Saturday, April 30, 2011

A Hit From Out of Nowhere

Songwriter Paul Nordquist sent along this item about a threshold moment in pop music:

I predicted years ago that stars and hits would eventually emerge from the free-music world, and here it is, in a totally surprising form.

Rebecca Black’s teen-pop song “Friday” is a huge breakout hit, thanks to its YouTube video and social networking. It’s quite a phenomenon. The buzz is that the song is incredibly bad, the dumbest song ever written. And yet people can’t stop paying attention to it. It’s an iTunes chart hit, and it’s gotten 120 million plays on YouTube.

“Friday” was created by an independent production company on a commission from Rebecca’s parents. That may sound funny, but that’s the production company’s business model. For the price they charged (reportedly about $4000), it’s a decent job. The nominal goal of the whole project was to deliver the video to YouTube so the kid could have her four minutes playing the role of a pop star.

People have blasted the production company for preying on people’s pop-star fantasies, but what they do is more honest and less predatory than the usual record deal.

The song is basic catchy teen pop, not the worst song ever, but easy to mock. The imperfections are what make it interesting. The song and video were done in a rush and on a low enough budget that people can sense there’s something amiss. It almost has the feel of a parody.

This article sums up the story pretty well:

What interests me most is that this is yet another way that music can get funded — by parents, as vanity projects for their teen kids. I’m delighted that this low-budget song has gotten so much attention at the expense of the big-budget record companies.

“Friday” is a big hit. Songs never get 125 million YouTube views. By comparison, “Born This Way,” a more conventional pick for the big pop hit of the year, has 43 million views. Using television as a point of comparison, American Idol is a big hit, but its average audience this season is “only” 25 million. And while “Friday” is musically controversial, that doesn’t explain its success. On YouTube, for example, it has 2 million “dislikes,” a phenomenally large number, but still tiny in comparison to its number of views. “Friday” is a legitimate pop hit that succeeds using the record companies’ own pop-hit approach, but from the record industry’s point of view, it came out of nowhere, from a previously unknown singer who isn’t even trying to make money. She spent less on the production than it takes to outfit a rock band for its first basement rehearsal. Most alarmingly from the record industry’s point of view, she spent nothing at all on advertising or promotion. It doesn’t mean money no longer matters, but perhaps it brings us one step closer to the day when money no longer drives the music industry.

Friday, April 29, 2011

This Week in Bank Failures

How do banks show profits while they are losing money on operations? A new Congressional report fills in part of this mystery, showing that banks borrowed more than $1 trillion from the Fed that they then lent back to the federal government, gaining perhaps $150 billion in interest-rate spreads over the last two years from this twisted mechanism for subsidizing banks.

Of all the bank failures so far this year, the one that will worry the banking industry the most is Georgia’s The Park Avenue Bank. This bank is not to be confused with a New York bank of the same name that failed one year ago, with a charge of TARP fraud filed against its president.

The Park Avenue Bank was a billion-dollar bank based in Valdosta, Georgia, with 11 offices across Georgia and one in Florida. At this point last year, it had announced a recapitalization and reorganization plan that looked to put it on reasonably sound financial footing again. Regulators were not impressed, however, and by the end of the year, the Fed had issued a prompt corrective action ordering the bank to take any available steps to shore up its capital, which usually means arranging to be sold to another bank or investor. If The Park Avenue Bank could fail, as it did tonight, then so could a thousand other banks that have taken some hits but look like they are set to weather the current storm.

The Park Avenue Bank made some reckless loan decisions, former employees have said, but its main mistake was to put most of its money at risk in the metro Atlanta real estate market, which collapsed hard and early, compared to real estate nationally.

Bank of the Ozarks is assuming the deposits and purchasing the assets of The Park Avenue Bank along with those of another Georgia bank that failed tonight, First Choice Community Bank. This bank had seven offices but only $310 million in deposits. Its assets were less than its deposits as of December 31.

Another two banks failed in Florida: First National Bank of Central Florida, with six offices in east central Florida, and Cortez Community Bank, with two offices in west central Florida. The deposits were assumed and assets purchased by Miami-based Premier American Bank. The two banks combined had $373 million in deposits.

In Michigan, state regulators closed Community Central Bank, which had $385 million in deposits at four locations. Deposits and assets are being transferred to Talmer Bank & Trust. The president of the failed bank had died of a gunshot wound under mysterious circumstances in October. His disappearance had prompted a run on the bank, and when he was found dead, it did not reassure depositors or the bank’s executives. The bank said in a regulatory filing last month that it was desperately short of cash and would likely not be able to continue operating. The bank was losing money so rapidly it had stopped filing financial disclosures, probably at regulators’ request. Regulators apparently did not close the bank until after it actually ran out of cash.

With tonight’s failures, there have been 39 bank failures so far this year. That’s a slower pace than the past two years, but bank failures are likely to continue at an unusually rapid pace for at least the next five years.

Thursday, April 28, 2011

Walmart Shoppers “Running Out of Money”

A CNNMoney story:

Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

Economists had predicted that higher fuel prices would have consumers making fewer shopping trips and spending less money, and if Walmart is worried about this, that’s significant. Walmart has possibly the best time series analysis in U.S. retail. They can tell what days their customers get paid by how much they spend and the items they buy that day, as compared to the day before. Now they say that their loyal “core” customers are coming in to the store just once a month, right after they get paid, buying everything they need for the month. Some customers are skipping their visit to the store in some months. It’s a sign that consumers are resisting the high cost of shopping trips, a cost that now starts with the cost of fuel.

U.S. fuel prices continue to rise, and the increase has already canceled out the consumer-boosting effect of the latest stimulus package worked out in a deal between the White House and Congressional Republicans in December. An extra $40 in the paycheck doesn’t go far if the cost of filling up the fuel tank is $50. There is some irony in this, of course: the gasoline that consumers burned in the extra shopping trips in February and March are part of the reason gasoline prices have gone up. If U.S. consumers were to somehow become exuberant, something you ordinarily hope for to spur a quick recovery from a recession, the increased driving would send gasoline prices up to $5 a gallon, high enough to put a damper on everything.

Wednesday, April 27, 2011

It’s Only a Game

When real-world problems intrude, games don’t seem so important. Video game sales in Japan have plummeted after the earthquake there. With so much cleanup work to do and with the prospect of rolling blackouts because of a shortage of electric generating capacity, it is harder to imagine spending time and electricity on games.

Today’s revelation of a security breakdown in Sony’s online gaming services, which have been shut down for a week, may do more lasting harm to the video game business, though. Information on the 70 million PlayStation network subscribers was exposed by a flaw in the network. The information obtained by unauthorized network users included names, addresses, and birth dates and may have included credit card numbers and expiration dates. Today’s hot new game, then, is “Spot the Fraudulent Credit Card Transaction,” and so far, gamers don’t seem the slightest bit happy with it. At the same time, millions of subscribers are sure to decide that they are safer canceling their online gaming accounts, taking momentum from an already fading pop culture phenomenon.

Online poker may take a similar, if smaller, hit from the latest revelations of money laundering, fraud, and other troubling practices in the industry. Meanwhile, problems in professional sports, most notably right now the National Football League’s labor crackdown, continue to erode the audience for game broadcasts. Games are supposed to be fun. It doesn’t take much of a hassle to cancel out the enjoyment of a game and push people away.

Monday, April 25, 2011

Transportation Costs Go Up, Shorter Music Tours

If transportation costs go up, music tours are likely to be shorter and more focused on urban centers as music fans travel to fewer shows. To maintain the impact of the tours, more shows will be broadcast and recorded. For many fans the only chance to see the tour will be at home.

The Bee Gees were pioneers at this in the 1990s. Unable to tour, they played a concert only about once every year or two, but maximized the impact with television broadcasts and video releases.

I had the opportunity to see another early example of this approach with the current tour by Tony Kaye and Billy Sherwood. The duo is playing just a few shows in Japan, so I couldn't see the show in person, but one of the shows was recorded for streaming on the Internet. Watching a concert on Ustream isn't the same as being there, but it also isn't the same as missing out on a tour.

Sunday, April 24, 2011

The $2.95 Paperback Returns

While some in the book business are expressing alarm at the revenue opportunity lost with ebook prices as low as 99¢, these prices are not unprecedented in the history of books. A century ago, the price of a dime novel was, as you might guess, ten cents. Some of the oldest paperback books in my collection have prices like 50¢, $1.25, and $2.95. It is not so hard to imagine that, with advances in technology, books might sell for those kinds of prices again.

I am not so sure that lower prices will imply lost revenue for every kind of author. It has always been the case that some authors sell better in hardcover and others fare better in paperback, with the very different price points being part of the reason. Ebooks provide the possibility of price points that may actually be less than the cost of the paper used in a printed book. These lower prices will surely be an advantage for whole categories of authors.

Lower prices do not mean that there is a new opening for low-quality books, however. Consumers are more pressed for time than ever and won't have much patience for poorly conceived and unedited prose. But there may be tens of thousands of skilled authors who are able to connect to an ebook audience even if their appeal is not broad enough or strong enough to stand up to the prices of printed books.

Saturday, April 23, 2011

Cloud Computing: Smooth Operation, Spectacular Collapses

With two high-profile cloud services offline this week, adding to a string of cloud computing failures, it is evident that cloud computing is not the highly efficient solution its supporters had expected. By dynamically balancing its workload, a cloud can operate surprisingly smoothly. There are fewer failures, but the complexity this requires leaves a cloud vulnerable to the kind of total failure that leaves engineers scratching their heads for days on end, working around the clock and missing holidays as they try to patch together something that works.

This pattern of smooth operation and spectacular failure doesn't occur because cloud computing is an immature technology, but because of the way it shifts risks. Auto-balancing works . . . until it doesn't. A system that depends on auto-balancing is likely to work fine right up until the second it fails. This can create the illusion of a reliability that isn't necessarily there.

This principle isn't limited to cloud computing, but applies across a wide range of topics. Tunisia's government, for example, weathered crises one by one until its ruler fell ill. Then it fell apart quickly. As another example, if we adopt the "smart grid" approach to electricity, we have to accept the risk of the weeks-long nationwide blackouts that a smart grid would occasionally produce.

Friday, April 22, 2011

This Week in Bank Failures

Bank failures have struck across most of the United States, but not everywhere. Nine states have not hosted a bank failure in the last ten years:

  • Alaska
  • Delaware
  • Hawaii
  • Maine
  • Montana
  • New Hampshire
  • North Dakota
  • Rhode Island
  • Vermont

An additional two states have had no bank failures in the last five years:

  • Connecticut
  • Tennessee

These states are, for the most part, not adjacent to each other, nor do they seem to have much in common, aside from the presence of most of the New England states. This suggests to me that the recent pattern of failure in banking is more easily considered and defined than the pattern of success. In other words, the banking industry probably has a textbook for failure, and banking executives who do things by the book and keep up with the latest trends are maximizing their chances of failure.

This also means that it is fair to look for lingering systemic failures in the U.S. banking system. The textbooks may be wrong, or the regulations, or something in the sales culture. The technology may be leading banks in the wrong direction, or the accounting conventions may be failing to highlight whole categories of risks. Probably just two or three systematic errors are responsible for most of the recent bank failures, and these are more likely to be identified by studying the failures than by celebrating the successes.

Thursday, April 21, 2011

Trends vs. Intentions

Banks say they’re lending more, but their financial statements say their loan balances continue to decline. Changes happen this way sometimes, with trends and intentions out of sync with each other. This can happen if there is a change in perception that runs in the opposite direction from the intention. In the banking example, perhaps banks are starting to become aware of just how weak many loan applications are. A loan officer might say, “We want to lend money, but a lot of the applicants haven’t quite decided what they want to do — they shouldn’t even be applying at this stage.” It’s similar to the way a lot of people, last year, thought they were driving more because of the lower gasoline prices, but they were actually driving less. They were more willing to drive, but at the same time, they had started to develop more efficient habits for errands, and that new efficiency reduced their driving distances.

When trends run counter to intentions, it just means that the trends are more powerful than anyone realizes. If banks are lending less when they’re trying to lend more, then lending less is just the spirit of the times. When the time comes when they want to lend less, they’ll be lending a lot less. Or, if people say they’re driving more when their odometers say they’re driving less, they are ready to start driving a lot less when there is a reason to.

Tuesday, April 19, 2011

Longer Car Service Life Isn’t Frugality

The story about lower car sales is that it is the result of a financial squeeze on consumers. People have to run their cars longer because they can’t afford to buy a new car right now. If that were the case, though, we should be seeing higher revenue at auto parts dealers as people push cars farther into their useful lives. I went looking for that this morning, and I couldn’t find much sign of it. Auto parts sales are up, but only slightly.

What this means is that people are driving cars farther mainly because cars are better made than in the past. The improvements in engineering are making cars more expensive, but also making them more reliable, so that they can run longer.

Put this together with the reduction in vehicle miles as fuel prices increase, and it points to a pace of vehicle sales that could be much lower than current levels.

Monday, April 18, 2011

The Debt Ceiling and Bankruptcy

People today are talking about the possibility of the U.S. government going bankrupt. It might sound like a great exaggeration, but it isn’t. Strictly speaking, a national government can’t go into bankruptcy, but that is a technical legal distinction that we can leave to the lawyers. All that distinction really means is this: the federal government’s “bankruptcy,” if it were to happen, won’t be decided by a bankruptcy judge, but by the White House and Treasury and, to the extent that it chooses to get involved, Congress.

When is the federal government effectively bankrupt? It has never happened, but if it were to happen, it would happen the day the government hit the statutory debt ceiling. The way things are going, this would happen six to eight weeks from now. Congress can, of course, intervene by raising the debt ceiling, but not everyone in Congress wants to keep the federal government out of bankruptcy.

You see, if the government is in bankruptcy, it will force the White House to cut government spending, and not just by a little, but by about a third, instantly. Some people think it’s the only way to stop the government’s spending spree. Suddenly there wouldn’t be so much money for health care, unemployment compensation, workplace safety, Social Security, border security, public employee salaries, and all the other things that small-government conservatives have been trying to chip away at.

But it wouldn’t stop there. Interest payments on government debt would stop immediately. That’s the part that has Wall Street calling the scenario “Armageddon.” Treasury bonds would be junk bonds, insurance companies, pension funds, money market funds, banks, and individual retirees would be wiped out left and right, the stock market would crash, there would be a run on the largest banks, and the barter economy would make a comeback among people who suddenly had no access to money in any form. With no money for fuel, the military would at least have to park its submarines and airplanes. City buses and subways might have to park too. “Armageddon” is an exaggeration, but a fitting one.

And it is not that the country can completely avoid these consequences if Congress raises the debt ceiling at the last minute. Just by getting as close to the edge as we have already come, the United States has lost some of its financial credibility, which means more of the budget will go to interest payments and less to government services. Treasury bonds could turn into junk bonds a week or two before the debt ceiling deadline — and if they do, their previous investment-grade status may not come bank for years. And there is still the problem of the federal budget, which has to be brought back down to some semblance of sustainability by next year, regardless of debt ceiling or interest rates.

You are sure to hear from a majority of experts along the way that it isn’t possible for the United States to go bankrupt. What they’re really saying is that it’s unthinkable for the federal government to put itself into the painful financial state of not being able to meet its obligations. But as we have seen many times in the last five years, “unthinkable” doesn’t mean that something won’t happen.

Saturday, April 16, 2011

Troubled Banks and Poker Money Laundering

There is a connection between the new crackdown on online poker sites and the troubled U.S. banking sector. It is easier for a criminal organization such as a poker web site to trick banks into laundering money for them when the banks’ internal controls are frayed by financial stress. And it is easier for a multi-millionaire to make a deal with a bank that involves shady financial transactions when the bank is short on capital and has nowhere else to turn.

Yesterday morning a senior executive at a Utah bank was one of the people arrested and charged in an online poker money-laundering scheme. Two of the poker sites, working together, made a deal with the officer which involved “purchasing” the bank (actually just an ownership share) for $10 million and paying a private fee (one wonders whether it could be characterized as a bribe) to the officer. In return, the bank looked the other way as it processed transactions destined for the illegal web sites.

No one else at the bank has been charged, but I have to wonder how much of a future the bank has. In the past, banking authorities have sometimes shut down financially troubled banks almost as soon as criminal investigations became public. But in other cases banks have remained open after their corrupt executives were removed by regulators.

There is little doubt that some of the defendants in the case will cooperate with the authorities, and as a result, this investigation is likely to go much further. The U.S. executives of the illegal poker sites are in obvious trouble, but don’t be too surprised if it turns out that executives of some of the apparently legal sites operating in other countries were also involved in the same money laundering schemes, and end up in U.S. jails. It has happened before.

Friday, April 15, 2011

This Week in Bank Failures

Federal banking regulators are ordering changes after the preliminary phase of the investigation into foreclosure fraud. The key reform that will be required immediately will be that banks (or mortgage servicers) provide a point of contact for mortgage borrowers.

There are far-reaching consequences for the point-of-contact rule for both borrowers and regulators. For borrowers, it ensures that there is someone at the bank they can talk to about the status of their mortgage and any pending actions related to it. Currently, large mortgage servicers route borrowers’ inquiries to call centers where representatives may not have current or accurate information on the loans, but that approach will no longer be permitted. The change also provides a new kind of leverage for regulators. If a person serving as a point of contact for mortgages repeatedly handles mortgages improperly, he or she can be fined or banned from the banking industry.

A criminal investigation into foreclosure fraud is continuing, and the Fed has hinted at regulatory penalties for lenders that participated in foreclosure fraud.

Iceland voters again turned down a plan to have their government pay back deposits from failed banks with a punitive interest rate. The case will now go to an international court, where the depositors are likely to recover only about two thirds of their deposits.

Portugal met its debt payments today, defying expectations that it would need new financing at this point. Portugal is attempting a bond auction next week to cover its payments due in May and June. The Portugal bailout is now in doubt, with European Union countries now thought to be unlikely to approve it. This could be the end of the financial attack on Europe, as investors try to squeeze higher interest payments from the financially weaker European countries one by one. Instead of agreeing to pay ever-increasing interest rates, countries under attack from here forward may simply stop paying interest on their debts. If Europe turns out to be out of reach for financial attack, the United States may very well be the next target.

For anyone who was beginning to hope that the large bank failures were behind us, there were two unsettling reports this week. The quarterly report from Bank of America showed that the United States’ largest bank is still not making a profit on operations and its legal fees are inching up toward $1 billion per quarter, while Wall Street is gossiping about its latest panicky executive changes. Meanwhile, an almost-large Alabama bank, Superior Bank, failed tonight, in the largest bank failure of the year so far.

By most measures, Superior Bank would be considered a large bank. It had 73 locations, 45 in Alabama and 28 in Florida, along with 24 lending offices. But by 2010, it was no longer large in financial terms, with $2.7 billion in deposits at the end of the year. A cease-and-desist order had given Superior Bank until the end of March to shore up its capital and fix its broken business model. It was late with its financial reports and faced a Nasdaq delisting next month after its market capitalization fell below $10 million, 99 percent below its 2006 peak. Its CEO left last month.

By most accounts, the problem at Superior Bank was a sloppy approach to home mortgage lending, with its eye on the number of loans it was writing rather than the quality of loans. Nearly all bank failures in the last year or so have been driven by problems in commercial real estate and real estate development lending, but Superior Bank’s problems point more toward home mortgages.

Community Bancorp, a Houston-based bank holding company that had accumulated capital to purchase distressed banks, is taking over the deposits and purchasing the assets, keeping the Superior Bank name for its newly-chartered subsidiary bank. Community Bancorp had previously purchased Mississippi-based Cadence Bank.

A second medium-sized bank failed in Alabama tonight. Nexity Bank had $638 million in deposits. Its headquarters was in Birmingham, Alabama, and it had two other offices, in Atlanta, Georgia, and Myrtle Beach, South Carolina, but it billed itself as an Internet-based bank. A new bank created by two banking executives, AloStar Bank of Commerce, is taking over the deposits and purchasing the assets.

Nexity’s holding company had been in bankruptcy for nearly a year. Its creditors, the largest of which is Bank of America, aren’t likely to get much from the bankruptcy court now that the FDIC has seized the bank. The holding company filed for bankruptcy after discovering that a quarter of the bank’s loans were in default.

Nexity’s loans were mostly shares in real estate development loans written by other banks nationwide. In theory, the geographical dispersion of loans should have provided some protection from risk, but instead, real estate troubles hit the whole country essentially all at once.

Two banks failed in Georgia. The larger was Bartow County Bank, with four locations just north of the Atlanta metro area. It is fair to say that Bartow County Bank was financially exhausted. It reported $330 million in assets at the end of last year, compared to $304 million in deposits, but the quality of the assets was conspicuously less than you would expect to see in an operating bank.

Hamilton State Bank is taking over the deposits and purchasing the assets.

Also in Georgia, New Horizons Bank was closed. North Carolina-based Citizens South Bank is taking over the deposits and purchasing the assets.

Small banks also failed in Mississippi and Minnesota. Heritage Banking Group had almost $200 million in deposits and eight branch locations, with its headquarters in Carthage, Mississippi, in the central part of the state. Trustmark National Bank, based nearby in Jackson, is taking over the deposits and purchasing the assets.

In Rosemount, Minnesota, a suburb of Minneapolis, Rosemount National Bank was closed. Central Bank is taking over the deposits and purchasing the assets.

The NCUA put two credit unions in conservatorship tonight: Texans Credit Union, in Texas, with 133,000 members, and Vensure Federal Credit Union, in Arizona, with 144 members, mostly employees of Vensure Employer Services. The credit unions will continue to operate under NCUA management.

Thursday, April 14, 2011

Slower Replacement for PCs

PC sales are down from last year, but it doesn’t mean that computers are becoming less important or that people are using them less. It is just that computers last longer than they used to.

More businesses are starting to adopt a consumer-like approach to computer hardware, replacing it only when it is well down the road to breakdown or obsolescence. Businesses still have the idea of replacing a desktop computer every three years and a portable computer after two years, but they are making more exceptions. About three fourths of computer sales are replacements for existing business PCs, so it doesn’t take much of a change in that category to bring the total sales numbers down by 3 percent.

Sales of desktop computers are down the most. That makes sense, as a computer that sits on a desk doesn’t get the wear and tear of one that is carried regularly from place to place. Wear and tear is declining slightly as computer designs become more durable, but obsolescence is declining rapidly as the computing becomes a more mature industry.

I believe business computing could start to shift to a component-replacement pattern, with a regular cycle of replacing disk drives in existing computers. The main reason a whole computer has to be replaced is to provide faster bus speeds, but in desktop computers at least, bus speeds are probably fast enough and have virtually come to a stop in the last three years. If many businesses start replacing computer components instead of whole computers, the sales figures for computers could fall significantly.

Tuesday, April 12, 2011

People Are Driving Less

U.S. gasoline prices have gone up by about third this year. From both economic theory and recent history, you would expect that people would be using less gasoline, mainly by driving less often. From what I can see locally, that is the case. People are still driving to work, and they are stopping at retail destinations on the way home from work, but there aren’t so many trips out after they arrive home.

Data on U.S. imports also suggests a decline in gasoline consumption. The amount of oil imported in February, the latest data available, fell to its lowest level since 2009, though with higher prices for oil, the United States is spending more on oil imports.

Sunday, April 10, 2011

Not Just a Matter of Size

There are no easy answers for the federal budget, so I don’t want my comments here to be taken as a criticism of it. It is far better, in my opinion, that we have the budget we ended up with this weekend than to not have a budget. Still, the budget compromise will have economic consequences that we may not be ready for. It is important to keep the size of the cuts in context: smaller, perhaps, than what will ultimately be needed, but nevertheless the largest decrease in the scale of any national government ever. And it is not just a matter of size. The budget cuts that were finally agreed on were not selected to spare the national economy. Some of the cuts that the House selected will reduce the size of the economy by more than three times the amount of money nominally saved. For these cuts, there is no budgetary gain to be found — the lost tax revenue is about the same size as the foregone spending. Initiatives that will ultimately be needed to get the economy growing again were cut right along with programs that are essential for the safety of workers in the U.S. economy. Productivity, obviously, will suffer as a result, resulting in some ugly GDP numbers and some inflationary pressure.

In terms of the operational footprint of the U.S. government, cuts on this scale have been attempted only once before, in 1981 when Reagan took office, and they threw the economy into a decade-long funk that culminated with the biggest banking crisis in the country’s history. The current cuts are happening when the economy is already staggering and the banking system already falling apart. These cuts, and the subsequent cuts that will be needed in the budget for the coming fiscal year, will reshape the United States in a bigger way than what happened in the 1980s, and this time, the changes will hit essentially all at once.

Saturday, April 9, 2011

How the Near-Shutdown Means More Money for Billionaires

I was surprised to wake up this morning and read that the government shutdown had been called off. The story is that conservative leaders persuaded the House Republican leadership not to use the health care issue and the budget process as an excuse to shut the government down. It’s a victory for the House Republican leadership, which showed it still has enough push to get the extremist members of its caucus into line.

But this episode has put more strain on the United States’ credit rating. The government will now have to make many more cuts in the next budget in order to have the money to meet its interest payments. Now seen as less credit-worthy than before, the U.S. Treasury will have to pay more to borrow money. Of course, this also means that the bondholders will be collecting more money from taxpayers. Interest costs might just have gone up by a billion dollars a day because of this latest legislative dysfunction, so no one should imagine that the few billion dollars cut from the budget along the way will actually save the taxpayers any money.

Rather, the higher borrowing rates resulting from this episode are just another example of a transfer of wealth from taxpayers to billionaire-investors.

Friday, April 8, 2011

This Week in Bank Failures

A federal government shutdown is expected to be ordered tonight, and there is a chance that the shutdown could last for a week or longer. If it comes to that, bank failures do continue during a government shutdown. State banking regulators and the FDIC aren’t affected by the government shutdown. Federal banking regulators are still obliged to close a bank well before the bank is forced to close its doors on its own, regardless of a government shutdown.

Opinions of Portugal’s creditworthiness have declined so much that banks in that country say they are no longer able to lend the government money. Portugal is expected to seek a two-month loan from the European Commission this weekend.

BB&T is discontinuing its free checking accounts on June 3, but customers can still get the $12 monthly maintenance fee waived by maintaining a $2,000 average balance each month. Executives at giant banks have suggested that all the banks will be discontinuing free checking this summer.

There were two bank failures tonight, each with less than $200 million in deposits.

In Illinois, Western Springs National Bank and Trust was closed. Heartland Bank and Trust Company is taking over the deposits and purchasing the assets.

In Las Vegas, Nevada Commerce Bank was closed. California-based City National Bank paid a $1 million premium for the deposits and is also purchasing the assets.

There was also a credit union liquidation tonight. Mission San Francisco Federal Credit Union had 2,500 members. Membership accounts have been transferred to Self-Help Federal Credit Union.

Thursday, April 7, 2011

Your Own Personal FDA

The U.S. government shutdown expected tomorrow includes the Food and Drug Administration. The FDA will not be checking to see that your food is safe except in an emergency situation — i.e., after large numbers of people have already gotten sick in a pattern that obviously points to a food source. This is an even more limited role than it appears on the surface, as many of the people who track down these patterns will also not be on the job. As for drugs, the FDA likely won’t have any enforcement muscle at all for as long as the shutdown lasts. The food and drug factories know this, and they know they can quietly do whatever they please for the duration of the government shutdown. This means it is up to you to ensure the safety of the food and drugs you and your family use for as long as the government shutdown lasts.

And actually, even when everything is working at the FDA, it can’t do as much as we might imagine to make food or drugs safe. We are relying on the good will of the factories to use the ingredients they say they are using and make the products they say they are making. There are rarely any outside tests or audits to hold them accountable, and even inspections are a hit-or-miss affair.

But now, assuming the government does shut down Friday as most observers expect, there are no inspections, no enforcement actions — in effect, no rules at all about food or drug products as long as large numbers of people don’t get violently ill. The safety of the food you eat and any drugs you take is your responsibility now. Think of yourself as the head of your own personal Food and Drug Administration.

It’s enough to make a person start asking questions, questions like, “Do I even know where my food comes from? How do I know it’s been handled properly? What do I need to do to minimize my risks?” These are good questions to ask in any case, but more important than usual now that the government is no longer looking out for you.

Wednesday, April 6, 2011

The Government Shutdown and the U.S. Government’s Credit Rating

The political observers I am hearing from are saying that it is almost certain that the House of Representatives will not be able to pass a stopgap spending measure and the U.S. government will shut down on Friday afternoon. As evidence, they cite White House preparations for a shutdown and a statement from the House Speaker that the deadline for avoiding a shutdown has already passed. They are split over the question of whether the shutdown will last only until Monday, or for weeks, perhaps running through the end of the fiscal year in September.

The United States might not have been formally downgraded by the credit rating agencies, but the failure of governance that the current situation represents has already unofficially harmed the country’s credit rating. This, not incidentally, is bad news for the federal budget, as it increases the amount the government must spend on interest payments — the exact scenario that got Greece and Ireland into financial trouble.

In theory, the United States could avoid that slippery slope by addressing the most urgent matters in a separate bill that could be just a page or two in length. By political convention, though, the government’s fiscal health and continuity can’t be addressed without a comprehensive spending plan. Constitutionally, spending plans have to originate in the House of Representatives. There is no mechanism for breaking a deadlock in the House beyond the House members’ own sense of duty.

The economic statistics that go with a federal government shutdown could easily look like a depression, with whole sectors of the economy thrown into suspense. For example, the real estate market would be on hold, with sellers not eager to sell during a period when many home mortgages are unavailable. Emergency budget adjustments by states would add to the economic slump. Households that spent their tax refund in advance would have to make similar emergency spending cuts when they realized the tax refund check is not on the way.

Tuesday, April 5, 2011

A Reminder that Email Is Not Secure

Word is trickling out about an email server break-in that might have allowed criminals to obtain email addresses for half of the people in the United States. The potential scale of the leak is so large because the server in question delivered mass email messages for dozens of large online business-to-consumer brands. If you shop online regularly, it is fair to guess that your name and email address are no longer a secret.

That, like it or not, is the nature of email anyway. Even in the best of times, email messages are passed around willy-nilly from server to server, with no systematic way of keeping track of all the parties involved along the way. That is the main reason it so important not to put sensitive information such as account numbers and passwords in email messages.

It is also important to have relatively obscure passwords for your Internet accounts, and especially for your email account. You’ve likely heard about passwords before, but I’ll repeat some of the most basic points here: A password should not be a word or phrase that appears in a dictionary. It should not be personally identifiable information, such as your name or birthdate. It should not be a favorite song or book or anything else that you might write about online. All of these are relatively easy to guess. But you’re doing reasonably well if you combine two separate things to form a password. Also, you should change passwords from time to time. If you’ve been using the same email password since 2002, that is probably too long.

Email passwords are especially important because a person who has your email password can use your email account to gain access to many of your other online accounts. If you’re worried about someone breaking into your email, one of the best things you can do is change your email password to something that will be hard to guess.

When you receive email, it is important to remember that you can never really know who sent an email message. If information you receive in email is critical, verify it in a more secure medium (such as a web site or telephone call) before relying on it as a basis for action.

Sunday, April 3, 2011

Contracting and Expanding Industries

It is not so hard to spot a industry that’s declining. Few would argue with the new IBISWorld list of dying industries (“dying” appears to mean U.S. revenue declining by more than 50% between 2000 and 2016, in this case). The top of the list is land-line telephone. I remember thinking I was something of a trailblazer in dropping my land line in 2006, but a lot of people may have thought the same thing. According to IBISWorld, that industry’s revenue fell by 55% in the last 10 years. It is similarly no surprise that record stores and photofinishing are on the list. The one category that seems to surprise people is “formal wear and costume rental,” but now that I think about, the recession pretty well killed off formal wear as a costume style for social occasions, and none of the costume rental stores I remember visiting in the 1990s are still in business.

But the whole economy is not declining, even if most of the largest industries are. It is not so easy to spot an industry that is likely to expand in the next few years. Some are obvious enough, like robots and electric cars, but these are so small that they almost cannot help but expand. The bets two years ago were on education, health care, and information technology, which “always” expand, yet they are showing little sign of expanding right now. Instead, technological and cultural changes are improving productivity in those industries while chipping away at their revenue. For example, the newer computers last longer, so customers spend less money replacing them. In health care last week, scientists found that routine prostate screening does more harm than good. Scientific discoveries such as this one result in better health care but take away billions of dollars in revenue from doctors and hospitals.

Spotting the expanding industries is an important preoccupation for investors, who do more good for the world when they invest in an up-and-coming industry. It is also important for economists, because economic growth comes from expanding industries. Most large industries and product categories are declining most of the time; in times like this, nearly every industry is in decline. The economic growth comes from relatively few places, often in industries with new technology. If we can pick out the growth areas, it is easier to predict where the economy as a whole is heading.

On IBISWorld’s 10 dying industries list, there are two where their projections could be mistaken: textiles and clothing. U.S. companies face increasing global competition coupled with a declining U.S. demand for clothing. On the other hand, new technology such as robotics and cotton recycling could become important enough to turn a dying industry into a growth industry. But how are you supposed to predict when and where something like that will occur? You can see why the big growth industries often aren’t the ones we expect.

Saturday, April 2, 2011

Hunger Strike for the Ability to Work

I’m participating in a fast today. Several thousand people across the United States are fasting to protest some of the recently proposed federal government budget cuts. It’s a purely symbolic action on my part, not really a sacrifice, as going without food today won’t have a noticeable impact on my ability to work. Probably most participants today, though, are actually suffering from the disruption in their food habits, and some are on an actual hunger strike, planning to go without food indefinitely until their concerns are addressed.

The point I personally hope to make is that it is the height of folly, even in an austerity budget, to axe the very things that are necessary for people to work and live. To a limited extent, the government must support such things as food, housing, safety, and transportation.

Let me start with transportation as an example. Broad cuts in transportation leave significant numbers of people at home, unable to get to work. When people don’t work, they don’t pay taxes. And when people don’t pay taxes, that makes the budget situation worse, not better.

It is the same with food. When people can’t eat, the quality of their work suffers almost immediately. If they are looking for work, the quality of their job search declines in the same way, and the tendency for employers to take them seriously or view them favorably all but vanishes. In the United States today, it is basically impossible for a person who looks like they are suffering from hunger to find a job. But again, as long as they aren’t working, they aren’t paying taxes. Thus, withholding food from people does not improve the budget either.

The budget talks in Portugal broke down because the ruling party wanted to make cuts that they themselves acknowledged would leave a significant fraction of the country’s citizens homeless and hungry. Portugal is in an actual fiscal crisis, but even in that situation, it makes no sense to make decisions that let a nation’s ability to work just wither away. Portugal’s budget plan was like a farmer who decided to save time by not watering any of the crops — a panic move that would make things worse, not eventually, but in the very near future.

Unlike Portugal, the United States is not in an actual fiscal crisis, but political opportunists are using the current budget pressures as an excuse to do away with some of the most essential functions of government, including food programs. The amount of money to be saved by withholding food from hungry people is so small it doesn’t matter to the budget anyway. The tax revenue lost when hungry people can’t work and food producers are forced to cut back production is larger. This may well be what the supporters of these particular cuts have in mind — not fiscal sanity at all, but using an imaginary fiscal crisis to try to squeeze whole groups of people out of the economy with aggressive cuts this year, and even more aggressive cuts next year after they have made the budget situation worse.

I won’t argue with the idea of an austerity budget, but austerity doesn’t mean starvation. A country becomes stronger and a budget is balanced by expanding people’s ability to work, not by taking it away. In the end, in an economic sense, a country is its workers. Cut the budget as much as it needs to be cut, but don’t take away the essentials of life that make people able to work. That’s the point I’m hoping to make by going hungry today.

Friday, April 1, 2011

This Week in Bank Failures

Ireland bank stress test results were released yesterday, throwing that country’s fiscal plans into disarray. The banks need an additional €24 billion in guarantees from the government, and there may shortly be no choice but to wind down some of the banks to protect the country from insolvency. As an initial step, the Finance Minister has announced a plan to merge two of the four largest banks. The plan also calls for the troubled banks to shrink their operations by about a third over the next two years, which will include closing some offices and selling some assets. Further action may be needed when the banks are looked at again in May. In its new approach to its banks, Ireland may be trying to follow the more successful pattern of Iceland.

The Dodd-Frank Act requires U.S. mortgage lenders to retain an ownership share in loans they originate, a requirement known as risk retention. Technically, it is the issuers of the mortgage-backed derivatives that are subject to the rule, but either way, risk retention affects the originating bank. The law may not have any effect on the market, though. In drafting regulations, federal banking regulators seem surprisingly eager to find ways to work around the law. Proposed regulations released this week would exempt most ordinary home mortgages from the risk retention rules. The proposed rules require, for example, a 20 percent down payment, a term between 1 and 30 years, and a written application from the borrower. Rules also cover areas such as ability to pay, insurance, and underwriting, but they exempt loans that are perfectly ordinary in these respects.

Regulators, along with real estate lobbyists, seem to be worried that the securitization market (assuming it ever makes a comeback) will completely bypass mortgages that are subject to risk retention. No one has explained why they imagine the market working that way — perhaps it is nothing more than a question of stigma — but that’s why regulators want to do away with the risk retention rules for most mortgages.

AIG is reorganizing its flagship property and casualty insurance business unit. Details of the moves suggest that AIG expects to need some kind of Treasury support for a stock offering when that business unit, Chartis, is spun off.

The Fed is not waiting for AIG to get back on its feet, and is going ahead (over AIG’s objections) with an auction of $15 billion in mortgage bonds it purchased from the insurance company when it was on the verge of bankruptcy.

Treasury-owned GMAC has filed for a public stock offering under its new name Ally Financial. The IPO could bring in $5 billion and set the stage for the U.S. Treasury and General Motors to sell off their shares in the lender. Regardless of the details of the stock offering, which have yet to be worked out, Ally is not expected to be worth as much as the $17 billion the Treasury put into it during the Wall Street bailout.