Saturday, May 29, 2010

How to Break Up BP?

It got going last week — talk of a boycott of BP, as a way to protest its oil spill and its approach to oil drilling. A small organized boycott is underway, but I don’t expect it to turn into anything big. Even if it can be established that BP knew the risks it was taking, by drilling a well without first having the technology to operate it, it’s hard to look at the rest of the oil industry and convince yourself that they are doing better. It is impossible to boycott the entire oil industry, but people will be moved to cut back, at least in a small way. At the very least, people who were thinking of driving to the beach may be persuaded to stay closer to home if they are worried that the beach may be closed by an oil slick by the time they arrive.

Limits on liability ensure that BP will not be liquidated to pay for the restoration efforts, but even so, the oil spill is more than a serious problem for BP. Even if the well could be successfully capped this weekend, the oil will continue to wash up on beaches for the rest of the year, and the cleanup effort will continue for several years. All this means that BP is ruined as a company. Its name will forever be associated with tar balls and the frightening smell of decaying heavy crude. This will put it at a permanent disadvantage compared to most of its competitors. Even before the oil spill there were obvious problems with BP’s management of its oil business. All this points to a situation where it will be more profitable to sell off the assets than to continue to operate the company.

So it’s probably not, in the end, a question of how BP can carry on, but of how it can best break itself up and sell off the pieces, making sure for the sake of the stockholders that BP’s tarnished identity doesn’t stick to any of the pieces that remain.

Friday, May 28, 2010

This Week in Bank Failures

Investor fears have turned their focus to Europe, and banks there are being squeezed. Four large savings banks in Spain announced a merger on Tuesday; it is hoped that the combination will have stronger liquidity. While commercial banks in Spain are tightly regulated and have thrived through the economic slowdown in that country, savings banks were heavily exposed to the real estate bubble there, and their lending troubles are being exacerbated by the loss of investor confidence.

Mischaracterizing repo transactions in financial statements appears to be commonplace in banking. This week, both Citibank and Bank of America disclosed, after investigating the question, that they have done this in recent years. In both cases, though, the errors are too small to matter, and neither bank expects to restate its past balance sheets.

Little progress has been made in the planned Prudential buyout of AIG’s East Asia unit AIA, with the head of AIA now coming out publicly against the deal, hinting that it could lead to the collapse of both AIA and AIG if it goes ahead as currently structured. The deal is equally problematic for Prudential, which may need to raise $21 billion in a new stock offering for the purchase of a company that may not turn out to be that valuable. The spinoff of the insurance units was supposed to be the easy part of the AIG puzzle, but has become problematic since the discovery that they have not been nearly as profitable in recent years as was previously imagined. Winding down AIA is not seen as an option, so AIG is taking a new look at a stock offering for the unit.

The financial reform legislation in its latest form would appear to push banks out of large-scale, high-risk financial arrangements such as leveraged buyouts that traditionally have been done outside of the banking business. This change would increase the importance of private investors in large financial deals. The Wall Street banks might be forced to spin off their private equity operations if the reform bill passes in something close to its current form.

The three banking subsidiaries of Bank of Florida Corporation were closed tonight. The three banks, Bank of Florida Southeast, Bank of Florida Southwest, and Bank of Florida Tampa Bay, operated as separate companies, but shared a common problem: a desperate shortage of capital, and an April 17 deadline from regulators to raise enough capital to keep operating. The three banks entered into a consent decree with the FDIC last Friday, which followed earlier prompt corrective action orders.

The holding company, Bank of Florida Corporation, reported a negative net worth in its latest financial statements, and received a delisting notice from Nasdaq last week. The company released first quarter results on May 3 showing a loss of $33 million, giving it a book value of $10 million. The first quarter earnings were revised downward by $15 million last week because of additional problem loans, giving the company a negative net worth. The banks took losses on loans in real estate development loans for three years, and recently had been forced to write down loans to companies in the construction business, as new construction projects in the southern half of Florida have nearly ground to a halt this year.

The banks had a combined 13 locations, all in Florida, and $1.3 billion in deposits. EverBank is taking over the deposits and purchasing the assets.

Two West Coast banks were also closed. The larger of these was Sun West Bank, with $354 million in deposits and 7 locations, most in Las Vegas, but two in Reno. Sun West had hoped to raise capital with a stock offering, but in the end, could not line up enough investors to make it work.

Los Angeles-based City National Bank is taking over the deposits and purchasing the assets.

In California, Granite Community Bank was closed. Granite Community Bank had 3 offices in the northern suburbs of Sacramento and $94 million in deposits. Tri Counties Bank, one of the larger banks in the area, is taking over the deposits and purchasing the assets.

With these five closings, the FDIC has recorded 78 bank failures so far this year, or 16 per month, a pace similar to that of last year.

Thursday, May 27, 2010

The Best Ideas Are Not Being Heard

One of the most frustrating things about watching the hapless efforts to stop the oil spill in the Gulf of Mexico is knowing that thousands of people who are observing the process have the answer. By now, people must have thought of 50 completely different solutions to the problem of an open well on the sea floor, any one of which would suffice to contain the oil, at least temporarily. These ideas are not being heard because the economy does not provide a mechanism for moving ideas from the people who have them to the people who need them.

BP, to its credit, is accepting ideas from the public, but doesn’t know what to do with the ideas once it receives them. Its engineers, quite properly, are focused on using known techniques to try to cap the well, and will never find time to consider the creative suggestions people are offering. It doesn’t help that engineering ideas that come in from non-engineers can be poorly described and further garbled along the way. It also doesn’t help that BP has publicly disparaged the ideas it has received — that doesn’t exactly encourage people to put their suggestions forward. I’m sure it’s true that many of the ideas are “crazy,” but if just 10 percent of the suggestions are constructive and 1 percent are workable, then it ought to be possible to find, among that group, the ideas that would actually be effective.

Or so you would hope. Yet there is no area of the economy that does well at collecting new ideas and putting them into practice. Science? New theories with strong evidence to back them up often languish for 40 years, until the old guard dies. Law enforcement? A building can be a “known drug house” for years before any surveillance is carried out. Books? Even if you are the star of a television show, most book publishers won’t look at your manuscript unless it comes through an intermediary. Speaking of television, it took MTV ages to get carried on cable systems, and even after MTV had become the best-known name in television, it still took years to get MTV2 on cable.

New ideas are often blown off with the free-enterprise excuse. If you have a good idea, it is an opportunity for you to start your own business and make a profit. That’s one of the kinder ways that people in a position to do something say, “Go away, and stop bothering me with your ideas.” Let’s apply this strategy to the people who know they have the solution to BP’s oil well problem. Can they get the funding to demonstrate their ideas? Perhaps — if they have an engineering degree and a track record in the field. Let’s say it takes 3 years to get the engineering degree, another 3 years to gain experience in an area of engineering, then 5 years to design and introduce a series of products on a smaller scale in order to gain credibility in the field, and finally, 2 more years to round up funding and have the original well-capping idea tested. I am certain this describes the pending career path of dozens of observers for whom the problems surrounding the oil spill have helped them become aware of their interest in one area of engineering or another. And the suggestion of the 13-year lag is not entirely silly — the way things are going, there is no guarantee that BP will have the well capped 13 years from now, and besides, the next deep-water well to blow will face the same difficulties. But it would be so much better if we could get those answers sooner, and not suffer through a 13-year lag that is really just an inefficiency in the structure of the economy.

And engineering moves faster than most parts of the economy. What do we do when we need solutions in less time than 13 years, or 20 years? At the very least, we need to be aware that many of the best ideas out there are being lost in the shuffle.

Wednesday, May 26, 2010

Dairy Industry Struggles to Find Balance

After last year’s turmoil, the dairy industry’s overconfidence continues to frustrate efforts to bring the industry into balance.

Consumer demand for milk is falling slightly, with high retail prices and nutritional concerns deterring consumers. Yet, even after a year that saw shockingly low prices paid to milk producers, U.S. dairy farmers produced the most milk ever last month. The increase in production, which is also occurring in Australia and Europe, is based on predictions of increases in milk prices, but with the excess supply, prices are sure to fall again.

Another indication that production is too high: U.S. cheese inventories are the highest in 26 years. U.S. consumers are eating less cheese, but unlike with milk, this has less to do with prices than with the association between cheese and restaurant food. It seems people mostly eat cheese in restaurants, and with the restaurant business off worldwide, the demand for cheese is lower. At the same time, excess milk supply tends to get turned into cheese, so cheese inventories will probably increase further, setting new records as the year goes along. Wholesale cheese prices have risen 10 percent in the last month, but with low demand and near-record inventories, prices seem certain to fall back at least to the previous levels.

With milk and cheese demand stagnating, cutbacks in production have to happen somehow. The problem is that governments are projecting higher demand and higher prices, leading dairy farmers to produce more milk than the market can support. Eventually, after being stung three years in a row, government authorities will have to lower their projections, or farmers will have to stop relying on them.

Tuesday, May 25, 2010

Decline in Crime Reflects Serious Mood

The FBI reported a drop in crime rates in 2009, and the decline surprised some economists. This is not just a continuation of a long-term trend that has held for about the last 20 years, but a significant step down, with a 5.5 percent decline in violent crime and a 4.9 percent decline in property crime, compared to the year before.

Ordinarily, crime correlates with economic pressure on consumers. Based on that, you would expect crime to go up with a broad decline in employment, as we saw in 2009. However, the context of events in 2009 was hardly an ordinary recession, and the crime report is consistent with other measures that suggest a new mood of seriousness took hold among U.S. consumers in 2008 and 2009. If we’re not messing around, that also means we’re not not making so many of the irrational, impulsive decisions that lead to committing crimes.

Declining beer consumption and unusually high voting rates are two other trends that seem to track with the serious mood of the economy. On the surface, it might seem that these trends may cause each other to a slight degree. For example, you can’t drink beer in a polling place, and beer consumption creates a state of mind that may lead to bad decisions, at least in country songs. Yet I believe these and other trends are mainly effects of a deeper spiritual change, perhaps having to do with people feeling determined to chart the course of their own lives.

Monday, May 24, 2010

National Security on the Sea Floor

Note to the Pentagon: protecting national security includes being able to operate on the ocean floor.

It makes sense to me that President Obama hasn’t yet declared martial law on the sea floor of the Gulf of Mexico. Oil from a deep-water well is spilling into the gulf at a rate, we can say now, probably at least 40 times the oil company’s original estimate of 800 barrels a day, producing probably the largest oil spill in history. The oil well at this point no longer has any functioning hardware, but the oil workers at least have some experience with the deep-water submarines they are using and some ideas about what they can try to do.

The chances of BP getting anywhere with any of the measures it is considering are slim. BP’s “worst-case scenario” is that a relief well becomes operational in September and allows the original well to be sealed. The actual scenarios we face are far worse than this. I have already explained why a relief well could make things worse just as easily as it could lead to a fix. No one should be surprised if the oil spill is still going on, still getting worse, when the year is over.

The actual worst-case scenario is not that the oil continues for a few months, but that nothing can be done, and the oil spill continues indefinitely, for centuries. I say this not as flippant response or as an exaggeration, but as a sober recognition that we do not have the technology to control any oil well at the depth where we are working. Considering what could happen, this is a situation where the logical approach is to try everything that is at hand — to let BP attempt whatever its engineers can think of until it is obvious that they are just grasping at straws.

It makes sense because if BP can’t do it, what comes next? I suppose a joint operation of the Army Corps of Engineers, the Navy, and NASA might make sense. Together, they may have the ability to work on a pipeline underwater in an alien environment inaccessible to humans, but there is little reason to expect quick results. They’ll be coming at the problem cold, having to create new technology before they can do the first things.

I hope someone in the Pentagon is already drawing up plans for a more immediate ability to respond to deep-sea problems. It really doesn’t make sense that a catastrophic sea-floor event is put in the hands of an international corporation just because the military doesn’t have any operational expertise in that arena. Now that the world has seen how much damage can be done just by poking a hole in the seabed, it’s something a military enemy would obviously think to do as part of a coordinated military attack. There has to be a way to protect against this. The same capabilities would also protect against the mistakes of oil companies.

Sunday, May 23, 2010

Yard Sale Shoppers

I wrote yesterday about the transitional nature of yard sales. If there is a trend among yard sale sellers, with yard sales occurring less frequently at some households or stopping altogether at others, yard sale shoppers don’t have to care. As it is, shoppers don’t have any hope of keeping up with all the yard sales. If the number of sales declined by a third, a dedicated yard sale shopper could adjust by shopping till 11 on a Saturday morning instead of noon, or driving a total of 30 minutes instead of 20, or spending 10 minutes poring over each sale instead of 5. It would be a barely noticeable change.

Besides, the more dedicated yard sale shoppers know they have to cut back on their purchases sooner or later. “Instead of being here shopping, I should be having my own sale,” one shopper commented to me yesterday. The shoppers I saw were more skeptical and selective than I saw a decade ago, and not because they didn’t have the money to spend. Yard sale items are priced at $1 and $2 partly because those are the prices that shoppers expect, but also in part because things wouldn’t sell in much larger volume at 10¢ and 25¢. Yard sale shoppers have to become as indifferent to prices as they are to retail branding, because even without spending enough money to notice, you could easily go home with a carload of stuff on a Saturday morning, and then where would you put it all?

Shoppers for years have known in an intellectual sense of the possibility of buying too much stuff, but now they know it in an operational sense. Yesterday I didn’t see any shopper going away from a sale with a bagful of purchases. Shoppers were holding themselves back, limiting their purchases in arbitrary ways to avoid accumulating too much at once. Some shoppers seemed to be limiting themselves to one item per sale, making an exception only if they found something extraordinary, but hardly anyone was buying more at any one sale than they could hold in their hands.

I came away with the feeling that I was seeing a threshold moment in the popular concept of consumer goods. Manufactured products are still seen as attractive, of course, but they have lost the presumption of value. Instead, the automatic reaction is that they are something you have to be careful about. You see this not just in the shoppers’ reluctance to buy, but also in the before and after pictures of a yard sale. A failed yard sale has sold one eighth of its items; a wildly successful one has sold three eighths. Either way, most of the items remain at the end of the day, to be recycled, donated to charity, or thrown away. This couldn’t happen if all these products had intrinsic value, but mass-manufactured products have become so plentiful that most of them are valueless unless they can be put in the right place. There is so much stuff that the familiar line, “I know I can find a place for this,” seems to have vanished.

“People weren’t buying practical household items,” one seller commented to me as a sale was closing. That was mostly true in what I saw, not just at that sale, but all day long. I could understand that from my own experience as a shopper. If I had needed a coffee mug or a dish towel, I could have found it at one of the first four sales I went to. But I didn’t need anything along those lines — I already had more housewares at home than I could use, and surely the same is true of everyone who has spent an hour at yard sales within the last year. At one sale, I bought a bread machine. I have one already, but I have been using it heavily for ten years and had started to wonder how much longer it will last. Bread machines must not have much scarcity value at yard sales either, because I bought a seemingly new bread machine at 1 p.m., very late in the day in yard sale terms, at 5 percent of its retail price — meaning other shoppers had been passing it by at that price all day long.

There has long been a debate among economists about whether consumers could ever reach a saturation point, so that there would be resistance to any further expansion in manufactured goods. From what I saw of yard sale sellers and buyers yesterday, I believe we are seeing the beginnings of that.

Saturday, May 22, 2010

The Last Yard Sale

“This is almost certainly the last yard sale we’ll ever do.”

That was a comment at one of the 11 yard sales I visited this morning. There was a similar sentiment at another one of the sales. I found these comments noteworthy because they came at two of the most successful sales I saw today.

A yard sale is rarely a financially impressive return on the time that the people organizing it put in. Imagine it as a challenge on a reality TV show: “We want you to raise money by selling the excess items you will find in this house — but you cannot sell anything that is necessary to the functioning of the household, and you must raise enough money to pay the salaries of the camera operator and lighting and sound technicians who will be recording your efforts.” Not likely, right? Along the same lines, the time you put into a yard sale is not likely to bring in as much money as putting the same amount of time into your own day job (or a job search, if necessary).

Yard sales make sense not for the money they generate but as a way to focus your efforts on taking away clutter and freeing up space in the house. The value of the freed-up real estate (such as shelf space and closet space) is greater than the money that comes in at the yard sale. But how many times can you go through the house and find enough clutter to hold a yard sale? Only about three or four times, over perhaps a period of five to ten years. After that, most of the clutter is gone. Search again, and you’ll still find clutter, but it won’t be nearly enough to hold a yard sale. You won’t want to sit outside for a day with five or ten boxes of stuff hoping to bring in $100. It makes more sense to load the boxes in the car and take them to a charity. Nor does it make sense to save things up for a few years for the next yard sale. That’s not a good use of real estate either.

This means that yard sales make sense as a transitional event. After you find that your material life is decidedly out of balance, a yard sale is one possible step in the process of getting things back in balance. Once that process is complete, though, there is no more reason to have a yard sale. When people declare the last yard sale, they’re saying they have their material lives under control again. And what that becomes a trend, as it appears it may be, it‘s a sign of a fundamental change in the consumption side of the economy.

Friday, May 21, 2010

This Week in Bank Failures

The U.S. House and Senate have passed quite different versions of financial system reform, and will now look for a way to combine their bills. In addition to the regulatory reforms for banks, the bill will likely include a formal mechanism, aside from bankruptcy court, to resolve major financial institutions that fail. More importantly, the Fed will probably be prohibited from making the kinds of loans it made in 2008 to keep insolvent banks limping along. Will the bill break up the banks? Not likely. It may give regulators the authority to break up oversized financial institutions, but probably only in a theoretical way that would not even prevent a merger of two of the five largest banks.

FDIC-insured banks are still barely breaking even. Their combined profit for the first quarter was $18 billion, which means most banks are not making a significant profit.

The economy as crazy quilt: We saw record high home foreclosure and home mortgage delinquency rates and a 19-year low in mortgage applications. This means that people are not able to put much financial energy into buying a house. At the same time, home builder sentiment is at the highest level in nearly two years, and housing starts are higher than last year’s levels. This means home builders will be borrowing a lot of money and building a lot more houses and condos, but consumers will not be buying them. If this follows the recent pattern, the builders and the banks that lent the money for the construction could find themselves in financial difficulty less than a year from now.

One Chicago bank, ShoreBank, appears to have raised enough new capital to keep going. It may have helped that ShoreBank has had a strong emphasis on residential renovation loans, which aren’t facing quite the same degree of economic stress that other Chicago banks are seeing in their loans for off-kilter commercial real estate development projects.

Some observers are calling ShoreBank’s success in finding capital suspicious, as only about 1 out of 5 banks looking for capital these days have been finding it, and the bank is a community-oriented bank in the President’s hometown of Chicago. One blogger thought the involvement of Goldman Sachs as a lead investor was suspicious, though that is often the role of Goldman Sachs in an investment deal of this scale — that is to say, a small scale that would be handled by a fund manager at Goldman Sachs. Two members of Congress sent a letter to the White House asking it to disclose any involvement it might have. ShoreBank, though, says that it has been conducting its own fund-raising campaign, and that the White House has not had any part in it. The whole ShoreBank conspiracy theory could just be a product of the heightened imagination of a Chicago news media that just spent three months poring over every detail of the failure of a bank owned by relatives of a Senate candidate.

One small bank failed tonight. Pinehurst Bank had $58 million in deposits at a single location in St. Paul, Minnesota. Wisconsin-based Coulee Bank paid a 1.33 percent premium for the deposits and is also purchasing the assets.

Thursday, May 20, 2010

Volcanic Ash Meets Arctic Ice

The airport at Svalbard was closed yesterday, though it has now reopened, as an ash cloud from the Eyjafjallajökull volcano in Iceland moved north and spread out across the Arctic Ocean. The southerly winds were good news for travelers in Europe, where airports reopened and hundreds who had been waiting a day or two got clearance to fly to North America. But it is not good news for Arctic sea ice.

At this time of year, the whole ocean north of Svalbard is covered with ice in all directions, to the left or to the right. Air tends to sink at high latitudes, so volcanic ash clouds don’t stay elevated for long in the Arctic. Probably half of the ash cloud will be settling today across a broad area of ice north of Svalbard and Greenland, where it will make the ice melt faster. Much of it will reach the coast of Siberia, but winds could carry this part of the cloud offshore again before it reaches the surface.

Ash is much darker than the snow pack that normally protects the Arctic ice cover from the sun. The ash will absorb heat from the sun and melt the snow and then the ice, much the same way that cinders and grit are traditionally used to treat snow-covered surfaces where I live in Pennsylvania. But while we want to remove winter snow and ice from the roads here, no one wants the Arctic sea ice to melt away.

It is hard to predict the magnitude of the ash effect; the importance of soot on the Greenland ice sheet has been recognized only recently, and we don’t have much experience to go on to guess the mass of the ash that is being deposited on the Arctic today. However, we do know that even tiny specks of industrial soot have significant effects on ice melt in Greenland. Some scientists who doubt the magnitude of the effect of carbon dioxide levels on polar ice melt argue that particulate matter, such as soot, is having a greater impact on the Arctic ice than the increasing carbon dioxide levels are having. It is safe to say that any particulate matter that falls on ice in sunlight will melt many times its own weight in ice. The volcanic ash from Eyjafjallajökull is light gray when dry but turns into a sticky black goo when wet, and it won’t take long at all to get wet as soon as it lands on the snow. Once there, I have to imagine it will stay in place until the ice melts through far enough to break up and tip over.

This volcanic ash event comes in a year when the North Pole ice is only about 1 meter thick, much less than the traditional 5 meters. The thicker ice blew away in the late winter, moving first toward Alaska, then turning toward Chukotka, where much of it has piled up against the coast to melt. The ice in the area of the North Pole is mostly first-year ice that formed last fall off the Siberia coast. Even without the addition of volcanic ash, it had a chance of melting through and breaking up this summer. With the arrival of volcanic ash just at the period of maximum sunlight and most rapid melting, the chance of that happening is increased. Coincidentally, today is also the day when 24-hour sunlight reaches Svalbard, so there will be no nighttime at all for the next two months in any place where the ash falls today. And the distance from Iceland to Svalbard is similar to the distance from Iceland to the European mainland, so on any given day, there is a chance that Eyjafjallajökull and the winds could send another ash cloud in that direction.

Wednesday, May 19, 2010

Wall Street Bailout Costs Specter His Senate Seat

At the time of the Wall Street bailout, I was one of millions of voters who wrote to Sen. Arlen Specter to warn him of the disastrous consequences to the global economy if the bailout bill were passed. It was the biggest public outcry in the history of the U.S. Congress, large enough to bring down both the House and Senate web servers for half a day at a time, something that had never happened before and has never happened since, and Specter, having a key position in the Senate, got more than his share of comments. He paid them no mind. This is the position paragraph from the e-mail message he sent me on October 3, 2008, a message I assume his office sent to everyone who contacted him on the subject and had an e-mail address:

I reluctantly supported this package because the failure of Congress to act would run the risk of dire consequences, including an economic downturn which could cause more foreclosures, jeopardize retirement accounts, and further restrict credit which is necessary for small businesses to operate. I am philosophically opposed to bailouts. I think that when you have Wall Street entrepreneurs who take big risks to make big profits and they go sour, they ought to sustain the loss themselves and not look to the government for a bailout which ends up in the laps of the taxpayers. However, I supported the plan to avoid economic disaster that would extend well beyond Wall Street.

I am convinced that more than 100 House members and a few Senators were duped into voting for the bill by leaders who persuaded them that it was something that it was not and that the situation was something that it was not. Specter was not a victim of the situation, however. He must have fully realized that the Wall Street bailout was simply a way to exploit a crisis in order to justify an government money giveaway on a shockingly large scale, a sort of going-away present from the Bush White House to its supporters on Wall Street. Specter must have realized that passing the Wall Street bailout would turn a situation that was a crisis for speculators and crooks into a crisis for the whole national economy — witness his language above in which he tries to position the Wall Street bailout legislation as an attempt to avoid the exact “dire consequences” that it was instrumental in bringing about.

This is easier to see now than it was at the time. As an economist, I could forecast the effects of the Wall Street bailout, not very accurately, to be sure, but in enough detail to know that it would not be the rose garden that people in Washington were promising. With the benefit of hindsight, everyone can see what happened in 2009. Wall Street bankers got richer while elsewhere, the economy staggered. There was the highest rate ever of home foreclosures and evictions. Lots of retirement accounts were wiped out, raising the novel tax question, “What do you do when your IRA account is in the hole?” The largest business lender and the largest business credit card issuer in the country both went bankrupt, and by fall, lending to small businesses and even to major national retail chains was so tight that stores could not even borrow money to put merchandise on their shelves for the Christmas season. Worst of all, the U.S. economy was closer to economic disaster at the end of 2009 than it was at the beginning. Other things happened too, but I thought I would just go through the list of things that Specter said the Wall Street bailout would prevent — things that it actually, to a significant extent, caused. Some of this hardship would have happened anyway, but much of it was put into motion by the Wall Street bailout. The bill led to a disastrous series of events, and the world will be paying the price for a long time to come.

None of this, of course, mattered to the people who ran the show in Washington at the time. What mattered was to profit from the atmosphere of crisis. And I don’t want to exaggerate Specter’s involvement in this. He objected strenuously to many of the details of the bailout bill, but he never spoke against the core idea of it, and in the end, he saw fit to rubber-stamp it. It was something he would explain to the voters later, yet when the time came to run for office again, he had very little to say about it. But then again, how do you explain away the biggest giveaway ever, especially after the world can see how disastrous the consequences have been?

And that brings us to where we are today. Specter lost his primary by an 8-point margin. And what is particularly telling is that he lost to a candidate who held nearly identical political positions. The way political strategists in Washington figure it, it is impossible to defeat an incumbent by merely copying his political stance, doubly impossible to do so for a relative unknown running in a primary election. But these are the same strategists who say that if you screw the voters more than a year before the election, they will forget by the time election day rolls around. It’s a strategy that didn’t work this time.

Tuesday, May 18, 2010

TV: “We Need to Get Paid”

The Variety headline from Sunday tells the story: “TV eyes online, races to save biz model.” The TV industry knows it is losing its captive audience as viewers have more options, but it is only running in its sleep, planning the future as if 2015 will be soon enough to face its current challenges.

How deep is the denial across the television industry? This passage from the Variety story sums it up:

“There is going to be tension between our business models and the immediacy and ubiquity consumers demand,” says Tom Rothman, chairman of Fox Filmed Entertainment. “We need to get paid.”

Indeed, “we need to get paid” was the mantra of top execs who spoke at the Cable Show confab in Los Angeles last week. TV Everywhere initiatives and the enhancement of on-demand services of all kinds were the dominant topic at the event, the annual conference and exhibition hosted by the National Cable and Telecommunications Assn.

The problem with that “mantra” is that in a competitive economy, it is not the executives but the customers who decide who gets paid. The television industry got used to the idea that they could squeeze more money out of TV viewers because, for a quarter century, they had an effective monopoly. Cable companies provided the only practical channel to get hours of video into homes, so anyone who had a deal with the cable companies was sitting pretty. They could deliver any kind of high-quality content and people would watch.

Meanwhile, the same weekend the television industry was huddling to try to decide the future of our collective eyeballs, YouTube passed the 2 billion mark — that’s 2 billion movies per day. From Wired:

YouTube’s viewership now exceeds that of all three networks combined during their “primetime” evening time slot, with more than 2 billion views per day, Google announced Sunday.

In the real world, where there are not three, but four or five major television networks, depending on how you count them, along with hundreds of other channels and more than 100 other countries, it’s clear that YouTube has a long way to go before it can claim to be bigger than television. At the same time, though, it is also true that YouTube contains only a small fraction of the video seen on the Internet (40 percent according to comScore, but the actual share is less than half of that after you add in the video sources not hosted by advertising networks). And you have to consider that YouTube has been at it for only five years.

So if the message from TV executives, “We have to get paid,” the message coming back from viewers is, “You have to compete in the real world now. Where do you fit in?” It’s a message that the TV industry isn’t yet ready to hear.

Monday, May 17, 2010

Consumers Making Credit Card Payments

Consumers are making credit card payments — not as well as we would hope, but not any worse for the consumer spending binge of the last two months. That’s the picture from today’s reports from credit card banks. There was a slight decline in 30-day delinquencies, while charge-offs increased at some banks and declined at others. While in a way this is good news, the level of delinquencies and charge-offs is still bad news, showing that consumers aren’t keeping up with their commitments. Charge-offs, the best measure of the cost of credit card delinquencies to banks, are still at unsustainable levels, hovering around the 10 percent (annualized) range, based on the reports that have come out so far.

If the state of consumer credit card payments is showing a slight improvement, it is mainly because consumers are getting out of the credit card habit. If “pay later” is the credit card mentality, debit cards are more likely to lead people to “buy later,” an approach that makes them more likely to save enough to make credit card payments. This way of thinking may affect the credit card purchasing decisions of consumers who use both debit cards and debit cards, a group that now includes about half of U.S. consumers.

It is hard to make direct comparisons from month to month or year to year in credit card statistics because the role of credit cards in the economy is changing so rapidly. This year, many banks have stopped charging over-limit fees, and since over-limit fees were sometimes included in their entirety in the minimum monthly payment, the elimination of the fees could lead to a substantial increase in on-time payments. The hardest minimum payment to make on a credit card is the one for the maxed-out card with fees added on top. If this is what is happening, it does not necessarily indicate larger payments or a greater ability to pay on the part of consumers.

Sunday, May 16, 2010

Jelly Beans

My marathon running experience this morning persuaded me that jelly beans are the hot new fad in distance running. Several of the water stations around the course were offering jelly beans along with the usual water and Gatorade.

The advantage of jelly beans is supposed to be ready energy, mostly coming in the form of glucose. This unabashed food-as-fuel philosophy stands a century of nutritional research on its head. Only traces of enzymes, essential fatty acids, minerals, and protein here, and no vitamins to be found - because sometimes all you want is something to keep you running for another mile.

It remains to be seen whether the jelly bean idea will stick. The small handful of jelly beans I ate about 4 hours into the race seemed to make the next mile go a little faster, but the extra energy didn't last any longer than that. Other runners, though, seemed more convinced of the power of jelly beans, carrying a small supply of them along for the entire race. And they ran faster than I did. So there might very well be something to it.

Saturday, May 15, 2010

Convergence in LED and Solar Cell Designs

LED light sources and solar cells are both on the verge of price thresholds that should make them everyday household products, and suddenly, a lot of scientists and engineers believe they have come up with the one technological breakthrough that will make the difference. In the process, they are showing us how similar the two technologies are.

For example, in both LEDs and photovoltaics, there is a lot of excitement this month about new techniques for manufacturing tiny ridges and grooves in the panel surface. The subtle variations in the surface shape, if formed precisely enough, make the light transfer more efficient, and it doesn’t particularly matter whether we’re talking about light going out or light coming in.

LEDs, of course, convert electricity to light; photovoltaics convert light to electricity. Both are manufactured as flat panels with lithographed electrical grids and other techniques in common. I am starting to wonder how long it might be before someone figures out a way to combine the two technologies, to make a single panel that converts light to electricity in the daytime and converts electricity to light at night. Or, a panel that converts light to electricity on the top surface and converts electricity to light on the bottom surface.

A device that converts energy from one form to another is a transducer. The idea of turning a transducer around is not new. Microphones and loudspeakers are also transducers, and any smallish loudspeaker, such as the ones you find in headphones, can also be used as a microphone, and some famous pop vocal tracks have been recorded this way as a special effect, using headphones as microphones.

Whether LEDs and photovoltaics achieve the same degree of reversibility or not, it sees likely enough that they will end up using much of the same manufacturing technology. This means that some of the breakthroughs in generating electricity will also serve as breakthroughs in saving electricity.

Friday, May 14, 2010

This Week in Bank Failures

The FDIC is trying to work out new securitization rules that won’t lead to the collapse of the credit card business after the current grandfather clause expires September 30. It is a tricky tightrope to walk. Regulators have little to go on as they try to guess how hedge funds and other investors will react to the new structure of the industry on October 1. For the past decade, credit card debt has been funded mainly by hedge funds who buy securitizations of the debt from the issuing banks. The increasingly strained relationship between banks and investors led to the collapse of Advanta Bank a year ago and threatens several more credit card banks this year. Changes in accounting rules require new rules for securitizations that will be considerably less favorable to both the banks and the hedge funds.

There are more Illinois bank failures to come, and tonight’s was Midwest Bank & Trust Co., which recently had 26 locations around the Chicago suburbs, though it apparently had 23 at the time of its closing. It had $2.4 billion in deposits. Ohio-based Firstmerit Bank is taking over the deposits and purchasing the assets.

Midwest Bank & Trust Co. got $85 million in TARP funds, but needed to raise at least $125 million more to keep going. Huge losses in its securities portfolio wiped away most of its capital, leaving it unable to absorb the inevitable losses that it would take in its loans for Chicago-area commercial real estate.

The bank hired a new CEO last year in an effort to turn its fortunes around, but while it was able to gain some concessions from creditors, it had nowhere to turn to round up the new capital it needed. It recorded $400 million in losses in 2008 and 2009, while it saw its stock price fall from $12 to 40¢ per share.

There were three small bank closings, each with over $100 million in deposits:

  • New Liberty Bank, one location in Plymouth, Michigan. Successor is local bank Bank of Ann Arbor.
  • Southwest Community Bank, one location in Springfield, Missouri. Successor is Arkansas-based Simmons First National Bank.
  • Satilla Community Bank, one location in Saint Marys, Georgia. Successor is Ameris Bank.

Can Microbes Contain the Oil Spill?

Following the daily NOAA extent maps for the oil spill in the Gulf of Mexico, it is easy to see that the oil is spreading out, but it is not advancing as rapidly as or reaching shore in the volumes that the more gloomy scenarios had predicted. Weather will play a substantial role in the movement of the oil slick, but extrapolating from what we’ve seen so far, it seems it could take months for the oil spill to spread across the eastern half of the Gulf of Mexico to reach Florida and Cuba.

Part of the reason is the presence of oil-eating microbes. They are part of the natural surroundings in an area where a small amount of crude oil leaks into the water every day. These microbes are surely killed off along with everything else wherever there is a heavy concentration of oil, but can flourish if the oil is light enough, and I have to imagine they are doing more than all the human efforts combined to control the light outer edges of the spill.

The scale of the oil containment effort is tiny compared to the scale of the problem. NOAA reports “more than 5 million gallons” of oily water removed from the gulf. That sounds like a lot until you compare it to the extent of the spill, possibly 250,000 square kilometers today (that’s 3 percent of the area of the Gulf of Mexico). Imagine taking one bucketful out of each square mile of sea water and you can see how little difference this would make. With all our efforts able to collect less than a tenth of the oil spilled so far, we’re mostly at the mercy of natural forces to limit the damage from the spill.

Wednesday, May 12, 2010

Gold and Globalization

Gold has long been associated with magic, and nowhere is this more evident than in monetary politics. Gold is the closest thing there is to global money. Gold had a major role in the trend toward globalization a century ago. Yet gold also has staunch supporters among the outspoken opponents of globalization. Some of the same people who call for the repeal of all international trade arrangements are also calling for the adoption of the “gold standard,” that is, giving gold the official status of money. The magic of gold will apparently overcome this contradiction.

Part of the appeal of money made from gold is that the value of gold is not easily manipulated. It is affected daily by events everywhere in the world, so it is not able to be controlled by anyone one country or any business located at a particular place in the world. But this also means that everyone is at the mercy of events elsewhere when it comes to the value of gold. One spectacular gold find anywhere in the world, or the first mining expedition to the asteroid belt, could cause unpredictable and uncontrollable inflation everywhere in the world, if the world’s money were tied to the value of gold.

The history of gold as money is riddled with hugely unpleasant episodes. Gold is deflationary at times when the working population expands faster than the supply of gold, which is most of the time, but it becomes abruptly inflationary with no advance warning whenever the gold supply increases. This created, over the ages, boom and bust cycles that make our recent experiences with boom and bust look tepid by comparison. The global nature of the gold supply means that economic expansion in one geographical area is likely to be accompanied by depression in other areas. As a global commodity, gold is not subject to the rule of law, so when gold was money, pirates and bandits had an outsized influence on economic matters.

The outlaw quality of gold is part of its appeal. If you have gold, you are rich, rich enough to thumb your nose at the law. If one country tries to use laws to control your behavior, you can go to another country. This, though, is just what people complain about in multinational corporations. It goes to show that you cannot tie money to gold without unleashing the worst effects that globalization has to offer.

Money, ultimately, is too flexible, too magical, to be tied to something as mundane as any single material. Fundamentally, money is the effect of spiritual forces such as intention and imagination. If there were no hope and no new ideas, then perhaps gold might serve as money again — but only temporarily. The truth is, money outgrew gold a long time ago.

Tuesday, May 11, 2010

A New Fashion Trend

I am starting to see fashion trends again, actual visible trends in new clothing for the first time in three years. The new clothing styles are decidedly less serious than we’ve seen lately, with colors and stripes designed to be noticed, and simple, functional fabric that won’t price clothing items beyond the reach of the newly thrifty consumer.

On my short visit to the mall early Friday evening, the one store that was busy with customers was H & M, and I think that was not just because of their price cuts, but also because of the streamlined clothing designs they were offering. Other stores selling classic designs were not doing so well — why buy a clothing design that you have already?

The fact that there can be any fashion trend at all is a sign that consumers are coming to a new sense of balance. I know people who a year ago wouldn’t buy a bar of soap, but are now buying small items such as shirts and hats again — not in large quantities, to be sure, but also without much hesitation. It is expected that people who cut their idea of the cost of living drastically will go for a period of time spending almost nothing, but then will start to spend again, at a lower level than before. I see signs that this may be happening, and the presence of a fashion trend is one of those signs.

Monday, May 10, 2010

Are Secret Derivative Trades a Fundamental Right?

I’m pleased to see that the subject of transparency in derivatives has become part of the current political conversation, even in the Senate, where amendments on the subject are being debated. Part of the discussion is the question of how much people who engage in derivatives trades should have to disclose.

Some people on the other side of the question have been arguing that derivatives trades are covered under the basic right of business secrecy. A business can keep its business deals secret, up to a point, so why shouldn’t the derivatives be included in that veil of secrecy?

The answer, quite simply, is that some things involve the public too directly to be a secret. If you own real estate, if you file a patent claim, if you take one of your customers to court — it is well accepted that there is no right of secrecy in any of these actions. If you sell stock in your business, or if you have a license to operate a bank or insurance company, you have to disclose your financial condition and results in considerable detail. I have yet to hear anyone present a convincing case that derivatives trades are any less a public concern than any of these matters. It is impossible to tell whether any business is solvent or insolvent without knowing the totality of its outstanding derivatives. If a business is insolvent, that will shortly become a legal matter in which the right to business secrecy disappears. Yet we have seen one business after another disguise its insolvency for two or three years by issuing or trading in derivatives — AIG being the most prominent current example, but this is a practice that goes back a generation. More than a fourth of the banks in the United States, I am told, have used derivatives to take assets off balance sheet in order to disguise their true financial condition. There should not be any right of secrecy in any such arrangement.

Businesses also use derivatives for reasons other than misleading people — yet who is to say what the meaning or purpose of a derivative is if it is kept secret from the business’s stockholders or creditors? If a business depends on derivatives as part of the normal course of business, that should be disclosed in full — because when the derivatives contracts fail, as happened on a large scale in 2008, it affects the stockholders and creditors.

I have said it before, but I will repeat it here: we will not have any idea of the true state of the financial system, or of any corporation, until its derivatives are known. The rule should be simple: any derivative that is not published can’t be enforced. I don’t believe that any exceptions are needed. Secrecy in derivatives trading is not a fundamental right — rather, it is a recipe for exploitation and deception. All derivatives should have been published five years ago when it became clear that they were at the heart of the financial sector’s troubles. That is still true today.

Sunday, May 9, 2010

The BP Oil Spill Was Not an Accident

Yesterday, as I was writing a post about the role of methane hydrate crystals in the oil spill containment efforts, a consensus had already formed among engineers and experts that the same methane hydrate crystals that caused the silo to fail also caused the original explosion and oil leak. This means that the oil leak was not an accident at all, but the inevitable result of the technology that was being employed.

If a tree falls in a minefield and causes some of the mines to go off, that is not an accident — it’s something you expect if you put a minefield near trees. Similarly, the BP explosion was not an accident. If the explosion had not occurred on the day it did, it would have occurred the next day, or the next week. The explosion was going to occur, and soon, and there was nothing anyone could have done to stop it, except to not drill the oil well.

To explain this, I have to explain the physical nature of methane hydrate crystals. Methane is a familiar hydrocarbon that forms naturally wherever plants decay. It is usually known as natural gas. In the atmosphere and in the upper levels of the ocean, it is a gas. Under very high pressure in the presence of water, however, methane forms a solid crystal, and that’s what happens on the sea floor under about 500 meters of water.

This is a highly unstable situation, however, because methane in this solid form is lighter than water and tends to rise as soon as it can work its way loose from whatever mud or other material is holding it in place on the sea bottom. As it rises, the water pressure around it falls, and when the pressure falls enough, the methane turns to gas in an explosion. This is not the same as the explosions that you hear about from time to time when natural gas breaks free from a container and catches fire. In that situation, it is the combustion that causes the explosion. There is no fire in the explosion of methane hydrate crystals. Just the fact of the methane converting from solid to gas is enough to create an explosion. However, the methane gas then bubbles up to the surface, and if it encounters the slightest spark, then it will catch fire and create a second explosion. This, apparently, is the sequence of events that occurred in the BP oil platform. There was a rush of methane into the platform, under so much pressure that workers were injured by flying furniture. A fire occurred. But the oil spill is not the result of the fire, but the result of the original underwater explosion.

Was it a freak accident that methane and crude oil happened to be in the same place? Hardly. You expect to find methane and crude oil together. They are both hydrocarbons. They are created together by the same geological processes. Wherever you drill for oil, you expect to get methane mixed in, and if you drill in deep enough water, you would have to expect the methane to be in solid form.

Yet this is not what BP planned on. Its deep-water oil well was drilled using the same technology that is used for drilling in shallow water. Engineers are still trying to figure out what to do about the methane hydrate crystals. There has to be a mechanism to separate the methane from the crude oil at the sea floor, before anything is brought up to a higher level where the water pressure is less and the methane will explode. Yet no such technology exists.

BP has started work on a relief well, which will duplicate the effects of the original well, and will therefore run into the same problem of exploding methane. It will be extraordinarily good fortune if the relief well can operate for any longer than the original well did, since it is drilling into the same oil reservoir with the same methane mixed in.

All this means that we currently have no plan whatsoever to contain an oil spill that, at the rate it is going, will cover the entire Gulf of Mexico by the end of the year. If the relief well fails in the same manner, it will double the rate of the oil leak, without providing any added control over the oil.

Yet no plan doesn’t mean it won’t happen. This is a solvable problem. Fundamentally what is needed is a refinery-style device, a giant filter that can separate crude oil from methane at the sea floor and direct them up to the surface separately. If we had known what we know now, this would have been part of the original design for the oil well. The physical nature of methane hydrate crystals has been reasonably well known for 25 years, so it would have been prudent to design with them in mind in the first place. It is unfortunate that both BP and the U.S. Department of Energy thought it was a good idea to conduct an experiment on this scale with such ill-prepared technology, when we could have simply waited until the right technology was available.

But we no longer have that choice. Prior to this event, if someone had told me, “We’re going to create a simple kind of refinery and operate it on the sea floor,” I would have said that it was a crazy idea that would never work. But now it has to work — unless someone has a better idea.

Saturday, May 8, 2010

Oil Containment Silo: More Questions Than Answers

BP lowered a building resembling a silo over the leaking oil well in the Gulf of Mexico. It was hoped that the structure would mostly contain the oil at that point and allow it to be piped out to the surface. On the initial attempt, though, it didn’t work at all. It turned out the building was much too small to serve this purpose, and the results will give physical chemists and perhaps geologists some puzzles to ponder.

Gas hydrates — think of them as methane ice — filled up the silo, threatening to lift it well above the sea floor, and preventing any significant amount of oil from entering.

The silo has been set aside, still on the sea floor, as engineers try to figure out what to do. A much larger silo, almost like a refinery, will probably have to be designed and put in place. This structure will separate the gas hydrates from the oil and allow each to be pumped out to the surface separately. Before this design can be put together, though, some questions in basic science will have to be answered.

It is not the easiest scenario for basic science research, with the clock ticking and all the beaches and wildlife of the Gulf of Mexico at stake. You could make a case that this scientific knowledge should have been assembled before the oil well was drilled. Now that we are here, though, I believe there is reason to hope that scientists can come up with these answers in time to make a difference.

Friday, May 7, 2010

This Week in Bank Failures

The five largest U.S. banks have a substantial exposure to Europe, according to an analyst report released yesterday. This could lead to a decline in the banks’ stock market value, affecting their access to capital, as investors grow skittish about a possible monetary crisis in Europe. If investors were nervous already when the week got started, their nerves are frayed after two days of volatile stock market trading.

Banks aside, the stock market appears to have hit a peak last week, and if a sustained decline follows, it could wipe out the profits of many of the giant banks. For the most part, they have been reporting losses from operations for the past five quarters, but have made up for their operating losses with trading gains.

A financial regulation reform measure is starting to take shape in the Senate, with agreement in principle on an amendment that would prevent the Fed and FDIC from making the kinds of loans that prevented the collapse of several giant banks and related institutions in 2008. As of last week, the Senate bill included only token reforms in the regulation of banks, but changes being discussed would add some substantial steps that would limit the risks that banks could take. Most of the experts testifying before the Senate committee have suggested ways in which the proposed measure could go farther, either in requiring disclosure or limiting the risky activities of banks and related businesses. Among senators, there appears to be a plurality of support for measures that would either require the largest banks to shrink or put them at a competitive disadvantage compared to other large banks.

The NCUA liquidated a credit union last weekend. The NCUA had put St. Paul’s Croatian Federal Credit Union into receivership, and after looking at its books, it determined that the credit union was too far in the hole to rehabilitate. Checks are being sent to the credit union’s members for the amount of their deposits.

Bank of America announced a settlement of a securities lawsuit against Countrywide Financial. Once the largest U.S. mortgage lender, Countrywide collapsed at the beginning of 2008 and was acquired, along with its problems, by Bank of America. Under the terms of the settlement, Countrywide will pay $600 million and its auditor will pay $24 million to settle allegations of securities fraud and insider trading. The settlement does not cover three executives, who still face an SEC securities fraud action.

There were four small bank failures tonight, each with less than $300 million in deposits:

  • 1st Pacific Bank of California, 6 locations, based in San Diego. City National Bank is taking over the deposits and purchasing the assets.
  • The Bank of Bonifay, 5 locations, based in Bonifay, Florida. First Federal Bank of Florida is taking over the deposits and is purchasing 32 percent of the assets.
  • Towne Bank of Arizona, one location, Mesa, Arizona. Commerce Bank of Arizona is taking over the deposits and purchasing the assets.
  • Access Bank, two locations, Champlin, Minnesota. PrinsBank is taking over the deposits and purchasing the assets.

Thursday, May 6, 2010

Stock Market Decline Follows Sobering Retail Reports

The main takeaway from today’s 3 percent stock market decline is that big-money investors had been expecting too much from consumers. A large increase in retail sales in March was followed by indications of a slight year-over-year decline in April, and the stock market notched down as some of the early reports trickled in.

The economic recovery cannot be led by consumers, as household income will not rise fast enough this year to make up for consumers’ declining access to credit. Expectations of a consumer-led recovery were apparently the reason why the stock market had edged up to unsustainable levels this year. The thought of a decline from the already low levels of a year ago took the wind out of those sails.

The U.S. economic recovery will probably have to be driven by exports, but improvements in exports will not come quickly if the European economy is as shaky as it looked today — another factor that could have led to expectations of a slower recovery.

The abrupt 5 percent decline in the middle of the day, which quickly reversed, appeared to be mostly a technical event, but the fact that the market fell more than 3 percent in just a few minutes before support arrived shows that investors lack confidence in the stock market at its current levels. There were indications too that some institutional investors were selling stocks to buy bonds this afternoon. That is a sign that those investors do not expect the stock market to improve from its current level during the next three months.

Wednesday, May 5, 2010

Crazy Things Happen

I was just now getting to see some of the photos and video from Nashville, showing the crazy flooding that central Tennessee has been experiencing since Sunday. By one measure, 13 inches of rain fell over the weekend, and areas that aren’t even within walking distance of a river have been affected. Nashville is one of the centers of the music industry, and I imagine I will hear later that some of my friends there had to evacuate, though I am hopeful that none of them have too much damage or inconvenience as a result of the flooding. The flood waters in Nashville apparently started to decline yesterday, and while people at some places got in to assess flood damage today, other facilities may have to wait until Saturday or Monday for their streets to reopen — I know from my own experience that flood waters rise much faster than they fall.

If I didn’t realize how big the Nashville story was until today, it‘s partly because there has been so much other news of the consequences of unexpected and unplanned events: a historic oil spill below the mouth of the Mississippi River, volcanic ash closing some European airspace again, not to mention Greece, Goldman Sachs, and all the other ongoing turmoil that is entirely man-made.

Most of what happens in life, and economics, is capable of being planned, but every day crazy things happen, and then we can set the plans aside and succeed based on how well we respond to events. When you get right down to it, planning is overrated. Being alert and ready to move is just as important.

Tuesday, May 4, 2010

More Volcanic Ash, Airports Close Again

A return of volcanic ash from the eruption in Iceland forced Ireland’s airports to close for several hours today, and airspace over Scotland was also affected. It is a reminder that the volcanic eruption shows no sign of stopping, and intermittent interruptions in air travel may occur for some time to come.

Monday, May 3, 2010

Tylenol Recalls Give Drugs a Bad Name

The recalls of Tylenol products announced in January are still going on, and three more rounds of recalls have been announced, the latest on Friday. The vagueness of the latest recall announcements is hardly reassuring: McNeil found unknown particles, unidentified or unauthorized ingredients (apparently in powder form), and inaccurate doses in tests of dozens of Tylenol products. There is little reason to imagine that this round of recalls is the end of it, so at this point, sick people take Tylenol and related products at their own risk.

So much has gone wrong with Tylenol, it’s hard to list it all. An FDA panel last summer ruled that the liver toxicity of its active ingredient is a serious problem requiring changes in dosage and labeling. A mold-related chemical found its way into the product, and then the required recall was delayed for months because of confusion at McNeil. Since the recalls have been issued, there have been data errors and web server failures, making it hard for people to tell whether the drugs they were taking have been recalled. And to top it all off, McNeil has made up an unbelievable story about a moldy pallet somehow getting into the product, causing the original problems. The FDA, which doesn’t have much of a track record in identifying manufacturing problems in drugs in the first place, is just now conducting its review of the problem. It could be a comedy of errors if it weren’t such a serious matter. But aside from the stories of customers sickened by bad drugs, the entire story is bad news for McNeil and the drug industry. The problems with Tylenol, even little problems like dead links on the web site, tarnish the commercial image of drugs. To sell drugs, pharmaceutical companies have to present them as problem-solvers. Yet drugs can cause problems just as easily as they can solve them, and McNeil seems to keep reminding us of this. This also affects the image of people who use drugs — for everyone who says, “I’m glad there’s a drug for that,” there is someone else who says, “I’m glad I don’t have to be bothered with that.”

Sunday, May 2, 2010

Another Katrina?

Some commentators have suggested that the ongoing oil spill in the Gulf of Mexico could be “another Katrina,” a reference to the major hurricane that nearly leveled New Orleans in 2005. For the most part, the comparison is a stretch. No major cities will have to be evacuated for the oil spill, millions of people will not be made homeless, drinking water and cellular telephone service will continue to be available, oil and natural gas production in the area will not have to shut down completely for a couple of weeks.

In some ways, though, a prolonged oil spill could be just as harmful as a major hurricane. One of those ways, possibly, is the effect on the land area of the Mississippi delta. By knocking over the trees that hold the ground in place, Hurricane Katrina took away significant parts of the land area of the Mississippi Delta. Much of this was land that was below sea level, held in place only by grass and trees. After the hurricane washed the plants away, normal coastal erosion washed away the ground, making it impossible for the plants to grow back. Where there used to be land a foot below sea level, now there is sea water five or ten feet deep.

An oil spill could have the same effect. According the the EPA, light crude oil, the kind that would tend to wash ashore, kills grass quickly, and prolonged exposure to oil can damage the roots of any plant, including trees. No one knows a way to clean up oil from a salt marsh, however, so any oil that gets in will tend to linger there, and from everything we know, we would expect it to kill off most of the plants. If oil kills plants, it has the same effect as a hurricane. The tides can then wash the unprotected ground away, potentially taking away most of the land area east of New Orleans.

This would be a serious problem for the city. The lowlands act as a barrier protecting New Orleans from the waves of the gulf. If they are washed away, it wouldn’t take a hurricane to prompt an evacuation of New Orleans. Any little storm would be able to flood half the city.

The only answer is to keep the oil offshore, as much as possible, and hope for the best. Choppy weather yesterday, though, washed the oil slick right over the barriers that were meant to stop it. If the weather improves and the oil spill can be stopped, there is a chance that the oil can be kept out of the Mississippi delta. If not, though, this event could lead to land losses just as significant as you would see in a major hurricane.

Saturday, May 1, 2010

Evacuating Port 25

Yesterday morning, I got the automated phone call that millions of other Internet users have been getting. The message told me that my Internet service provider was cutting off access to Internet e-mail in its most standard form. To be specific, after June 1, my ISP will block e-mail sent from any computer in a home or small business using port 25. Going forward, only large corporations and Internet providers will be able to use port 25. Most ISPs have made this move already. It’s a problem, though, because port 25 is traditionally the port designated for sending e-mail.

The reason Internet providers have decided to get everyone out of port 25 is that most e-mail that comes across on port 25 is spam. The same could be said, though, of almost any point or component of the Internet e-mail system. If about 99.9 percent of Internet e-mail is spam, then there aren’t many places where e-mail is sent or received where more than half of the e-mail messages are legitimate.

For ordinary Internet users, there are work-arounds, other ways to send e-mail. We are having to evacuate port 25 and use other ports or other protocols instead. This can be a slight inconvenience, but the broader significance of the move is more troubling. What it means is that Internet providers are losing the e-mail war. Spammers are overwhelming the e-mail system, and Internet providers are in retreat. You don’t have to know what an Internet port is to know that it’s a problem to lose one of them to the outlaws. On the Internet, as on the ocean, the number of ports available is not unlimited, and if we cede one port to the outlaws now, it is just a matter of time, perhaps as little as five years, before they control all of them.

Eventually, the Internet e-mail system will completely break down, and I don’t think it will come as a great shock to the world when it happens. People are already moving away from Internet e-mail. It’s a nice thought that you can exchange messages with anyone in the world, but people prefer to get most messages from people they know, and e-mail sent over social networks now exceeds the volume of legitimate e-mail sent over the Internet.

Some e-mail engineers believe, despite all evidence to the contrary, that “port 25 blocking” will save e-mail. Others are mistakenly pinning their hopes on various of the failed ID initiatives of the past decade, including the two that helped make AOL a non-player in the Internet e-mail business. It‘s proof that engineers are capable of nostalgia, but it doesn’t help us arrive at the answer. Ultimately, the current e-mail system is not flexible enough to survive, and we can only hope that network security engineers are consulted when its replacement is designed.