Friday, August 29, 2008

This Week in Bank Failures

Tonight’s failed bank is located in Georgia. The ironically-named Integrity Bank is a “small” bank with offices in five towns that recently had $1.1 billion in assets. Accounts have been transferred to Regions Bank. Regions Bank is paying a 1 percent premium for $34 million in assets.

Integrity Bank was based in Alpharetta, Georgia, and its closure comes 11 months after the failure of cross-town rival NetBank.

Integrity Bank was unable to raise more capital after declining real estate prices hurt its loan portfolio. In particular, according to The Wall Street Journal, one real estate developer defaulted on $83 million in construction loans. The decline in real estate values in Georgia occurred more than a year before it hit nationally. According to Bloomberg, the holding company’s stock value had declined from $2 at the beginning of the year to 4 cents today.

In an interview published in The Wall Street Journal this week, the FDIC suggested that it would shortly start borrowing money from the Treasury. The money is expected to be paid back after the FDIC sells off the assets it acquires in bank failures. The FDIC says it has gone through about a third of its reserves in the 10 bank failures so far this year. Economists expect as many as 100 to 200 bank failures in the coming year, probably including a few of the largest banks, so the FDIC will need more funds from the Treasury soon.

The timing of this closure, on a holiday weekend, assured that there would be almost no national news coverage. The timing also suggests that the FDIC has many more banks to close in the coming weeks and cannot afford to take a weekend off, even for a national holiday.

Wednesday, August 27, 2008

New Orleans Island

Three years after Katrina, another hurricane is headed for New Orleans.

Tropical Storm Gustav, which will surely be a hurricane again tomorrow night or the next day, is expected to pass the western tip of Cuba Saturday night. It isn’t really possible to predict the movements of a hurricane any farther in advance than that, but the most likely track would have it narrowly miss New Orleans Monday night, following in the footsteps of Katrina.

Every time a hurricane approaches the Gulf of Mexico, people in New Orleans are losing sleep. The city closest to the center of the gulf, it is especially vulnerable to hurricanes. It is just a matter of time before it gets hit again.

And we don’t know how many more hits it can take. The same geological forces that dropped the city itself below sea level are taking away the delta land that protects it from the waves. Every hour the sea takes the roots out from under a tree somewhere in the delta, in an area where the water is too deep for a new tree to grow. When a hurricane hits, a million trees can go down at once. For political reasons, the maps aren’t being redrawn very quickly, but if you compare the pre-Katrina and post-Rita satellite images of the Louisiana coast, you can see that those two events took away vast areas of land.

The city at the mouth of the Mississippi is turning into an island.

One estimate among geologists (famously broadcast on 60 Minutes in 2005, but not news to scientists who have been following this issue) is that around 2100 what remains of the delta will be submerged and the sea will reach New Orleans. Experts disagree about the current rate of subsidence, but there is no debate that most of the city is several meters lower than it was 500 years ago, and whether the ground is sinking at 1 millimeter a year, or 2, it is a problem.

Most of New Orleans could be submerged too — its current sea walls and levees aren’t built to stand up to the waves of the sea. They can handle a Category 1 hurricane only because they don’t face the open sea. Engineers disagree about whether they are fit to stand against a Category 2 hurricane. If Gustav keeps to its forecast, they may get to find out.

Massive sea walls could be built around the city to keep the waves out. Engineers from The Netherlands say it could be done, but it could cost so much, it would be hard to justify in terms of real estate value.

The walls, if they were built, would separate the city from the Mississippi River. So it really wouldn’t be the same city.

On the other hand, there are those who do not want to see New Orleans rebuilt. Such a battle against nature, they say, can only be costly, risky, and futile. And some argue that New Orleans is not “American enough” to justify a national effort to save it.

In my opinion, though, the distinctive character of New Orleans is precisely the reason we cannot afford to lose it. For it to succeed, though, it may have to succeed as an island — which means moving it above sea level. The widely offered suggestion of raising much of the city about two meters above sea level makes sense to me. Doing that across the whole city would cost a fortune, of course — $10 to 40 billion just to deliver the fill, and besides, there aren’t enough highways to carry all the trucks it would take. But compare that to the cost of responding and rebuilding after just one disaster, and the relative cost doesn’t seem disproportionate.

And we’re not talking about blanketing the whole city with a layer of fill all at once. Some neighborhoods, of course, are well above sea level, weren’t flooded, and don’t need to be raised. Many blocks are too historic to be torn down or buried. But there are also areas that will work much better if they are lifted up.

It could make a big difference someday to have hospitals, the electric power supply, and major through streets above sea level. I would also want to build up the sides of the canals with level land a city block wide — then I wouldn’t worry so much about the canal walls.

I am only guessing here, but the point is that some places are more important than others and that you can get a lot of the benefit from being above sea level even if it’s just a fraction of the city, and it’s something that can be done bit by bit. Lots of the homes being rebuilt are on stilts. That’s a move in the right direction. It protects the individual home from flooding, and it’s a necessary step if the street may be raised in a few years. It’s worth thinking big if that’s going to keep New Orleans going into the next century.

Friday, August 22, 2008

This Week in Bank Failures

It’s become almost like clockwork. On Friday night, after the network news is over, you can check the FDIC web site to see which, if any, banks closed this week.

Tonight it was Columbian Bank of Topeka, Kansas. With less than a billion dollars in assets, it is considered a small bank, but was recently the 17th largest bank in Kansas. Its nine locations, most in Topeka, have been taken over by Citizens Bank of Chillicothe, Missouri.

The failure is blamed on a run of bad loans and a general decline in business at the bank, probably partly related to the recession.

As notable as the bank failure itself is the muted nature of the news coverage. The story is being dutifully reported, but I had to go to the Kansas City Star to find a news site that is treating it as a top story. This is in keeping with the axiom in news reporting that when something just keeps happening, it eventually isn’t very newsy anymore.

Wednesday, August 20, 2008

EBay Pushes Sellers to Fix Prices

For those who thought eBay was kidding about its transition from auction engine to retail integrator, yesterday’s announcement of 30-day fixed-price listings should tell them it’s really happening.

The 7-day duration of a listing was a vestige of eBay’s auction days. An auction has to last for a limited time because only the bids placed in the last hour mean anything (and for many eBay auctions, just the last 30 seconds). But how many stores are open for only 7 days? Extending the duration of fixed-price listings from 7 to 30 days makes a lot of sense.

But this change is more than it appears on the surface. Most 7-day eBay listings go unsold. With 7-day listings, a typical item might be listed 5 to 10 times before it sells — giving eBay the biggest chunk of its fees, but creating lots of meaningless work for sellers. With 30-day listings, the same item is likely to sell the first or second time it is listed — fewer fees for eBay, but a lot less work for the seller.

To simplify things still more, eBay will no longer charge extra listing fees for high-value or multiple items in a listing. This will also greatly reduce the number of listings.

With eBay’s current fee structure, a seller offering 1,000 rolls of masking tape has an incentive to list each roll separately. Some sellers use programs to automatically create 10 or 20 nearly identical listings every day. With the new listing fees, a seller can save a fortune in listing fees by creating just one listing every 30 days. A specialized seller selling a moderate volume of a few items (this was the core eBay seller until eBay started to push them out two years ago) will save several thousand dollars a year.

This is not just a nice, long overdue price cut for sellers on eBay, who have been hit with fee increases year after year for the past ten years. It also means that auction sellers can no longer compete with fixed-price sellers. With lower costs, fixed-price sellers can sell at lower prices and squeeze out auction sellers of the same items. The auction format is still available but now makes sense only for unusual items whose market value cannot easily be determined.

It is the buyers who ultimately pay to keep eBay going, and eBay is looking out for the buyers in making this change. The inconvenience of the auction format is one reason so many buyers have left eBay. Getting to bid on perfectly ordinary items was a novelty in 1998, but customers are no longer entertained just by bidding. A bidder goes through all of the motions required to buy an item, perhaps several times, usually without actually getting to buy anything. The time and effort goes to waste, and the losing bidders can get the impression that they are being used, especially if, as so often happens, the winning bid is placed within the last five seconds of the auction or if (before the eBay rule change of two years ago) the seller cancels the auction in the final minute. Most items sold on eBay have well-known market values, so it is simpler for everyone if the seller sets the price and waits for someone to buy.

To the people who manage the money at eBay, this fee change might seem crazy. The listing fees were the easy part of its marketplace revenue, money eBay collected for doing nothing, and nearly all that revenue will be going away. But eBay has little choice. Sellers will not keep paying listing fees over and over again for items that are slow to sell. To speed up its marketplace, eBay needs to bring buyers back. Buyers will come back only when there is something to buy, so eBay needs to drum up better listings from sellers, and it needs to do it now. Many of the people who tried to do their Christmas shopping on eBay last year were so disappointed by the spotty selection and difficult purchasing process that they swore never to go back. They will be back again this year, of course, but if the eBay marketplace does not make a better impression this time, they may go away again and never come back.

To get more listings, of course, eBay will have to bring sellers back, and cutting fees may not be enough. EBay policies still prevent or discourage its “Main Street” members from setting prices for items. Small and medium-sized sellers still pay higher fees than the largest sellers, making it hard for them to compete. At the same time it is cutting its listing fees, eBay is introducing big increases in its transaction fees, based on the value of items sold, and this increase has led more than a few sellers today to say they are pulling out. Then there is the issue of the estimated 200,000 former eBay sellers, the heart of the old eBay auction marketplace, who eBay has banned for reasons that remain a mystery. Even if eBay were to apologize and waive startup fees, an action that would run completely against its corporate culture, it it hard to imagine that the old eBay sellers would come running back.

EBay does not seem to mind shedding its many small sellers, but will surely have to cut deals with more big companies to get new merchandise on its site. That, of course, is what retail integrators traditionally do, and if eBay is determined to succeed as a retail integrator, it will have to prove it can succeed at cutting deals with billion-dollar sellers.

Sunday, August 17, 2008

The News Hole and the World War That Wasn’t

If you want to see what a news hole looks like, the current Olympics period is the best example I’ve ever seen. Everyone who deals with news is doing fewer and more superficial stories, as a significant part of the audience is away watching the big event. Even BBC News decided it would be a good time to save money by having less news. In my case, though I hope it’s not terribly obvious, my blog posts have been fewer and quicker. I don’t want to take too much of my time writing for the three people who are still reading my blog this month.

In the United States, this is likely to be the biggest news hole ever, continuing right through the Labor Day holiday weekend and the two major political conventions.

News holes are recessionary by nature. A big event like the Olympics means productivity declines, if workers are distracted during the work day, and work hours are reduced, if people leave work early to catch one of the television broadcasts. The entertainment and advertising industries, which depend on being able to catch and hold people’s attention, also have less to do during an extended news hole. All this means less is produced and less is purchased. It’s not really a problem, of course, but it might look bad in the August economic aggregates when they come out.

When people are seeking publicity, a news hole can slow them down. At one time, I had thought to release the audio edition of my new book Fear of Nothing around now, but there would not have been much point. Between the Olympics, conventions, general election season, and holiday shopping season, I would have a hard time finding gaps in which a “new” author with a new book could get some attention in the media.

Fear of Nothing is a small product, but major product launches are being postponed for the same reason, and this too has the effect of slowing down the economy. Not everything can benefit from waiting till next year, so look for the big announcements that can’t wait to be squeezed into the few gaps that can be found in the rest of this year’s calendar. The middle half of September and the middle half of November will surely be jammed with more new things being announced than anyone can keep track of.

Of course, people who want their news to be ignored deliberately release it — or create it — during a news hole. That’s what seems to have been going on in the Georgia war. By the most credible accounts, Georgia launched a carefully planned surprise attack on Russian forces, and on its own citizens, to coincide with the beginning of the Olympics. As with many military confrontations, it is very hard to sort out exactly what happened, but you have to ask what the leaders of Georgia were thinking. They certainly didn’t plan it to come out this way, with the Russian army locking down half their country and taking most of the rocket launchers and other military hardware the Georgian forces had been using to harass the Russians for the past few years. So you have to assume they had really bad intelligence.

And since the Republic of Georgia seems too small to have its own bad intelligence, the suggestion I have heard that its leaders were duped by their “friends” in Washington, New York, and London into starting the war makes sense. One conspiracy theory I have heard is that a member of the John McCain campaign, a lobbyist with ties to Georgia, or someone close to him, provided assurances that the world would back up Georgia if they would get a war started. An alternative theory is that Georgia was told of a fictional planned attack coming from the Russian side. Either way, this would help to explain why John McCain rushed to make a statement backing Georgia in the war, and identifying Georgia as the United States’ closest ally in the region. McCain’s statement, interjecting himself in the conflict, stands in stark contrast to the more measured responses from world leaders.

The claim that Georgia is a close ally of the United States must have come as a surprise to most of the world, probably to McCain himself. McCain, remember, doesn’t know much geography. In that same part of the world he made a policy statement a month ago about the supposed Iraq-Pakistan border, apparently confusing Iraq with Afghanistan. If he can get those two countries confused, it is likely enough that he never heard of Georgia before. As far as anyone else knows, Georgia is no more a U.S. ally than Russia is. And so it seems likely that someone was feeding misinformation simultaneously to at least the McCain campaign and the Georgia military leadership.

Seen in this light, the events in Georgia are an eerie echo of the events surrounding the start of World War One. So was someone using the news hole to try to start a new world war? To me, that seems believable, while the competing official accounts of the war in Georgia are clearly not true.

Who would want to start a world war? The most obvious incentive I could point to would be a commodities trader, perhaps a hedge fund manager, holding a long position in crude oil and scared to death by the recent declines in crude oil prices. Nothing would drive up oil prices faster than a sudden worldwide outbreak of hostilities. But it would be a mistake to look for an answer that obvious. There are no end of reasons people can have for wanting to keep the world, or a part of it, off balance. Leaders who are in a position to start wars have to be very skeptical of information pointing to war that might have been planted by people who have some private gain in mind.

Fortunately, the Georgia war did not spread, and when it is over, we may want to send a thank-you note to Putin, whose advice to the world — essentially, “Everybody stay back” — seems in retrospect to have been the right idea to help keep what was already a tragic situation from expanding into something much worse.

Wednesday, August 13, 2008

Relief From Consumer Spending

No one should be surprised or dismayed by the decline in spending reported today for U.S. consumers in July. The only thing that had been driving up consumer spending was higher prices for food and energy. With energy prices peaking and the beginning of a new season of fresh produce, there was no reason for spending to go up again last month.

Think of it this way. The increase in consumer spending in the first half of this year was involuntary. Consumers had been forced to spend more month after month just to keep up with energy prices. And so when consumer spending shows the slightest decline, as consumers finally have a few dollars to pay down their debt, we can view that not as a sign that the recession is killing the economy, but with a sigh of relief.

Monday, August 11, 2008

Specialization: The Case Against

I spent the second half of July working hours every day on details of the design of my forthcoming book, Fear of Nothing. The design work involved lots of dragging on the mouse as I selected rectangular regions, moved objects, and adjusted controls on the computer at least 10,000 times. My wrist got sore from the repetitive mouse movements and two weeks later is only 80 percent recovered.

It makes you wonder about the people who do the same work all year long. They don’t have the luxury of working on something else for two weeks or longer to recover from the physical stresses of design work. Some, of course, avoid the repetitive stress injuries completely by having stronger arms and better work practices. But some are eventually disabled by the repetitive stress of their work. I have personally known three who were forced to stop work entirely for several months after the stress of computer work temporarily cost them the use of their hands.

And this is, in a nutshell, the case against specialization. Economists traditionally are in favor of specialization as a way to improve productivity. If you work in an area you are good at, you will get more done than the average person who attempts that kind of work. Focus on one area of work and learn all about it, and you become even more productive.

Economists tout these advantages of specialization, but there are arguments against specialization. Work on the same thing all the time, and it is hard to come up with a fresh perspective that could lead you to innovations in your work. Do too much of the same thing, and it will wear you down.

Repetitive stress injuries are the most feared result of doing too much of the same work. They are so common they are often abbreviated RSI. Every area of the body has a form of RSI. Typists get neck stress and often eyestrain if they spend all day looking at the same copy board. Baseball batters can get upper back injuries from the twisting of swinging a bat. Guitar players wear out their finger tips if they try to play all day long. Singers who sing for more than an hour at a time may wear down their voices. A driver who spends the day pressing pedals with the right foot can get sore in the upper part of the right leg. You get the idea. General Motors faces the possibility of bankruptcy largely because of the medical costs from the repetitive stress injuries of its assembly-line workers.

It is not human nature to do the same thing all day. Early farmers had to learn mental tricks to keep themselves focused on the sunup-to-sundown work of harvesting. But their reward was enough food to last all winter, and the off-season gave them four months to rest and prepare for the next season. Most work now has no off-season, and the mental tricks necessary to focus productively on accounting or computer programming for 48 to 50 weeks of the year are more than most of us can muster.

So we are jaded. We are good enough at what we do to keep going, but so burned out that we barely slog along. Specialization is a good idea, but it is so easy to overdo it.

There are enough anecdotes to establish that staying in a specialty is not the key to success: The corporate lawyer who made a fortune when he started a vineyard. The medical doctor who moonlights as a computer programmer. The journalist who moved up in the world by becoming a corporate trainer. The enthusiastic beginner who, for the first few months, outperforms everyone else in the office, even those who have been there for forty years.

I have never been a big believer in specialization in my own career. Am I a recording engineer? Well, yes, but also a guitarist, drummer, computer programmer, book author, photographer, and let’s not forget economist. It’s easy to say that I might have found greater success by focusing more on just one of these areas of work. Maybe I would have. But maybe I would have burned out and ended up doing the same mediocre work that so many people do after a few years of doing the same thing.

We know a little about how to keep work fresh, and it pays to start with the most basic things. If you work at a computer screen, look off into the distance for five seconds every two minutes to keep your eyes fresh, and get at least five minutes of exercise on your lunch break. Or, if your job is all standing and walking, make sure you sit down for five minutes every now and then. “Shoulder to the grindstone” might be a cliché for hard work, but it is the opposite of what it takes to stay fresh and productive. Instead, look for small ways to mix things up.

Thursday, August 7, 2008

Paycheck Effect at Wal-Mart

As one of the few U.S. retailers still showing a healthy profit, Wal-Mart can tell us a little about the state of the economy. The sales report for July tells that the stimulus checks, paid by the Internal Revenue Service to taxpayers mostly in May and June, are gone now. More significantly, Wal-Mart is saying they are seeing a pronounced paycheck effect in many stores, as shoppers come in the day they receive their paychecks to buy essential supplies.

There are always significant numbers of consumers living paycheck to paycheck, but if there are so many that it shows up on Wal-Mart’s sales reports, it shows an economy that lacks resilience. People who are barely making ends meet don’t always have the flexibility to respond when economic conditions change, and that lack of flexibility, as it occurs across the economy, is what turns disruptions into recessions.

Friday, August 1, 2008

$40,000 Per Vehicle

“Ray Young, GM’s chief financial officer, said the company burned through $3.6 billion in cash during the second quarter, which he attributed largely to reducing the company’s inventory by nearly 90,000 vehicles . . .” [AP] Did GM really spend $40,000 in cash for each excess vehicle it took out of its inventory between April and June? Yes, it did. I know, because I was there.

I had had easier jobs. The Shamanic Economist can help out any company in any crisis, but even so, I was starting to have second thoughts about my stint at The World’s Second Biggest Automaker. Times were tough, consumers were more skeptical than ever, and the factories kept churning out pickup trucks and SUVs faster than I could pass them off to the dealers.

I sighed and called up the next dealer on my list — number 9957 on the speed dial. He couldn’t take any more trucks either.

“Sorry,” he told me. “These customers are wack. Just yesterday, this family comes in, they want a car but it can’t burn any fuel at all and they can only pay six hundred dollars. I finally get them into one of them old Caddys but they talk me down to two fifty. I’m telling you, if we didn’t have that car wash I’d be out on the street by now.”

It was the same story I had been hearing all day. I thanked him and hung up the phone, shaking my head. I was supposed to get five excess trucks moved out of the company’s inventory, but I had been on the phone since Monday, and the trucks were still sitting in the lot out back.

Just then the door burst open, and my boss rushed in. “Rick!” he exclaimed. “I’m so glad you’re here. They just sent over more trucks for you — ninety thousand more.”

“What?!” I exclaimed. I looked out the window, and sure enough, there were 90,000 brand new trucks in the lot, gleaming in the morning sunshine. “Jimmy, I don’t know. No one wants more trucks these days. Even if I could pay people fifty thousand dollars per truck I don’t know if they would take them.”

“Fifty thousand per truck!” Jimmy said. “That would be four point five billion. You know the company doesn’t have that kind of money.”

“Well, of course I know that. So why do they keep making so many trucks? Why don’t they close a couple more of those fac—”

Jimmy cut me off. “Look. We know you can get it done with just forty thousand per. You’ll find three point six billion in unmarked bills in the gray nylon bags in the back of that first gray SUV.” He pointed to the beginning of the line of SUVs that seemed to stretch from the back of the building all the way to the horizon.

“But —”

“Look, I know you can do it. I don’t have time to hear your excuses. Give me a call when you’ve got all these trucks out of here.”

“But —” I said again. But Jimmy had already walked out the door. I sighed and went out to the lot, got the bags of money out of the gray SUV, carried them back inside, and threw them under my desk. Wiping the sweat off my forehead, I got back on the phone. The next dealer on my list was speed dial number 22780.

It was the same old story. “Sorry,” he said. “Just forty thousand? Couldn’t do it. Haven’t had a real buying customer in the showroom all week. Say, how are those electric cars coming along?”