Thursday, April 30, 2009

This Is What Inventory Reduction Looks Like

Yesterday’s U.S. GDP report for the first quarter of 2009 showed the largest reduction in business inventories ever. Inventories in the first quarter were substantially smaller than in the fourth quarter. I guess I can understand why Wall Street got excited by this, but they got it wrong. Nearly half of the reduction in inventories was at auto dealers and in consumer electronics. To alleviate any possible confusion, I wanted to show you what this looks like.

An American Revolution - closed

Circuit City - closed

The first picture shows one of many Circuit City locations that finished liquidating a month ago. The store is now ready for its next tenant. The second picture shows an auto dealer that moved out at the beginning of the year. There was no time for a sale or an announcement — they just took the cars away and boarded up. Many dealers closed around the same time, often because sales were down or they couldn’t get their inventory loans renewed.

Smaller inventories are often an early sign of the end of a recession, and for many kinds of inventories, that interpretation makes good sense. If the shelves in the supermarket are starting to look bare, and there is nothing for shoppers to buy, the supermarket will have to order more products, the factories will produce more, and so on, an increase in economic activity. But Circuit City will not be ordering any more flat-screen televisions. The auto dealers that closed will not be ordering more cars, and the ones that remain open will have to cut back too as sales remain at a low level and manufacturers cut back on models and options. On top of that, General Motors is looking to cut off more than a thousand additional dealers between now and next year, and that number will surely go higher if General Motors goes into bankruptcy. Every sales location has to have its own inventories, so the fewer dealers there are, the smaller the total inventory is.

If you look at the rest of the inventories that go into the GDP report, they are also declining, but not as fast as employment is declining. That is an important comparison to look at, because most inventories are meant to be sold to businesses or consumers, and you need to have people working or earning a paycheck for that to happen. When you see inventories not falling as fast as employment is falling, you know that inventories will have to fall further. There really isn’t any good news to point to in the GDP report.

Instead, the report confirms what we were seeing already: a steady economic retreat. The economic decline has been eerily consistent from one month to the next since September across all the economic measures. Such a steady decline can only happen when businesses are trying to cut back in an orderly way to keep their budgets from blowing up. That might sound relatively benign, but the other way of looking at it is that businesses are cutting back as fast as they think they can without causing the kind of disruptions that would hurt business. This pattern of retreat is likely to continue until businesses are confident that they are profitable again.

GDP is gross domestic product, the most telling measure of the income of a nation as a whole.

Wednesday, April 29, 2009

Specter Follows the Crowd

Sen. Arlen Specter is not the first Pennsylvanian to switch from the Republican Party to the Democratic Party. Last year, there was a tidal wave of party-switching across the United States, but nowhere more so than here in the Philadelphia suburbs, which went from being the tipping point in Pennsylvania politics to being part of the solid Democratic northeast. I saw this happen in my own township, which, if you believe the political signs and clothing, went from being two thirds Republican in 2007 to two thirds Democratic in 2008. Visits by Obama and McCain probably helped that transition along, as there couldn’t have been a more stark contrast between the feel-good stump speech Obama delivered at the train station just one mile from here and the going-to-battle rhetoric dozens of handpicked supporters heard when McCain came by.

The suburbs are not where you go to battle. Suburbs are inherently conservative, and that’s one of the reasons they’ve moved so quickly and decisively into the Democratic camp. Democrats, these days, are promising to fix problems but keep things basically the same, while Republicans are talking culture war — not a tough choice, if you see it in that light.

In his statement announcing his change of party, Specter said that “the Republican Party has moved far to the right.” I don’t know if he saw the same problems with Republican positions that so many other Pennsylvania Republicans saw, or if he saw his supporters making the switch and felt that he had to go along. In the end, it does not matter. Republican National Committee chair Michael Steele said Specter was an opportunist who had left the Republicans for his own political survival, but what that really means is that the odds of any Republican winning a statewide race in Pennsylvania are not particularly attractive.

Specter’s move is politically significant because it makes it harder for Republican leaders in the Senate to organize a filibuster. Specter’s announcement came on the same day that the new Secretary of Health and Human Services was confirmed. The Senate voted 2-to-1 to confirm, but up until yesterday, some Republicans were still threatening a filibuster to block the confirmation vote. Now that Specter has left the Republican caucus, it will not be so easy for Republicans to organize or threaten a filibuster. The Republican strategy of resisting all progress in Congress will become more rhetorical than procedural in the weeks ahead.

In recent decades, Pennsylvania has been considered a battleground state, which either a Republican or a Democratic candidate could hope to carry in a competitive presidential race. But with the utter failure of McCain’s Pennsylvania-or-bust strategy last year, which saw him campaign more here than in any other state yet still lose by double digits, and now Specter’s move to the Democratic party, it probably time to take Pennsylvania out of the battleground category.

Tuesday, April 28, 2009

The Hazard of Crowds: What Flu Is Doing to the Economy

A public health breakdown such as the swine flu that people are worried about now is an economic disadvantage for crowds. Wherever large numbers of people gather, it creates a significant risk of flu spreading, roughly in proportion to the number of people who are in that place that day. This creates a new disincentive to go to work, school, shopping, parties, rallies, movies, sports arenas, high-volume restaurants, and anywhere else that draws a large crowd.

Part of people’s response to contagious diseases is irrational. There is a risk in going to work or school in a building where there are 300 other people, but it is a slight risk. The greater risk is found in places that people pass through by the thousands: airport, subway station, shopping mall. Similarly, there is a risk in food, but only if it has been handled improperly since it was cooked. The greater risk with food, as always, affects the person who has to handle raw meat, and it is a risk that is easily contained by washing everything promptly (or, I hasten to add, avoided by preparing something other than meat). People seem to avoid vacationing whenever a contagious disease is spreading, yet the risk in a vacation spot could be less than the risk of going to work.

Yet most of the response people are having to the flu is basically rational. Flu can make a person unhappy and unproductive for a couple of months. It’s a risk that wouldn’t really make sense to ignore, and most of the risk comes from associating with crowds.

Specifically, flu risk leads to these broad economic changes:

  • People are more reluctant to go to work in crowded places. More people work at home. Some people postpone their job searches.
  • People go shopping less often. Even if they try to spend as much by buying more each time they go shopping, they inevitably buy less by going shopping less.
  • People worry more about unrelated diseases that have similar symptoms and are more likely to stay home with an illness or seek a medical diagnosis.
  • People cancel some plans to travel to meetings, conferences, and vacations.
  • All this results in a significant reduction in transportation. People burn less fuel and put less wear and tear on vehicles. This is more bad news for Detroit, as now even fewer people will replace their cars this year. And oil prices have already fallen on the flu news.
  • Worry, illness, and crowd avoidance all reduce productivity in all kinds of work. This could be the biggest economic effect of the flu. People who are sick in bed rarely get any work done, even if they try, and after they return to work, they may be moving and thinking a little slower for two or three months. People who worry make more mistakes and drop more tasks that needed to be done. And people who stay away from work may not be producing much.

News reports are mostly talking about what “could” happen “if” there is a significant flu outbreak, yet all of the above was already happening in varying degrees yesterday. And as the disease spreads, something the World Health Organization says is now inevitable, the effects will get bigger.

The economic implications are all the more troubling in an economy that is already pulling back, especially when it comes to retail. The retail sector has been holding on remarkably well under the circumstances, but if there is a disease scare that makes people not want to go to the mall or the supermarket, we could see another wave of store closings.

Monday, April 27, 2009

Avoiding a Swine Flu Pandemic

A new swine flu outbreak, which incorporates genetic segments from bird flu, is being urgently tracked by health officials in Mexico and on both sides of the Atlantic and Pacific oceans. I believe the worries about a pandemic, which could affect hundreds of millions of people worldwide, are exaggerated, simply because at least the last 10 outbreaks that were said to have pandemic potential died away in less than two years. I believe something has changed in our public hygiene that makes it harder for a flu outbreak to maintain momentum. But this also means we can slow down the spread of flu by doing more of whatever it is we are already doing in that area.

Scientists are trying to figure out what that might be, but the most likely area of concern is hand-to-surface contact. Based on that guess, these are things you can do to minimize the spread of flu:

  • Wash your hands frequently, especially after contact with public transportation, work, school, cinema, shopping, and any place where large numbers of people from all over gather. Public health experts suggest using soap and washing for 20 seconds.
  • Clean surfaces that hands come in contact with, especially door knobs and hand rails. In tests, all-purpose cleaners and surface cleaners proved to be best for this purpose. They are quicker and safer than the specialized cleaning solutions you might hear about.

Finally, don’t let the fact that summer weather is coming to the northern hemisphere make you feel complacent about the flu. About 50 people died in warm weather in central Mexico last week because of the flu, which unlike most flu strains is hitting healthy young adults the hardest. Flu and similar viruses seem to be spread among humans mainly by hand-to-surface contact, and by taking familiar precautions in that area, you are protecting not only yourself, but the public at large.

Sunday, April 26, 2009

After the Collapse, Iceland’s New Government

The early election results for Iceland are in, and the Independence party is out.

It’s a result that surprises no one, as the Independence party presided over the worst financial collapse in Iceland’s long history, for years actively encouraging the banking excesses that led to the collapse of the banking industry and the currency and left the country owing the International Monetary Fund $30,000 per resident.

What surprises some is that two liberal-leaning parties, the Social Democratic Alliance and the Left Green Movement, won enough seats to form a government. That never happened before. Another first is the number of new members of parliament. Just 36 of 63 members of parliament are returning from the previous session.

The results somewhat echo the U.S. elections of 2006. A groundswell of popular discontent led voters to throw out the conservative-leaning ruling party after it had taken so many risks that it had scared away many of its conservative supporters. Politicians who want to learn a lesson from this might recall that conservatism originally included the idea of avoiding and minimizing risks. Regardless of how many conservative stripes politicians can claim, if they are seen gambling recklessly with a country’s fate, they risk being thrown out by the voters.

Saturday, April 25, 2009

The Credit Card That Comes With Vanilla

President Barack Obama likes vanilla — for credit cards, anyway. In a meeting with bankers this week, he used the idea of vanilla to suggest that bankers had an obligation to offer no-features credit cards first. That is, if they decided to offer a credit card to someone, they should offer the no-features credit card first, and add features only if the cardholder-designate specifically requests them.

For example, if Discover Bank wants you offer you a Discover Card with a Cashback Bonus feature, they first have to offer you one without the Cashback Bonus. So that you can keep your credit card simple if you want to.

This was not just a suggestion, but a provision that Obama seemed to be offering to House Democrats as a possible addition to the credit card reform legislation currently working its way through Congress.

Needless to say, this would completely change the way the credit card business operates. I have held my share of credit cards over the years, but I have only once ever had a bank offer me the choice of a no-features credit card. This must have been some kind of marketing study, because they offered me the choice of six different kinds of cards: one with airline miles, one with cash rebates, one with my choice of a novelty picture, and so on. I picked the one with no features at all, figuring that keeping my credit card dealings as simple as possible would be an advantage to me. It was, but in a way, it was also a bad choice. I found out later that to the bank’s credit card marketing people, a no-features credit card was the equivalent of a big “loser” stamp across the cardholder’s forehead. I guess they figured anyone who had a no-features card was someone was barely scraping by financially and didn’t even make it onto the pre-qualified list for a card with free music. Whatever the rationale, the no-features card got the worst treatment from the bank, and when they decided it was time to start adding fees to their credit card accounts, it was the no-features cards, the ones that cost the bank the least, that got hit with the new higher fees first. If banks think of no-features cardholders as losers, what will they make of a world in which anyone who wants to can have a no-features card just by not asking for anything more? Will the banks start to see half of their credit card customers as losers, or will they adjust to a world of greater consumer choice, in which consumers have a little more say about where they fit in?

Friday, April 24, 2009

This Week in Bank Failures

It was a week of intrigue in the banking industry. A Freddie Mac executive talked about quitting, then the next day met a violent death that is being investigated. There were conflicting statements about Bank of America’s dealings with the Fed, Treasury, and New York State Attorney General. As banks seemed to accelerate their efforts to abuse their credit card customers, a reform bill gained momentum in Congress, and the President weighed in, suggesting that banks should be required to simplify credit cards for consumers. And two months of suspense ended for the 19 largest banks in the United States as Treasury officials briefed them today on their stress test results. The Fed disclosed a few key details of the stress test methodology to the public, but has not yet decided what test results will be made public.

The stress tests were based on two scenarios that are far more mild than what is likely to happen to the economy over the next two years. The assumptions about changes in real estate values are realistic enough, but the view of employment and income is surprisingly conservative for something that is called a stress test. The more optimistic of the two scenarios basically assumes that the economy hit bottom in March, and we just haven’t noticed it yet. The more adverse scenario assumes that things will not get much worse — that unemployment will hold right about where it is this year and rise only slightly next year.

One reason the stress test scenarios are so rosy is that they were created in February, at a time when many forecasters were unaccountably optimistic about the economy’s prospects. But I fear the real reason that the test scenarios are more optimistic than actual economic data is that the Treasury is hoping to help the banks raise money in private capital markets. To do that, it has to make the banks look like survivors, even if it’s not true. But this is a game that Wall Street is familiar with — every business startup exaggerates its prospects — and it’s hard to imagine any player on Wall Street giving the banks hundreds of billions of dollars based on that old song and dance. The test results surely show that nearly all of the banks that were tested are likely to need some additional capital, so where is that capital supposed to come from?

The Georgia Department of Banking gave the FDIC an early start on its bank closings tonight, seizing American Southern Bank of Kennesaw, in the Atlanta metro area, as soon as it closed at 4 p.m. Although the FDIC lined up an acquiring bank, this one is mostly on the FDIC; nearly half of the deposits were brokered, and the FDIC will be paying out those deposits to the brokers. The remaining estimated $56 million in deposits are being assumed by Bank of North Georgia, which is also purchasing $31 million in assets. The FDIC expects to take a loss of $42 million disposing of the other assets. American Southern Bank opened in 2005 and had just one office, although it apparently had a second office at some point.

The bigger story for the FDIC tonight, though, was the failure of First Bank of Beverly Hills in California. With around $1 billion in deposits, it might have been too large for the FDIC to round up another bank to take the deposits. Or, the number of retail depositors might have been too small to interest another bank. Instead, the FDIC will begin mailing checks to depositors on Monday.

First Bank of Beverly Hills had just one office, not in Beverly Hills, but 25 miles to the west in Calabasas. It was previously known, until 2004, as Wilshire Financial Services Group. It specialized in California real estate loans, especially in bridge loans for commercial developers. Bridge loans are meant to be short-term loans, sometimes just for a week or two as borrowers complete planned transactions, yet that became a high-risk business in California in the last three years. The bank’s stock market value had plunged from $7 million at the beginning of the year to less than $1 million in March. It had announced a deal to be acquired by a lending company, but that deal apparently would not have passed regulatory scrutiny, and was called off on April 15. The FDIC estimates a cost of $394 million for this bank closing.

The FDIC took another substantial hit with the closing of First Bank of Idaho, which had seven offices in Idaho and Wyoming. Three locations used the name First Bank of the Tetons. The FDIC’s cost to close this bank is estimated at $191 million. U.S. Bank, a large regional bank that has dozens of branches in Idaho and a presence across the west and as far east as Pennsylvania, is assuming the deposits and acquiring the offices of First Bank of Idaho, paying a 0.55 percent premium for the deposits. The FDIC is retaining most of the assets.

First Bank of Idaho steered clear of subprime mortgages, it said in a statement released April 14, but took substantial loan losses from the decline in real estate values. The Office of Thrift Supervision ordered it on April 6 to improve its operations and increase its capital levels.

The largest bank failure tonight, though, was a credit union. Credit unions were thought to have steered clear of most of the lending failings of commercial banks, but on the other hand, credit unions make a high proportion of home mortgage loans, which puts them at risk in a real estate downturn. The National Credit Union Administration (NCUA) tonight took over Eastern Financial Florida Credit Union and appointed temporary managers for it. The credit union has $1.6 billion in assets and 200,000 members.

Credit union failures are so rare that there isn’t a well-established sequence of actions for the NCUA to follow. The objectives in a credit union failure are quite different from those in a failure of a commercial bank. In a bank failure, ordinarily, the objective is to protect the depositors, while the owners of the bank get paid only in the rare instance that there is money left over at the end of the process. At a credit union, however, the depositors are the owners. There is, then, relatively little to be gained by closing a failed credit union or by merging it with another credit union. Instead, the NCUA will try to change the management approach of the credit union to make it more successful so that the deposits are protected. Eastern Financial Florida Credit Union will continue normal operations for now, and the NCUA will evaluate it in detail to determine its next moves.

There was one more bank failure tonight, this one in eastern Michigan. Michigan Heritage Bank, based in Farmington Hills, was closed. The deposits are being transferred to another local bank, Level One Bank, which is paying a 1.16 percent premium for the deposits. Level One Bank is also purchasing one fourth of the assets. The FDIC expects this closing to cost it $71 million.

Michigan Heritage Bank had three offices within a ten mile radius. Level One Bank, prior to acquiring these offices, had one office, one mile down the road from the headquarters of Michigan Heritage Bank. Level One Bank issued a press release describing the acquisition of its three new offices as an appropriate growth opportunity.

After a series of losses at Michigan Heritage Bank, the Fed ordered it to suspend its dividend in December, then ordered it to raise capital by April 15. But the bank’s stock market value last year fell from $9 million to about $200,000, giving it little prospect of raising capital by issuing more shares of stock. The bank signed a letter of intent with a private investor on April 15, but that deal was called off on Monday, leading to tonight’s closure.

Thursday, April 23, 2009

E-Mail Notifications: An Outline for a New E-Mail Standard

If people fear e-mail, it is because it is a source of important information about things to do — and it is deeply flawed. Important messages don’t get through, and simple notifications have to be dressed up as letters, with about a page of superfluous words added, to improve their chances of getting through. At the same time, many of the messages that do get through are outright junk. This means you have to wade through page after page of dubious messages to get to the ones that tell you what you might need to do.

A replacement for the current e-mail standards could change all this. It would need to incorporate filtering, and to do so more effectively, it could include more data about the things to do found in the message. Already e-mail contains a few data items, such as the reply e-mail address and when the message was originally sent. In current e-mail standards, however, these are treated as metadata, not really part of the message, but information about the letter that the e-mail message supposedly contains. It would make filtering easier if these were treated as full-fledged data items and if there were more of them.

If you think of e-mail as containing mostly notifications, and few actual letters, you would want to add data elements that describe the follow-up action, its deadline, a link to the web page where action might be taken, and a link to a web page that explains the message. Then you would want your e-mail program to let you change these after you receive the message, in case your interpretation of what you need to do is different.

With a few more data elements in a message, the “letter” part of many messages could be eliminated or reduced to just one line. This would have multiple advantages. You could filter these messages accurately — when a message’s links go to a known web site, then your filters can prioritize the message appropriately. And with deadlines or due dates available to the filters, you can have more assurance that you’re not missing deadlines that are buried in your e-mail inbox. The link data elements would not be able to disguise a link with text that says something like “click here,” a favorite trick of spammers. Indeed, if an e-mail message contained a letter with a link in it, you would know it was probably junk. And without the ability to link deceptively, it would be almost impossible for spammers to send effective spam messages.

Much of this could be done within the current e-mail standard, but I believe it would be better if a new e-mail standard were drawn up. This new standard would be based on these ideas:

  • Treating messages as notifications, rather than letters
  • Filtering at the center of the standard, not an add-on
  • Adding data elements suitable for notifications
  • Treating data elements as data, rather than metadata, and a letter, if one is included, as just another data element
  • Treating links as data elements, not requiring them to be included in the letter
  • Incorporating identity information from participating social networks

With these changes, I believe e-mail could be made twice as productive. That is, you could finish the key things you depend on e-mail for in half the time. Of course, much of the time people spend in e-mail is spent on memos and documents sent through e-mail, and this won’t change that process, but it seems to me it could speed up virtually everything else that has to do with e-mail.

While it would be useful to have a standard that the world could agree on, there is nothing that actually forces anyone to wait for that standard to be put together. Any two social networks that wanted to get together on this could get the new e-mail system going, and since e-mail is pretty simple compared to the other things that social networks do, they could probably have something ready for users to try out within a month or two.

Wednesday, April 22, 2009

The Curse of E-Mail Filtering

Yesterday I described what makes Internet e-mail so awkward: it’s built for letters, but few of the messages it carries are really letters. Most notes written from one person to another go through the messaging systems of web sites, especially social networking sites. Those messages, although they may be read and written on a web page, don’t go through the Internet e-mail system. Most messages that go through Internet e-mail are spam, and the biggest challenges in e-mail are separating the spam from the legitimate e-mail, and then among the legitimate messages, separating the messages of value from those that can be ignored.

In other words, the heart of effective Internet e-mail is filtering. E-mail filters are like the Santa Claus of messaging, separating good messages from bad. Yet even though this is the most important thing to happen with e-mail, it is not part of the e-mail standards at all. The core of the current e-mail system is an add-on, with no two engineers agreeing on how it should work.

Worse, e-mail filtering is done based on the outdated assumption that an e-mail message should contain a letter. Most of the rules in e-mail filtering are performing a simple style check, to see how closely the message resembles a letter. Other rules check for nearly identical messages being sent to many people at once. This catches the most obvious spam efforts, but it is a tricky combination. It results in a test that the most important messages will tend to fail. There are perfectly legitimate notifications that might be sent to a million people at a time — “There is an electric bill ready for your review,” for example, or, “Madonna concert tickets are now on sale.” The people tasked with sending these messages are forced to dress them up with all sorts of superfluous verbiage just to get them past the e-mail filters. It’s an inefficient use of engineering talent, and it is also a waste of the customers’ time, as you could read the actual one-line message faster than the dressed-up one-page message that is more likely to make it through the filters.

Most e-mail filtering is designed to let most legitimate messages through, but there are exceptions. Many corporate e-mail servers are protected by firewall e-mail filters that freely delete messages they can’t figure out. And a few Internet service providers, notably Verizon, have adopted the same kind of filter for their paying customers, gleefully deleting the note from your Aunt Brittany because she sent it to a list of 15 recipients, and sent it from her husband’s computer rather than her own. The vagaries of Internet e-mail filtering mean that you can never really be sure that any message gets through. Of course, this just adds to the e-mail mess, as people who really need to make sure their message gets through will send it several times.

It would be nice if messages from people you like could bypass all the e-mail filters. Unfortunately, you control e-mail filtering only after a message reaches your own account, and to get that far, it may have to pass through three to six e-mail servers along the way. And even when a message gets to you, you are taking chances by filtering it, because astonishingly, the Internet e-mail system does not record any reliable information about the source of a message.

Information that could vouch for the source of a message could not come from the e-mail system. That information would have to come from some kind of social network. It makes sense that most personal e-mail has moved to social network web sites, because there, when you receive a message, it comes with some assurance that its sender is someone you have heard of before. Quite possibly, no filtering needed.

To strengthen and extend this side of e-mail would take at least these two steps:

  1. Stronger passwords. Many people use simple one-word passwords, such as “hi,” to sign into a social network. These passwords are simply too easy for spammers to guess. If a spammer can sign into your account and send a bunch of advertising messages to everyone you know, making the messages appear to come from you, it largely defeats the identity protections that a social network provides. Worse, the social network might boot you off if that happened.
  2. Exchange of messages between social networks. You wouldn’t have to join every social network to get the benefit of identity protection for e-mail messages if social networks could work out a way to exchange messages. The messages would have to come with a few measures to help you judge the validity of the identity of the sender. Then, for example, you can skip over the message from the person who has been in the social network for 2 days, has 2 contacts, and is writing about “discount prescriptons.”

I have just scratched the surface here, but it is already clear that if you set out to design a new e-mail system that starts with the need for filtering, you get a completely different approach than what you arrive at by trying to fix the current e-mail system. One of the things you realize when you look at e-mail this way is that it’s not really about the messages. The messages themselves are small, even inconsequential, compared to the totality of what a messaging system has to do. It is ultimately about the people you want to connect to and the things you want to do.

Tuesday, April 21, 2009

Why E-Mail Is So Awkward

A month ago I learned that Internet e-mail is declining and more person-to-person notes are happening inside social media web sites than outside through Internet e-mail servers. This realization made me suddenly self-conscious about my own e-mail use. I started to ask myself whether I really needed Internet e-mail anymore.

The answer, of course, is that I do need Internet e-mail, but not for quite the same reasons that I had imagined when I started on this line of inquiry. Internet e-mail is essential for:

  • Proving you’re a real person so you can sign up for some web sites.
  • Password recovery when you forget your password at a web site.
  • Notifications of events that happen, for which you can take further action at a web site.
  • Updates from businesses you want to keep up with.
  • Inquiries from people who might want to buy your stuff, hire you, or do business with you.

My guess is that when you look at your own e-mail inbox, most of the important messages you get fall into one these categories. And if you look at e-mail this way, you can immediately see why e-mail is so awkward. The Internet e-mail standards and e-mail programs are designed for letters. That’s why it’s called e-mail, after all. Yet most actual letters, from one person to another, are sent within social network web sites, not through the open e-mail system. So here we have a system that’s designed to carry letters, and we’re using it for everything but.

Years ago, there was an effort to overhaul e-mail, and it didn’t get very far. The main thing we got out of that was a system of filters to allow us to ignore the worst kind of spam, the messages sent from machines controlled by criminal organizations to e-mail addresses chosen at random.

E-mail filters are an awkward add-on to a system that was originally designed not to need them. Yet they are the most important thing in the e-mail system, because the criminal element in unsolicited commercial e-mail generates more than 99 percent of all e-mail messages. Without spam filters, we basically wouldn’t have e-mail.

E-mail filters are awkward because in the e-mail system, we run things with the idea that the letter must get through, as if we’re running the new Pony Express. If we were to overhaul the e-mail system now, we would want to change that. We would put the filters at the heart of the system, make them part of the standard itself, not an add-on. We would de-emphasize the idea of a letter, since so few messages are actual letters. And we would end up with a communications system that is very different from the e-mail system we have now.

Monday, April 20, 2009

Stem Cells Show Promise

Stem cell research is not just a nice idea, but one that is branching out in all directions, much like the stem cells themselves. Looking just at the latest headlines, researchers have promising leads on treatments based on stem cells for:

What researchers are learning is that stem cells are more flexible than scientists had previously thought and that various body tissues are already programmed to make use of stem cells when they are available. The result is that some of the treatments being studied are simpler than had been expected. The most encouraging thing, though, is that these discoveries are occurring everywhere, in several countries and in various kinds of laboratories. What is more, researchers are finding different results by studying different kinds of stem cells. All this suggests that this is an area of research in which there is a great deal more to be discovered.

Sunday, April 19, 2009

The Mall Goes Bankrupt

General Growth Properties is the ungainly and ironic name of the owner of some of the most successful malls in the country. The name is all the more ironic now that the company is in bankruptcy.

What does a bankrupt mall look like? It’s not likely you’ll see anything different. The mall would love to cut costs but can’t afford to show the slightest hint of decay or neglect because of the risk of making shoppers feel unwelcome or giving stores second thoughts about paying the rent. So far, there are no plans to close any of General Growth Properties’ malls, but other malls are closing or emptying out, putting pressure on healthy malls to look extra-healthy.

As the year started, there were predictions that 100 malls or more could close this year, and the way the CEO of General Growth Properties tells the story, banks are worried enough not to lend to anyone who is running a mall.

The root of the problem is declining income for consumers, who in turn are spending about 5 percent less than retailers had planned on. The lower revenue for retailers leads to stores closing, and with fewer stores, malls collect less in rent. Even before consumer spending turned down, there were malls that were half empty, their corridors “echo chambers” (as one writer put it) connecting the anchor stores to the food court. As retailers decide which stores to close, the locations in malls that look like they’re falling apart will be near the top of the list. It’s in order to avoid that downward spiral that your local bankrupt mall will be going out of its way to give the appearance of success.

Saturday, April 18, 2009

No Soft Landing

When the economy is in turmoil, people tend to look for a soft landing, a way to minimize the impact of the changes going on. That’s why Congress and the U.S. Treasury spent a trillion dollars to keep Wall Street from falling apart last fall, for example. Yet the instinct to look for a soft landing can create unnecessary risks for the economy as a whole. I opposed the Wall Street bailout not because Wall Street is not important, but because the costs were so high that the bailout had a destabilizing effect on the economy as a whole, exposing the whole country to risks that, with a different approach, could have been contained.

The risks are becoming easier to see as the economic decline accelerates. After blowing two trillion dollars on two questionable initiatives, it will probably be impossible for the U.S. government to undertake a third. It should instead retain its little remaining borrowing power for an actual emergency. And that is not just my opinion. There is a consensus among economists and financiers that government borrowing has its limits, so it is just a question of where the limits are. Some think we passed them a year or two ago. But the International Monetary Fund (IMF) puts the limits right about where we are now.

The head of the IMF is recommending (from a Telegraph story)

further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

“The impact becomes negative for debt levels that exceed 60pc of GDP,” said the Fund.

According to this model, it is time for the United States to put the brakes on government spending before debt load begins to weigh down the economy. And the IMF is not taking into account the possibility that recent global financial changes could make government borrowing more difficult than in the past. That’s a change that could pull the limits to government spending lower.

Wall Street as we knew it is not coming back, yet the quest for a soft landing is leading Congress and regulators to drag their feet on the structural reforms that are needed in the securities market. At a minimum, the derivatives contracts we are hearing so much about need to be made public. The longer that and other reforms are delayed, the larger the problem grows, as harmful business dealings continue to mount. Like continuing to build a tower after design flaws are discovered, the result of the delay will not be a softer landing, but a larger loss when the eventual collapse occurs.

To ease a transition, you have to see it coming farther in advance. An Earth-impact asteroid that is identified five years in advance can probably be redirected just by attaching sails to it. Hospitals that plan for the coming decline in health care can scale down by cutting back on hiring. Once the problem is here, options are more limited. General Motors’ most important options now are about what to include in the business plan it presents to the bankruptcy court. Hospitals that did not plan for the downturn may now have to decide the size of their layoffs. The problems on Wall Street were well known five years ago. Some of the fixes that were discussed then, in the papers, in board meetings, and in Congress, have still only been studied. Read Black Swan author Nassim Nicholas Taleb’s reform proposals and consider how much less painful the current situation might be if they had been phased in starting five years ago:

Ten principles for a Black Swan-proof world

Taleb’s ideas might seem drastic, but it is only because they are needed quickly to avoid compounding the current problems and creating a worse crisis next year than the one we saw last year. If they could be phased in over a period of years, they would not be so hard to take. But we did not get an early start, so we do not have the luxury of a soft landing now.

Friday, April 17, 2009

This Week in Bank Failures

It has been a trying week in the U.S. banking system. The Treasury, after saying it would not be releasing results of its stress tests on the 19 largest banks, now says it will release some information, but it has not decided what yet. This increases pressure on these large banks to pay back their TARP money, which among bankers carries a greater stigma than the other bailout money they are getting. But there are contradictions in the banks’ statements, leading me to doubt whether they will really be doing anything.

JPMorgan Chase, for example, claims it never needed and did not use the $25 billion it got from the Treasury’s TARP program — yet it has borrowed $40 billion since using temporary guarantees provided by the FDIC. So the story about repaying TARP could just be a bit of misdirection. A bank can tell investors it is raising money to repay TARP, then go on to use the money to cover loan losses instead.

No one is looking for strength in banks’ first-quarter earnings reports. Anything resembling a profit is considered a hopeful sign, and many banks will be reporting a profit, or at least a smaller loss, thanks to a change in accounting rules that allows some assets to be valued above what they could be sold for. Wells Fargo pre-announced its largest quarterly profit ever, yet the profit came entirely from a reduction in write-downs following the accounting rule changes. At other banks, according to reports, payments from the U.S. Treasury by way of AIG may be providing most of the profit.

Banking regulators had problems of their own this week. On Wednesday, posts on political blogs magnified earlier comments from Washington about an imagined banking panic and led to something of a lunch-hour run on the banks. This appeared to be intentional and coordinated on the bloggers’ part, though I haven’t seen anything to confirm this. Fortunately, cooler heads prevailed and nothing carried over into the next day, but it is a sign of how tense the situation still is half a year after the crisis on Wall Street. The Fed, in an effort to promote a kind of transparency that would keep rumors like this from gaining traction, said it might start holding regular press conferences.

In Europe, earlier efforts to stabilize the banking system have given way to political posturing and finger-pointing. One of the more colorful stories comes from an Audit Commission report in the United Kingdom. The report inexplicably asserts that local governments should have known of the Iceland banking collapse 7 months in advance. They did not, of course, and one local council had the misfortune of placing a deposit with an Iceland bank 20 minutes before it went under. About 3 percent of U.K. local government funds are tied up as a result of Iceland’s collapse, totaling more than $1 billion.

Two small banks failed tonight: American Sterling Bank of Sugar Creek, Missouri, near Kansas City, and a thousand miles to the west, in the northeast corner of Nevada, Great Basin Bank. Each bank had five offices and roughly $200 million in deposits. American Sterling Bank’s offices included one each in California and Arizona. In each case, the deposits were transferred and more than 90 percent of assets were sold to an acquiring bank, with the FDIC providing partial loss protection on most of the assets. The FDIC estimates the same cost for each closure, $42 million.

Metcalf Bank, which is also based in the Kansas City metro area, is taking over the deposits and offices of American Sterling Bank. Metcalf Bank has offices across the Kansas City area, including one three blocks away from the headquarters of American Sterling Bank in Sugar Creek. An insurance company had been trying since the beginning of the year to negotiate a purchase of American Sterling Bank, but ultimately did not get the U.S. Treasury assistance it had been seeking.

The deposits and offices of Great Basin Bank of Nevada are being transferred to Nevada State Bank, which has offices throughout Nevada. The failure was blamed on loan losses, but with bank branches about every two blocks, Elko may simply have had too much banking for a city of 17,000.

Thursday, April 16, 2009

Health Care Continues Its Decline

Hospital layoffs are becoming more frequent as the number of patients seeking treatment in the U.S. health care system continues to sag. The layoffs are smaller than we saw in November and December, but they are everywhere, with hospital jobs being cut 50 and 100 at a time on almost a daily basis. Yesterday it was Spokane. The day before that, Boulder. Last week, a hospital in Madison, Wisconsin, had to apologize after it mistakenly called a nurse out of surgery to lay her off.

It is not that Americans are more healthy than they were a couple of years ago — they are, but only ever so slightly, and that is probably the result of less medical treatment, not the cause of it. Rather, it is a reflection of a growing reluctance to rely on commercial medicine as the first line of defense against illness.

Probably more than anything, it reflects the time pressure that people face these days. It may help to remember that medical practitioners have been pioneers in this regard. In the 1970s, physicians were notorious for having packed work schedules and rushing from one task to the next. Now seemingly everyone is that busy, and it perhaps should not be a surprise that after decades of hearing, “Get some rest, and drink plenty of water,” from a harried physician, that consumers would first try similar home remedies on their own initiative, thinking to save two or three hours on a trip to the doctor’s office.

Health care is all but recession-proof, making the cutbacks that much more vexing. The revenue lost now is probably not coming back after the recession is over. Health care, along with government and education, was tipped as one of the sectors to keep growing during the recession. This is the year when the aging U.S. population was supposed to provide the biggest boost to health care demand, with the peak of the baby boom reaching retirement age, so if health care revenue is not going up now, when will it?

Wednesday, April 15, 2009

Don’t Confuse Patience With Customer Satisfaction

Customers know business is difficult. So they put up with a lot. They’ll give a business or an industry a chance to work through its problems — but only up to a point. Over time, patience gives way to impatience, and then, customers may go off and look for alternatives.

Patience is good, but business managers who expect more ruthless behavior from customers can get confused. If you believe that customers wouldn’t still be hanging around your business unless they were happy, you might not take a look at the problems the customers are having until the customers have given up on you.

Customer patience creates a lag between a business’s performance and its sales measures — a lag that can extend for many years. Take newspapers as an example. Newspapers in the United States peaked in the 1980s, but the numbers on the industry could give you a different impression. Circulation was at its highest later, around 1990–1993, and advertising revenue continued to edge up until 2005 or 2006. That means readers were complaining about newspapers for 20 years before the more numbers-oriented newspaper publishers started to pay attention.

I don’t mean to pick on newspapers. You can point to similar stories in the record business, pro sports, and elsewhere — not to mention the Internal Revenue Service. Most businesses today are managed by numbers: scorecards, financial statements, quality reports, and the like. It’s management by failure — they don’t pay attention to a problem until it hurts their results. Management by failure is inherently slow because you wait for a failure to occur before you take action to understand a problem. Any company can have a huge advantage just by trying to get ahead of problems, to notice them quickly and respond faster than the customers will.

Tuesday, April 14, 2009

What the United States Can Learn From Cuba

Yesterday U.S. President Barack Obama eliminated some administrative barriers for travel to Cuba. Restrictions remain, but with some red tape going away, many Americans are talking today about the possibility of traveling to Cuba.

Having never been to Cuba myself, there is not much I can add to the lively debate going on over Cuba policy. It seems, however, that Cuba is not as controversial a subject as it appears on television. A recent poll of Miami Herald readers, for example, found that 84.2 percent favored free travel to Cuba, with only 11.3 percent supporting the then-current restrictions. From people who know more about Cuba than I, here are the most popular suggestions I could find of things that Americans might learn something about on a visit to Cuba:

Monday, April 13, 2009

When Construction Just Stops

A 32-story office tower planned for downtown Portland, Oregon, never got off the ground. The foundation and three-story underground parking garage are likely to be basically finished today, and construction is stopping right there, at ground level. The stoppage is blamed on difficulties in getting financing for the project, but the reason banks are reluctant to lend is the real reason projects like this are coming to a stop: no one is entirely sure that the city, or the country, needs another huge building right now. In normal times, it is safe to assume that a building that is 50 percent rented when construction starts would be 90 percent rented in the year it opens. In a recession, it could be the reverse — as the prospective tenants’ plans run into problems, the building could be just 10 percent rented by the time it opens, leaving the builder with no income to make payments on the loans.

It is that kind of doubt and uncertainty that feeds a recession. In boom times, people know what they want, and the biggest worry is that they will go too slow and a competitor will get a head start on them. In a recession, it is the opposite. One’s own poorly chosen objective or strategy is the most likely cause of failure. The large businesses that worry too much about the competition during a recession are the ones that create the most spectacular collapses.

In principle, it’s good that people are willing to stop and think to make sure they’re doing the right thing before they commit large amounts of money or energy to something. But it is a problem for the construction workers who head home unemployed at the end of the day, many to remain out of work for the rest of the year. We want to keep the economy going steadily because we need to eat every year, not just in boom times. In a recession, it can appear that the economy is wracked with indecision, and the more hungry you get, the more dysfunctional this behavior appears.

Sunday, April 12, 2009

Capitalism vs. Free Markets

The New York Times today has a roundup of opinion about the popular perception of capitalism and socialism, in response to a recent poll that surprised some by finding that only a plurality of Americans find capitalism superior to socialism. Times editor Tobin Harshaw focuses mostly on possible shifts in the definition of socialism, even going so far as to quote a dictionary definition of it. But what of the shifting meaning of capitalism?

The core idea in capitalism is capital, which in theory is the equipment necessary to produce things of value. Capitalism holds that the people who supply this equipment should take charge of all the work that gets done. This makes sense if you think of an industrial-age enterprise such as one of the forges built not far from here at Valley Forge in the 1800s. The metalworkers who worked there couldn’t do much without the forge itself. Yet, as I have been saying for years, the importance of equipment in work has been declining for more than a century. In most businesses there is no key piece of equipment that makes the business go. And so, often, capitalism is the kid who says, “It’s my baseball, so I’m in charge of the team.”

There is confusion about this because talking heads have repeated the phrase “free market capitalism” for so long that people have started to put those two ideas together, and that is a mistake. The free market is the main thing driving down the importance of capital. In a free market system, anyone who wants to be a capitalist, to put equipment together to set up a business, has to compete with all the other capitalists. A business in which capital is king and the needs of workers, customers, and suppliers are secondary is soon replaced by another business. And it cannot be any other way in a world in which capital is no longer as scarce as the other key resources that make a business work.

Despite the efforts of capitalists to hold on to their privileged positions, market forces will continue to work against them. The New York Times may not yet understand this, but the public does. The Times points out another recent poll from the same pollsters “in which 70% of Americans prefer a free-market economy.” Clearly, Americans see a divergence between free markets and capitalism. Billionaire-investors, business tycoons, and their friends in Washington may continue to introduce roadblocks to slow down the decline of capital, but that cannot last forever; the free-market approach will win out in the end.

Saturday, April 11, 2009

Recession Is a Time for Change: 5 Reasons

You hear about a recession as a slowdown, but if you focus on changes in culture, lifestyle, and technology, a recession is faster than normal times. In evolutionary theory, change happens faster under stress, and we know that a recession can be stressful for most people, so it makes sense that the pace of change would pick up.

It may also be a good time to approach change consciously and intentionally. In other words, now might be a good time for some of the changes you’ve been thinking about for years, or even a good time to reexamine and redesign your life. Here are five reasons why:

  1. You might be forced to change if you lose your job, investments go bad, or your favorite pizza place closes.
  2. You might have more time to focus on yourself if your work hours or entertainment spending are cut back.
  3. Change happening all around you makes it easier to get in the flow of change. When everything is changing, people expect you to change too.
  4. There are new opportunities as a result of other people’s initiatives.
  5. It’s easier to get help because other people are in the same situation, with a greater need to change and more time to dedicate to it.

Friday, April 10, 2009

This Week in Bank Failures

Changes in accounting rules will allow some banks to report impressive-looking profits for the first quarter. These accounting changes allow banks to record assets such as loans at greater than market value when, in the bank’s opinion, there is not a well-functioning market for the asset. This is something banks were doing anyway, but with the rule change, they are likely to stretch it that much further. But more write-downs are ahead. Experts caution that most banks’ asset valuations are based on a projected unemployment level of 7.5 percent for this year. The actual unemployment level is already higher than that and is likely to reach 11 percent around the end of the year. Unemployed workers often make late loan payments, which is bad news for banks.

Saturday afternoon (morning on the west coast), A New Way Forward is organizing rallies nationwide to protest the Wall Street bailout. Offering the formula, “Nationalize–Reorganize–Decentralize,” they are asking for the largest banks to be broken up into pieces small enough that they can’t threaten the national economy.

According to published reports, the Treasury’s stress test has been completed and was designed to pass all of the 19 largest banks in the United States regardless of the condition they were in. The laws that cover bank examinations prevent the Treasury from saying much about any specific bank, but the secrecy surrounding the stress test is not reassuring.

The North Carolina Commissioner of Banks tonight ended the saga of Bank of Wilmington. This bank was founded in 1998 in Wilmington, North Carolina. It was known for the last two years as Cape Fear Bank as a reflection of a plan to expand its operations southward, yet in the end, six of its eight offices were in the Wilmington area. The bank saw massive loan losses that began soon after the name change and became the focus of a proxy fight that lasted most of last year. Proxy fights at banks are almost unheard of, and this one ended in a compromise when the bank’s CEO resigned in September. But the bank’s problems were just beginning, as losses continued to mount, and in February, the bank’s stock value fell to less than $2 million as the FDIC issued a cease-and-desist order to prevent the bank from paying any dividends to stockholders. One week ago, the bank suggested it was undercapitalized and had “substantial doubt” that it could continue to operate.

Cape Fear Bank’s $400 million in deposits are being taken over by a South Carolina bank, First Federal of Charleston, South Carolina. First Federal is also purchasing most of the assets at book value, with the FDIC providing loss protection on most of the purchased assets. The FDIC estimates the costs from this bank failure at $131 million.

A much larger bank failure occurred tonight in Colorado, where New Frontier Bank of Greeley, Colorado, was closed. Unable to find a buyer for this failed bank, the FDIC set up a temporary bank, calling it the Deposit Insurance National Bank of Greeley, or DINB. DINB will operate for 30 days under the management of Bank of the West. DINB will take over all insured deposits and will process checks and other payments during the next 30 days, but customers should start next week on the process of moving accounts to another bank.

The FDIC will take over New Frontier Bank’s $2 billion in assets and will collect payments from its loan customers. The closure is expected to cost the FDIC $670 million.

The FDIC found multiple deficiencies in New Frontier Bank in a cease-and-desist order issued in December. New Frontier Bank reported a loss of $11 million last year, the only loss in its 10-year history, but its bad loans nearly doubled between October and December, and then its largest customer went bankrupt in January. The bank had expected to be bought out by an investment group, but the investors and regulators apparently could not agree on the amount of capital needed, and the prospective buyers gave up about a week ago after another large loan failed at the bank. This came around the same time that the FDIC had ordered the bank’s founder removed from his job as president. This week customers were lining up to withdraw their money in anticipation of a possible failure, in some cases just wanting to make sure they took out enough to pay their taxes next week.

Thursday, April 9, 2009

How Radical Are Your Cuts?

Suze Orman’s “live on half” idea, meaning, spend just half of your income or half of what you’re used to on your living expenses, is a good idea for a lot of people at this point. It’s a great time to reduce or pay off debts, to put yourself in a more stable financial position in case there is a disruption in your income. Some of the biggest corporations (I recently mentioned Ford and General Electric) are doing this, and you might have a reason to do it too.

I like the idea of “live on half” because it gets you away from the thought that you can get where you’re going by making a few cuts here and there. To cut your expenses by half, you have to start taking away things that you think are essential parts of what you’re doing. That’s what gets you from incremental cost-cutting to radical cost-cutting.

And that can be a difficult hurdle sometimes. People think they’re doing radical cost-cutting, when in fact, their cuts are only incremental. How radical are the cuts you are thinking about? See where you think they might fit in in the following table. I’ve included a range of cost areas so you get the idea that this distinction works no matter what you’re spending your money on.

Subject Incremental Cost-Cutting Radical Cost-Cutting
Hair Getting your hair done only once every two months Getting your mom to cut your hair
Food Eating out only once a week Eating mostly fresh vegetables and grains that you cook at home
Television Canceling HBO and NFL Network Canceling cable entirely, and movie rental plans too, and getting the VCR out of the closet so that you can watch your old video tapes
Home Firing the landscaping service and cutting your own grass Renting out your house for a year and moving into the spare room in your sister’s house
Vacation Buying tickets on Priceline Camping at a campground 12 miles from the beach
Clothes Buying clothes only if they are at least 75% off Wearing the clothes you already have
Car Shopping for a less expensive, more fuel-efficient car this time Continuing to drive the car you already have, and working from home and not going out for days at a time
General Motors Phasing out Hummer and Saturn, and delaying most model redesigns Eliminating all models except for a range of Chevrolet cars and GMC trucks, and cutting off 80% of dealerships
The U.S. Federal Budget Canceling the laser plane, and cutting funding for abstinence-only sex education Closing all overseas military bases, and pulling all troops out of Asia and Europe

I’m sure you won’t be prepared to do most of the radical cuts you can think of, but it’s still constructive to be able to think of them, and to recognize that you have options if you need to cut expenses more than you have already.

Wednesday, April 8, 2009

Get Leverage From Incremental Lifestyle Cost-Cutting

One of the themes in this recession is radical lifestyle cost-cutting. That is largely because of the way Tim Ferriss changed the meaning of radical lifestyle cost-cutting book in his book The 4-Hour Workweek. If you sell your home, or rent it out, because you won’t particularly be needing it for a few years, that doesn’t mean you’re homeless — it means you’re traveling the world. I touched on this topic last month, and I’ll keep coming back to it as long as the recession lasts.

In focusing on radical lifestyle cost-cutting, though, I don’t want to overlook the power of incremental lifestyle cost-cutting. If you can cut your cost of living by a few dollars a month, it might not seem like much, but it can make a big difference in your financial picture. And this is something that Americans are doing in large numbers.

I know this is true because of the consumer credit totals just released by the Federal Reserve. Consumer credit card debt (combined with any other “revolving” line of credit) fell from $963.5 billion in January to $955.7 billion in February. That is a $7.8 billion decline, or about $40 per cardholder.

A $8 billion change might seem small when you compare it to some of the numbers in the headlines, but it actually represents a groundswell of debt payment. It comes, after all, at a time when household income is declining, and right after Christmas, at that. And the reduction in credit card debt is corroborated by other measures: a sudden jump in the savings rate and declines in grocery and restaurant sales. When you understand that people are eating less so they can pay off their credit cards, it tells you that times have changed.

The important thing to understand is that these are incremental changes in spending, but they represent a sea change in people’s finances. If you are like the average American, you have recently gone from spending 98 percent of your income to 96 percent. That is not a big change in spending, but it gives you twice the financial leverage. For example, you could put twice as much money into paying down your debts, and pay them off perhaps three times as fast, depending on the interest rate you are paying. If you are 35 years old, this can make the difference between paying off your debts when you are 50 or remaining in debt for the rest of your life — a big difference in the big picture. When you look at the whole country, the rate at which people were paying down their credit card debts between January and February is fast enough that, if everyone kept it up for about nine years, it would theoretically be enough to pay off all the credit cards in the country. Nine years is a long time, but having no more credit card debt would be a massive change in American culture. That tells you what a little bit of financial leverage can accomplish.

If have debts and are making at least an average income, there is no reason not to go father with this. Cut back your spending by 10 percent, to about 88 percent of your income, and you can have six times the financial leverage of someone who is spending 98 percent of their income. All this is possible with incremental cost-cutting, finding ways to cut your cost of living by a little bit here and there.

Tuesday, April 7, 2009

Save Money, But Don’t Waste Time

There are plenty of reasons you might want to save money these days. The realization that the banks could cut off your credit cards with a single keystroke, even by mistake, makes it an urgent matter to spend less so you can pay off the credit cards and some some money for an emergency — and that is just one common scenario this year.

To help you out, people are trotting out the same old money-saving tips, some of which date back to before the Great Depression. And there is a problem with many of these tips: they can use up a lot of time. That is a problem because whenever you need to save money, you need to save time too.

I know not many people are falling for the old grocery-coupon scam, in which you can spend hours slicing up the newspaper and poking around the supermarket for a few dollars in mostly illusory savings. But what other tips don’t make good use of your time? There isn’t a simple answer because it depends on your skills and preferences, and you have to consider the amount of money that’s involved.

One of the hottest penny-pinching tips this year is “brew your own” — coffee, that is, although the same strategy could just as well be applied to beer. Yes, it is possible to make your own cup of coffee, but should you? If the extra work at breakfast makes you late for work, or if your coffee tastes terrible, or if you end up drinking extra coffee and feeling extra jittery, then the dollar you save won’t mean that much. Of course, if you really had to save money, you could drink water instead of coffee, but I will leave it to you to decide whether the times are that desperate.

Cooking supper is a great way to save time and money, as the time it takes to cook a meal is usually less than the time you would be waiting at a restaurant. Yet this assumes that you have a workable kitchen and can keep at cooking long enough to get good at it — and these are assumptions that won’t work for everyone.

Some people hate to wash the dishes, and you can get around most of that chore by using disposable plates and cups. Someone would point out, of course, that paper plates are a cost you could avoid, but if the thought of washing the plates makes you want to go eat at a restaurant instead, then the penny you would have saved on paper plates won’t amount to anything.

Most old-time money-saving tips focus on the trade-off between time and money: make your own soap, change the oil in your car yourself. Now that everyone is squeezed for time, a more fruitful area to consider is the ways you can save both time and money while compromising something like style or entertainment: postponing a haircut or cash wash, or watching old video tapes instead of renting a movie. The compromises take some of the fun and flair out of life, but compromises like these have to be made sometimes, because nothing takes the fun and flair out of life like the realization that you are out of money and out of time.

Monday, April 6, 2009

Ford Strengthens Its Position

As rival General Motors acknowledged that it was preparing for bankruptcy “if it’s required,” Ford Motor Co. continued to portray the character of a survivor with the $10 billion financial restructuring it announced today. The main thing Ford did was issue stock in exchange for much of its long-term debt. It also paid off some of its debt in cash.

The debt conversions at Ford are meant to track with those required of General Motors and Chrysler as a condition of their government bailout. Neither GM nor Chrysler has been able, to date, to restructure its debt in this fashion, which was one of the reasons, one of many, that the White House rejected their turnaround plans. Nothing so specific was required of Ford, which isn’t getting a bailout, but its efforts to follow the bailout guidelines might mean it hopes to be eligible for a bailout next year, if it turns out it needs one then.

But it might not. Ford’s remaining debt is said to be $15 billion, which sounds like a lot, but is less than two months of revenue for Ford. It is a very manageable debt load for Ford if the company can manage to break even over the next couple of years. That is a challenge, of course, in a time when sales of all durable goods are down sharply, but Ford, having spent the last two years cutting its capacity and fixed costs, is in a much better position to ride out the downturn than most other automakers.

The major automakers that are doing best so far in the U.S. market this year are Hyundai, Kia, and Subaru, with sales down only slightly from last year. Doing the worst is Mitsubishi, down 57 percent. This suggests that people are buying new cars based on practicality rather than attitude this year.

Sunday, April 5, 2009

When Credit Cards Become Less Important

Suze Orman made a recommendation recently on the Oprah Winfrey Show that must have surprised some of her regular viewers: to make paying off credit card debt a lower priority. Usually if people know just one thing about Suze Orman, it is that she sees paying off credit card debt as the turning point in achieving personal financial success, so if she is saying to put less emphasis on credit card debt, it seems like a big change.

Yet Suze has been saying all along that it is important to have an emergency fund large enough to cover a few months of living expenses. Her change in strategy is a recognition of the increasing importance of the emergency fund.

  • Your personal emergency fund should now cover at least 8 months of living expenses, Suze says, because if you lose your job this year, you could easily be unemployed for that length of time.
  • You can no longer rely on credit cards or other bank lines of credit for your emergency funding, because if you lose your job or become ill or injured, that is when banks are most likely to cancel your credit.
  • To collect your emergency fund faster, Suze suggests cutting your living expenses to half of your income, or half of what you used to spend. This also helps you get ready for an emergency. You don’t want to have to be figuring out how to cut your living expenses at the same time you’re looking for a job, for example, so cut back now.

For people who don’t have an emergency fund, this would mean paying the minimum amount due on credit cards until you save up an emergency fund. From my experience working for banks, I would suggest paying one dollar more than the minimum payment if you can. I am pretty sure that banks are making lists of customers who pay the minimum month after month, and targeting those customers with interest rate increases and credit limit reductions. Paying one dollar more might be enough to keep you off that list.

Once you have an emergency fund, please don’t keep it all in one place. This is especially important if you work for a bank: don’t keep much of your emergency fund in the bank where you work. You don’t want to risk losing your job and your emergency funds at the same time, even if there is only a tiny chance of that happening.

With the banking system looking a bit queasy these days, no one should rely on it in the absolute way you might have a year or two ago. Keep enough cash and food at home to get through at least three weeks. Many people do this anyway, but I know there are also people who keep no cash at all and rely on their cell phones to tell them where the nearest ATM is. That’s not a strategy you should rely on for the next three years. Pretend you’re in a science fiction movie and the ATMs stop working for a few weeks. What do you do?

Credit cards are becoming less important in this recession. Banks have already cut the total credit limits for credit cards by almost half, and they may keep cutting for several more years — and that’s not even counting the risk that bad credit card debts could drive a few banks out of business. As another writer put it recently, cash is king again — make sure you have some.

Saturday, April 4, 2009

More Scientists Notice the Pace of Arctic Climate Change

One of the biases you will see in science is a tendency to believe that things are not changing. There would be no science unless we could pin down principles and characteristics that don’t change, so it’s understandable that science would seek those out. At the same time, the built-in skepticism of science often turns into a skepticism of change, in which scientists may continue to insist that things are not changing until there is overwhelming evidence that change is occurring.

All this is frustrating to those of us who are trying to get science to recognize a change that is taking place, such as the change in Arctic climate reflected in the disappearance of the Arctic ice cap. It is easy enough for someone like me to point to one event after another and say, “That never happened before! That never happened before!” Scientists need good, clean data, and often lots of it, before they can prove anything.

In the Arctic, scientists have long since proved the “Arctic ice cap” of mid-20th century textbooks does not currently exist. But that’s not the same as proving that the ice cap melted. Maybe the textbooks were wrong. There was nevertheless enough solid data by about 1997 to create a consensus that the Arctic climate is changing and the ice is melting, but not nearly enough to describe the pace of change. How long would it take for the Arctic ice to melt? Some thought 10,000 years; others, 250.

That recognition is more progress than it sounds like, because once you establish the existence of a trend, it’s considered fair game to use any available data to make the best guess you can about the pace of change. The stories that are coming back from visits to the Arctic Ocean suggest that the change is happening rapidly, and more and more data is being collected.

One reason scientists are starting to acknowledge the pace of change in the Arctic is that the data is showing that the more cautious climate-change models are wrong. One model of Arctic climate predicted a five-degree increase in fall Arctic surface temperatures by 2070. Then data came in that showed that the predicted five-degree increase had already occurred by 2008. Does that mean the Arctic ice is melting 62 years sooner than they thought? Well, maybe so — it’s hard to argue with hard data.

You can watch the extent of Arctic sea ice day by day and see history taking place. This spring the ice is melting rapidly and is closer to the record minimum track of two years ago than to the long-term average. Will Arctic sea ice set a new record minimum this year? There have been several new record lows in recent years, and with the ice thinning dramatically last year, a new record low this year seems more likely than not.

To the public, television is the ultimate proof, and most people won’t be completely convinced that the ice cap is gone till they see the live pictures on CNN of Richard Branson’s yacht at the North Pole. That may still be a few years away, but commercial shippers are hoping for the first trans-Arctic commercial freight traffic this summer, and that too would be a change that would be hard to argue with.

With all the focus on sea ice, it is easy to forget that the most compelling evidence of climate change is on land. The loss of permafrost has been affecting towns across Alaska and northern Canada since at least the early 1990s. It’s a change you can see, it doesn’t depend on the precise calibration of anything, it’s a permanent change, and it affects everything else.

Friday, April 3, 2009

This Week in Bank Failures

In a week that saw a summit meeting of 20 of the most successful countries in the world, a meeting largely occupied with the unfolding turmoil in the financial system, it became a little too obvious that various parties are trying to use the difficulties in banking to further their own political agendas.

The most egregious example of this was a Wall Street Journal piece. It started off trying to paint the demonstrators at the G-20 meeting in London as a sort of anti-capitalist movement, but that is more or less the kind of wretched excess you expect from The Wall Street Journal. The part that was over the top was when it went on to suggest that the real cause of the banking crisis, and the culprit that the demonstrators ought to be demonstrating against, is deposit insurance.

Lest anyone think The Wall Street Journal has not lost its greedy little collective mind, let me spell out where we would be around now if the deposit insurance provided by the FDIC had been done away with sometime during the recent boom. There might not be a single commercial bank able to keep its doors open consistently in the United States. There would be no more automatic teller machines. Nearly every bank branch would be abandoned, and the bank headquarters, those that were able to keep operating, would be available by appointment only, with locked doors and armed guards to keep the retail customers and reporters out. The money lost in the bank failures that occurred, which would by now have included most of the banks in the country, would have led to the bankruptcy of most of the businesses in the country. Those of us fortunate enough to still be working would either be getting paid in cash at the end of each day or would be taking a tremendous risk of never collecting their pay. The Dow Jones Industrial Average wouldn’t be hovering near 8,000 — it wouldn’t exist anymore. The Wall Street Journal, in the unlikely event that it were still in operation, would be reduced to selling its papers on the street for 25 cents a copy, as the infrastructure that currently allows it to appear on newsstands across the country would have broken down. And the “riots” it would be reporting on would not be a few hundred people trying to make as much noise as they could in London, but would include the angriest one million of the four million unemployed workers in New York City.

In short, if we didn’t have deposit insurance, the scene we would be seeing would be a cross between the Great Depression and Escape From New York. The Wall Street Journal is correct in saying that deposit insurance causes various kinds of market distortions. But the suggestion to do away with it because of that is madness, and the stridency in its prose is just another reminder of how far removed from any useful view of reality Wall Street has become.

Thursday, April 2, 2009

The G-20 Deal: A More Gentle, Coordinated Global Collapse?

At first glance, the statement from the G-20 summit today in London seems an exercise in nostalgia. It looks back more than forward — back at what might have been if a series of mistakes had not been made.

Some good could come out of that, of course: regulatory reforms that might keep some of the recent financial disasters from recurring. The collapse of the financial system was put in motion in gaps that were allowed in financial system regulation and accounting rules, and the G-20 statement recognizes that those gaps are a problem. But the more important issues, about transparency, derivatives, and governance, were seemingly too controversial for the G-20 to take on.

As for working our way out of the recession, the initiatives the G-20 announced are much smaller than those already undertaken by the United States and will probably not have a detectable effect in rousing the world economy. It is large enough for the leaders involved to say they did something, but not so large that it would put any major government’s treasury in peril. This also means that it is not enough to turn the recession around, but it is perhaps enough to allow a more gentle, coordinated global collapse. It is left for someone else to figure out how to revive the world economy.

In truth, no one knows whether the most powerful national governments in the world will be able to do more than they are already doing. This is part of the reason the G-20 was able to reach agreement so quickly on this occasion. They were constrained by the situation they found themselves in. On many of the key issues they were considering, they did not have a wide range of options to consider.

Wednesday, April 1, 2009

Making Every Day Count

Quality engineers tell us that the surest way to improve at something is to keep track of how you’re doing. If you want to make a more efficient light bulb, measure the efficiency of the light bulbs you’re making. If you want more money, keep a record of all the money you bring in and all the money you spend. If you want to lose weight, measure your weight and your waist.

A great deal of your success in life comes from the things you do from day to day. To help you measure your performance in any of these areas, Benjamin Franklin devised a simple record-keeping technique, which is described here:

One key tip to help you be happier

Keep track of how you’re doing every day on the habits you want to cultivate, and you stand a better chance of making every day count. If you know your results from the day will end up on a chart that you’ll be looking at, you take your actions a little more seriously — and you’re less likely to forget your everyday goals by getting caught up in the unique distractions of the day, which on a day like today might include: