Brazil's Lula: U.S., Sort Your Banks Out

RIO de JANEIRO -- President Lula da Silva of Brazil sat around the G20 table in London recently and yesterday at the World Economic Forum delivered some chilling news.
"I saw a lot of humility around the table in London," he said. "Nobody new the right answer [to fix the global economic crisis]."

President Lula did some rich-country bashing, not America-bashing per se, despite the oft-repeated remark here at this gathering of the business elite that Latin America's crisis was not its fault for a change.

After a formal speech, the dynamic and populist President lambasted the system that led to the collapse and warned rich countries that they face dire consequences too if redistribution of wealth and new oversight controls do not work.

"Like the Titanic, no one will escape," he said. "First class, third class, everyone will sink with the boat. The role of everyone, from the mass media to business, labor ad politicians, must be examined."

The theme of this year's gathering of business and political elites was the impact of the meltdown on Latin America and what can be done to mitigate the negative effects. Interestingly, the impact on South America has been relatively small so far because it is less dependent upon the United States than is Mexico and Central America.

Ironically, foreign direct investment grew by 8% in 2008 even though the world's FDI fell by more than 20%, said a Mexican economist.

Lula's prescriptions were draconian and somewhat predictable:

-- The futures market should not be shut down but leverage should be severely constrained to stop speculation in food and other commodities which gravely impact the world's poorest.
-- The U.S. should stop being close-minded to nationalizing its banks as is now the case strictly "because of ideology."
-- More fiscal help through multilateral nations must be extended to the poorest nations because none of this meltdown was their fault and they suffer the most. "The main victims are the poor people living in developing countries," he added.
-- The estimated US$16 trillion sloshing around in futures markets contaminated commodity prices and must have oversight to stop the creation of destructive price bubbles.
-- Vigilance against protectionism is essential. "Protectionism is like a drug. First there is relief then there is depression," he noted. Trade worldwide will drop by 9% in 2009 and 50 millions jobs with it.
-- A new economic order must be devised and the world's leaders should "not be prisoners of old paradigms that have collapsed".
-- The lines of credit to enable trade for poor countries is an important start.
-- Banking guidelines in the "rich world" must be curbed and forced to match leveraging such as exists in Brazil of 10 times, not 35 times capital. (Roughly half of Brazil's banking system is government-owned, a remnant of 20 years of banking crises and stagnation.)
-- The new system must link financial and productive sectors so that people cannot make "billions of dollars" just shuffling paper at the expense of the rest of the world which makes real things.

Another irony about Latin America is that after its many crises, most public sectors and banks are in good shape compared to the U.S. or Europe. However, the private sector is heavily leveraged as a result of explosive growth for a decade that is now coming to a halt.

"Petrobras [Brazil's national oil company] is a very good company, with assets and a new giant discovery, but credit has disappeared as a result of the U.S. crisis, and the company has huge loans to roll over. The lack of credit could become the actual crisis."

Brazil is undertaking a US$646 billion stimulus program to stave off unemployment and to invest in infrastructure, education and housing.

"Without redistribution of wealth, growth is not sustainable," he said.

Lula is a charismatic leader who has steered Brazil past the shoals of extreme trade unionism, socialism and rich selfish elites into a growing economy.

His advice should be heeded.

Diane Francis blogs at the Financial Post.