This Week in Bank Failures

In testimony this week, Bernanke and other regulators testified that shutting down large financial institutions would permit the economy to avoid a repeat of the upheavals of 2008. Bernanke cautioned, though, that regulators would have to avoid the temptation to turn a blind eye to problems.

A credit union was liquidated this week. Wisconsin regulators closed First American Credit Union of Beloit, Wisconsin, on Wednesday. Michigan-based First Community Federal Credit Union assumed the assets and liabilities to provide uninterrupted service to the credit union members.

I am not expecting any bank failures tonight because of the holiday weekend and the season, which finds so many workers on vacation. Should any occur, though, I will be sure to look into them.

“Drill (BOOM!) Baby (BAM!) Drill”

Today’s oil rig explosion will prompt even the more optimistic oil explorers to pause and reassess the safety of the technology of offshore oil drilling. Two rigs destroyed by explosions caused by separate acts of nature five months apart certainly makes it seem like the oil drilling process is not sufficiently controllable using current technology. If drilling for oil in the sea is like riding a dragon, because the technology really isn’t up to the task, then it makes good sense to leave the oil where it is until the right technology is available.

Greece Cracks Down on Smoking

In another sign that Greece is addressing its financial challenges, the country is cracking down on smoking. A new measure bans all smoking in public places and all cigarette advertisements.

A previous attempt, which had a complicated set of exceptions, was ineffective at curbing smoking, so the new measure includes no exceptions and imposes fines of up to €10,000 for business violations. During the current economic slowdown, the amount of the fine is enough to close down the average restaurant, so owners and workers will be forced to pay attention to the new rules. Individual smokers can be fined as much as €500 per violation. That’s not necessarily enough to be an effective deterrent, but it is more than just a token fine.

Greece is the smokiest country in Europe, where an estimated 40 percent of adults smoke cigarettes and more than half of the country’s medical expenses are smoking-related. The country can’t afford the costs of so many illnesses, not to mention the many other costs associated with tobacco use.

The government’s decisiveness in dealing with this issue is the same forthright approach we’ve seen in hundreds of other reforms that, taken together, have put Greece on a sound financial footing. This is a choice that was available to the country all along, and looking back, it is hard to understand why the previous government chose accounting fraud instead.

Ethical Questions in Housing Market Support

A Fortune story in CNNMoney.com, “Housing quagmire: Is it time to remove relief?” raises the usual questions about the wisdom of supporting the housing market, along with interesting new questions. If the housing market is, as many economists believe, 10 to 20 percent above a sustainable price level, is it ethical to provide special encouragement for people to buy houses now?

The few who are buying homes now might likely be overpaying for them.

Then, after prices fall, these borrowers and their banks might fall into the exact same problems that are causing so many foreclosures and bank failures already. A quote in the story from Dean Baker:

“We’re just putting more people in the trap,” Baker says of government policies that basically encourage people to buy or stay in homes beyond their budget. “I don’t feel good that we’re finding more suckers.”

There is no question that housing market support has some short-term benefits for communities and the banking system. Having more occupied houses means fewer unoccupied houses for criminals to exploit, and that’s good for communities. At least 50 banks that might have failed this year won’t go under till next year because of the short-term effects of propping up the housing market.

But if these benefits are coming at the expense of more bank failures in the future, and more consumers lured into the financial trap of an underwater mortgage, is it really ethical to continue the programs that create them? It is a difficult question to answer because we don’t know the exact proportions of these effects relative to each other, and no one can say the exact degree to which the value of any given house will decline from here.

A point to consider, however, is that it is financially natural for the value of a house to decline over time. People who have taken advantage of the appreciation of the value of their homes have had the advantage of demographics, but in normal times, houses depreciate. Things wear out and break down. The insulation or security that seemed adequate when the house was built is inadequate decades later. Most houses built in the last century will be demolished or rebuilt at some point in this century — their value will diminish to zero, or near zero.

And this is without even considering the possibility that the cost of building a house could decline because of technological advances. We tend to discount that possibility because it has never happened in our lifetimes. But it will surely happen someday, probably within the next 30 years, and when new houses are less expensive to build, this reduces the market value of all houses. If the economy or the financial system is built on the assumption that technology will never reduce the cost of a house, then it is just setting itself up for an unpleasant collapse at some unknown time in the future.

Ready for a Disaster in Hurricane Season

Tropical Storm Earl was upgraded to hurricane status late yesterday and is expected to strengthen into a major hurricane by tomorrow morning. The hurricane will brush past Puerto Rico with at least gusty winds and flooding rain. By Friday, the hurricane could come on shore somewhere in the northeastern United States. Based on the current forecast track, that could be anywhere from North Carolina northward, including the possibility of crossing my location in Pennsylvania.

The Northeast hasn’t had a direct hurricane hit for a while, so the forecast for this new hurricane might serve to remind people what it means to be prepared for a disaster. For any disaster, this includes having drinkable water and food on hand, and perhaps batteries and fuel for driving. NOAA has a page of specific suggestions when there is a chance of a hurricane.

One simple action that can easily be done four days in advance is storing some water. For many people, this is as simple as filling several bottles with tap water. It’s something that you can easily do on any ordinary day, but that you may not be able to do after a disaster strikes. We can’t control and can’t always predict which way a hurricane will go, but there are things we can do to minimize the harm it may cause.