What has now happened was inevitable. As the economy declines, the first to go are its lower wage earners -- often the holders of subprime mortgages. As energy prices rise and disposable income shrinks, consumer spending is bound to head south.
Real estate prices have been falling for some time. As home values fall below the principal on many mortgages, borrowers default on their loans and mortgage lenders are forced to take huge write-offs. More than 20 mortgage lenders have already filed for bankruptcy. Citigroup, the world's largest bank, is slipping into a financial disaster that could run into the billions.
All of this depresses America's currency, but a weak dollar also has its advantages. Some US corporations that may have outsourced jobs in the past, to Canada, for example, are now planning to bring production back to the United States. And thanks to the weak dollar, many companies that would otherwise have a hard time remaining competitive are achieving unexpected successes on the world market. One of them, the Terex Corporation, a manufacturer of construction equipment, was able to double its workforce at one of its plants to 3,000 workers, because exports, to Europe in particular, are booming.
These advantages could tempt US politicians to continue to look on as the dollar falls. But because the dollar is the reserve currency and not just any currency, all they are doing is exporting their problems to the rest of the world. Europe's export industry has already been affected.
Two industries with central importance for the German economy are suffering from the weak dollar: the aviation and automotive industries.
Together Airbus, Daimler, BMW, Volkswagen, Porsche and their suppliers employ more than 700,000 people. These companies play a key role in making Germany one of the world's leading exporters. But it is precisely this success in global markets that also makes them so susceptible to currency fluctuations.
Airbus, with its Power 8 restructuring program, is in the process of reducing its costs by €2 billion a year by 2010. This will mean the sale of 7 of the conglomerate's 16 European plants and the elimination of 10,000 jobs. But these steps were intended to keep the company competitive at an exchange rate of $1.35 per euro. But that was yesterday's exchange rate. Today one euro is worth almost $1.50.
Of course, Airbus could be made far more efficient by abandoning the politically motivated division of labor among Spaniards, British, the French and the Germans and assembling aircraft wherever it makes the most sense economically: the giant A380 in France and the A320 family in Germany.
But the executives seeking to streamline Airbus are currently running a race with the US currency that they cannot win. For instance, it is already a great step for Airbus' Germany headquarters in Hamburg that productivity in portions of final assembly in the plant there has improved by 40 percent since 2005. It may be a step in the right direction, but it is still far too small to offset exchange rate losses.
The dollar will have fallen even farther and forecasts been thrown off kilter long before Airbus's cost-cutting measures have taken effect. Every cent by which the euro exceeds $1.35 costs the company €100 million in revenues. A rate of $1.50 a euro translates into losses of €1.5 billion for Airbus.
Of course, the financial managers at Airbus and other companies have sought to offset the expected weak dollar with hedging transactions -- by buying options that guarantee a fixed exchange rate for their dollars in one or two years. This is nothing but a temporary stopgap measure. If the US currency continues to plunge as severely and rapidly as it is now, European companies will not have enough time to react with the usual adjustment mechanisms.
Airbus can hardly counteract the trend by laying off workers and closing factories. Its order books are full and its workers are working extra shifts to keep up with the demand. Wage cuts will also be insufficient to offset exchange rate losses.
It is now time for Airbus to take a step it should have taken years ago: The company needs to shift some of its production to the United States. It was worse than careless of executives at the European aerospace company not to have done this long ago. Airbus is more dependent on the US currency than almost any other European enterprise. And it is more vulnerable than most to turbulence in the foreign currency markets.
In addition to lacking aircraft assembly facilities in the United States, Airbus also purchases far too few parts in the dollar zone. Even if Airbus CEO Thomas Enders decides to change this situation, it will be a long time before new suppliers can be found and a possible US plant can begin operations. Until then the company is likely to face substantial losses, forcing it to postpone investments in new aircraft. Airbus's ability to compete with Boeing will suffer as a result.
The German automobile industry is better prepared for currency fluctuations. Years ago, BMW and Mercedes-Benz built plants in the United States, where they produce and assemble cars, especially SUVs: 100,000 at BMW and 170,000 at Mercedes-Benz. But this isn't enough to offset the consequences of the declining dollar. Both companies still sell many vehicles in the United States that are exported from Germany. And even the vehicles they assemble in their respective plants in Tuscaloosa, Alabama and Spartanburg, South Carolina require engines, transmissions and axles made in Germany.
Munich-based BMW lost €666 million ($983.5 million) last year because of the weak dollar. The company has responded with plans to expand its US production volume to 200,000 vehicles.
Martin Winterkorn, the chief executive of Volkswagen, plans to decide soon whether his Wolfsburg-based company will build a plant in the United States. But his decision has practically been made for him. With almost all experts assuming that the dollar will continue to fall, VW can hardly afford additional billions in losses in the US market. Pulling out is not an option, either. VW's only likely option will be to build a plant in the southeastern US where it can produce roughly 200,000 cars a year.
So far German carmakers and machine builders have not had to cut jobs in Germany when they open new factories in the United States. But it is clear that even if these companies continue to grow, they will hardly be creating any additional jobs in Germany. Instead, the new jobs will be going to Asia or the United States, which is fast becoming the land of cheap currency.
The fact that the dollar crisis has not affected Germany, one of the world's major exporters, more seriously than it has is because most German exports go to other European countries. Only 13 percent of German exports end up in the dollar zone.