Tuesday, June 30, 2009

Minimizing the Cost of Plastic

Suzanne Garland and I have just completed a month in which we set out to not use our credit cards. We mostly paid cash. As a result, we spent more carefully and, as far as I can tell, spent less than we might have otherwise.

Twice in the last two weeks, though, I found myself paying by credit card, even though I was carrying enough cash, just out of fatigue. It occurred to me to ask how often fatigue plays a role in people’s spending decisions, including my own. Spending money is such a spiritually resonant event that ideally, it ought to always be done from a position of strength. How much do we spend unwisely just because we are too tired to make the right decisions at the moment? Perhaps there should be a rule not to make any spending decisions from a position of fatigue. Fatigue, perhaps, is a condition that calls for rest rather than shopping.

Much has been made recently of the cardholder fees associated with credit cards, and the risk of data loss in credit card transactions is also a consideration, but credit cards have a significant cost even when everything goes perfectly. The merchant pays its bank a transaction fee of about 35¢ plus about 2.5 percent of the transaction total. That means, if you buy a $70 concert ticket with a credit card, the bank gets about $2 and the ticket seller gets only about $68. The bank fees then are divided up among about five banks and clearinghouses in five different states. It is the same story with debit cards.

By contrast, when you pay with cash, the cost of handling the cash transaction consists mostly of the hourly wages paid to the cashier who is standing right in front of you. Money is more local when you pay with cash. The cash you spend in a store helps keep the store running, instead of helping to keep the banks running.

Not satisfied with running up the fees on credit cards, banks are now boosting fees on debit cards. One of the most troubling tricks banks have is a $35 overdraft charge for each debit card transaction that the bank processes after the checking account has run out of money. You might think banks could refuse those charges, but many banks do not offer cardholders that option. To make this trickier, often the only reason the account is overdrawn in the first place is that the bank has assessed a surprise service charge on the account. Thus, while debit cards have their advantages, it is risky to use them for large numbers of routine transactions. Make eight debit card purchases in a day, and if the bank has already drained the checking account, you could be looking at $280 in overdraft charges.

All things considered, it is better not to rely so much on credit or debit cards. I believe I will go back to using a credit card to buy gasoline, but I do not want to be using my card every day.

Suzanne last week applied for and obtained a debit card from her bank. She has started to use it for online transactions, and she thinks it will help her manage her cash at times when it is hard to get to the bank. But for the most part, she says, she will be paying for purchases in cash. And that is what I’ll be doing too. Paying for routine purchases in cash can be more work, but you end up getting more for your money.

Monday, June 29, 2009

Senate Finds Systemic Fraud by Health Insurers

A U.S. Senate study released Wednesday documents just one health insurance fraud scheme, but it found that virtually the entire health insurance industry was participating. Insurers intentionally underpaid certain claims by approximately 30 percent. The study also found that the companies compounded the fraud by intentionally misleading customers about the extent to which they would pay claims.

Tens of thousands of insurance company employees must have participated in this pattern of fraud for more than ten years, yet no criminal charges for insurance fraud are planned, and this is just one of many ways in which insurance companies commit insurance fraud. It is no wonder if health insurance companies feel as if they can do whatever they want, with little or no risk of prosecution or government intervention of any kind.

This state of affairs is largely the result of the conflict of interest built into health coverage, and it can be corrected only by changing the way the health insurance industry operates. But restructuring the whole industry could take five years or longer. A quicker approach would be to have the government set up its own health coverage system with integrity built into to the way it operates. People who need coverage now should not have to wait five years just because it is hard for insurance companies to change — and it could be more than ten years if the insurance industry decides to challenge the reforms in court. But after a properly functioning government health plan exists, the insurance industry could copy the practices of the government health plan.

If the system worked the way the laws say it should, many of the insurance companies should be shut down. If fraud is supposed to be a sufficient cause to revoke an insurance license, then a business model based on fraud ought to permanently disqualify a company from any involvement in the insurance business. I suspect the reason regulators do not take action against insurers is that they are afraid they will make a bad situation worse. But if we are so dependent on the insurance companies that we cannot rein them in no matter what crimes they commit, that is all the more reason to create an alternative.

Sunday, June 28, 2009

Breaking the Beef Habit

When energy prices spiked last year, one the most shocking increases was in the price of beef. Beef is ten times as energy-intensive as other foods, and prices went up to levels that surprised consumers and restaurants. As a result, many people stopped viewing beef as an everyday food, and started saving it for special occasions.

Beef prices have stabilized this year, rising slightly in some countries while falling in North America, but the price relief hasn’t convinced people to start eating beef again. Instead, people are eating less beef than last year. Having broken the habit of eating beef regularly, people are not inclined to go back. The economy is also a factor. Beef is seen as expensive, as indeed it is compared to almost any other whole food, and people think of it as an expense they can do without when money is tight.

U.S. wholesale beef prices continue to fall as producers did not cut production enough to match falling demand. Exports to Asia have not picked up as the industry had hoped — Asian consumers continue to worry about mad cow disease, a problem that the U.S. beef industry still has not effectively addressed. Meanwhile, in Australia, most cattle farmers may be losing money again this year, as wholesale beef prices remain at low levels.

There really is no reason for beef to be an everyday food. It is fundamentally a junk food, with health risks that far outweigh its minimal nutritional value. After movies such as Super Size Me and the new Food, Inc., consumers may be more aware of the health risks of food such as beef. The heavy environmental impact is a negative for beef, as more consumers consider the environment in their food choices. And the huge advertising campaigns that made beef popular were more than a generation ago. And so, while beef is sure to remain a familiar food in most of the richer countries of the world, it is hard to see anything that could stop its recent decline in popularity.

Saturday, June 27, 2009

Yes, You Can Save Money By Cooking

More people are cooking their own food to save money. I know this from the long lines I saw the last time I went to the produce market. Food costs much less if you cook it yourself, and less still if you buy fresh produce in season. How much less? I took this photo of everything I bought on my trip to the produce market.

Produce, $9.00

All the food you see here, which is more than many people would want to carry in their two hands, cost me $9.00. That’s less than I would usually pay for one meal in a restaurant, and less than I might pay for a day of packaged food from a supermarket.

Cooking your own food is less expensive in part because it is more efficient. A lot more processing, packaging, testing, and transportation goes into packaged food. Restaurants serve only about half of the food they prepare, and customers eat only about three fourths of the food that is served. Cook your own food, and you can cook as little or as much as you want.

If you are in the West Chester, Pennsylvania, area this afternoon, you might want to stop by Veggie Fest, an event with a food and cooking theme. (Update: Photos from Veggie Fest.)

Friday, June 26, 2009

This Week in Bank Failures

Banking executive Allen Stanford has been indicted for fraud and related charges and has pleaded not guilty. According to the charges, Stanford and others exaggerated the financial condition of the Stanford group of companies, including Stanford International Bank in Antigua, reporting about $1 billion more in assets than actually existed, in order to mislead investors. In Antigua, a financial regulator has been charged with taking bribes from Stanford.

The House of Representatives is still trying to figure out what happened at the end of last year when Bank of America acquired Merrill Lynch, an iffy deal that could eventually contribute to the bank’s collapse. There are conflicting stories of what happened, and Fed chief Ben Bernanke said little to clear things up in his testimony Thursday. He said that Fed officials acted “with the highest integrity” but failed to explain why he did not take action to stop the deal, or to alert other banking regulators, after the financial consequences to the bank became clear in December.

The secrecy with which the Fed operates, in general, has continued to be a subject of discussion, with some lawmakers calling for an audit of the Fed, and others proposing to reduce the Fed’s authority in some areas.

Why has Georgia seen so many banks fail? Part of it is just that the economic slowdown hit Georgia a year or two earlier than the rest of the country. What is happening now in Georgia may hit the rest of the country starting next year. But it is also true that Georgia has more banks than most states. Even though a few have failed and a few have arranged to be bought out to avoid failure, Georgia still has a lot of banks. The failures that have occurred in Georgia do not represent the kind of threat to the state that is posed by the bank failures in Nevada, for example, which did not have so many banks to begin with, and where some areas no longer have convenient access to banking services.

Many of the Georgia banks that have failed had just four offices, and that was the case again tonight when Neighborhood Community Bank of Newnan, Georgia, failed. The Fed on May 27 had rejected the bank’s capital plan, saying it would not provide it sufficient capital to operate, and ordered it to arrange sufficient capital levels within 30 days. That deadline passed yesterday, and tonight, the bank was closed and its deposits turned over to CharterBank.

Geographically, the deal makes perfect sense for CharterBank, a community bank operating along the I-85 corridor on both sides of the Alabama-Georgia border. Neighborhood Community Bank was also along Interstate 85, in the next two towns to the north.

CharterBank is also purchasing 94 percent of the assets of the failed bank, with the FDIC providing partial loss protection.

Another bank failure occurred nearby a few minutes earlier. One county to the north, in Villa Rica, Community Bank of West Georgia failed. This bank had a second office in Kennesaw, Georgia, that operated under the name Cobb Commercial Bank. The FDIC did not have a buyer for this bank, and will mail checks to the depositors on Monday. Customers of the bank who receive automatic deposits in their accounts should immediately make arrangements to receive their money at another bank or in another form, to avoid delays in getting that money.

The two failed Georgia banks had the same financial story. Both were formed only a few years before Georgia’s real estate market peaked — Neighborhood Community Bank in 2000, and Community Bank of West Georgia three years later. Both had heavy real estate loan exposures. At the end of the first quarter, about one third of their loans were delinquent, and their net worth was vanishing, just $5 million and $7 million, respectively, amounts certain to be wiped out by losses on real estate they had already foreclosed on. Each bank had total deposits that were a little under $200 million. The FDIC estimates costs around $150 million from the two bank closings combined.

The two banks were not affiliated with the several other banks in the area that use variations on the Community Bank name.

Some of the least fruitful real estate investments in recent years have been on the fringes of the suburbs of major cities. Real estate developers trying to pick the next hot location for suburban expansion ended up planning and building homes, stores, and offices that no one wanted. It is no surprise, then, that so many bank failures have been found in these areas. The first bank failure in Minnesota this year was Horizon Bank, just beyond the northern suburbs of Minneapolis-St. Paul, in Pine City and North Branch. This was a small bank in a small town, with just $69 million in deposits, in a town of 3,000, and because of its small size, regulators might been slow to respond to its deteriorating finances. The bank’s offices, deposits, and most assets are being transferred to Stearns Bank, based in nearby St. Cloud. With the two new branches, Stearns Bank now has six offices in Minnesota, along with one in Arizona. The closing will cost the FDIC about $34 million. Horizon Bank was known until recently as Pine County Bank. It is not connected to the better-known Horizon Bank owned by Horizon Financial Corp. of Bellingham, Washington.

In California, an equally small bank closed tonight, MetroPacific Bank in Irvine. The office, deposits, and assets are being transferred to Sunwest Bank, a commercial bank with four offices across southern California. This closing will cost the FDIC about $29 million.

The last bank closing tonight was a larger bank in California. Mirae Bank was founded in 2002 with an emphasis on reaching Korean-speaking businesses and consumers in Los Angeles. It had four locations in Los Angeles and one in Torrance. As of a month ago, it had $362 million in deposits.

Its deposits are being transferred to Wilshire State Bank, which is also purchasing 99 percent of the assets and will be operating the five offices. Wilshire State Bank is a large bank with 12 offices in Los Angeles County, four elsewhere in California, and six in other states. In its letter to Mirae Bank customers, Wilshire State Bank takes pains to emphasize its own Korean-American and multi-ethnic background. The FDIC is providing partial loss protection on most of the assets. This closing may cost the FDIC around $50 million.

The FDIC has tallied 45 bank closings in the first half of 2009. That compares to 25 for all of 2008 and 3 in 2007. A year ago, as the current string of bank failures was just getting underway, some economists were forecasting 200 U.S. bank failures. At this rate, though, the final total is likely to be higher than that.

A failed credit union was resolved on Wednesday when the NCUA merged Eastern Financial Florida Credit Union into Space Coast Credit Union. Eastern Financial had been put into conservatorship on April 24. This move more than doubles the size of Space Coast Credit Union.

Thursday, June 25, 2009

Too Much TV?

Mail is mostly advertising, and the volume of mail has fallen pretty much in line with the fortunes of the advertising industry. One category of mail I receive has not fallen off, though. Television services continue to send me letters, flyers, and post cards, trying to persuade me to spend my money on a cable or satellite service. This tiny corner of the national economy is providing me with more than 5 percent of my mail.

When a business category starts to be over-advertised like this, it’s usually a sign of trouble on the way. The industry is overbuilt — because the prices it is charging are so high that there seems to be a big profit available. But then competition, saturation, and customer fatigue take their toll, and the industry has to cut back, sometimes in a dramatic shakeout. It has happened to “long distance” telephone service, music subscription services, ISPs, cell phone handsets, beer, real estate, pickup trucks. It’s now hitting the banking business. And it will hit television before too long.

Television is losing customers, and it could minimize this by cutting prices and simplifying delivery. It is as if cable companies do not realize how high their prices are and how complicated their systems are to use. It is not something they will figure out by comparing themselves to the satellite TV providers.

Instead, they need to compare television to the Internet. Imagine this list of questions:

  • How many channels does your Internet get?
  • How do you keep track of your favorite shows on the Internet?
  • How do you record Internet shows so you can watch them later?

Questions like these are so clueless you can’t even answer them. The Internet is not subject to the arbitrary limitations that accompany television service. The real questions are not about the Internet, but about television:

  • Why does a cable service limit you to just a few channels, and force you to find them by number?
  • Why can’t a cable service keep track of shows for people?
  • Why does a cable service have to be limited to delivering programs just at scheduled times?

And of course, why does cable have to be so complicated and expensive? The TV industry’s very muted response to these questions tell me they don’t see the trouble coming. But trouble is coming. The post cards don’t lie.

Wednesday, June 24, 2009

The Mobile Phone Spies

The protests in Iran against the fake election results have brought attention to the way governments spy on text messages and sometimes phone calls to and from mobile telephones. Iranian police spilled the beans by arresting more than 100 people based on text messages sent from their phones. They also made their efforts obvious by slowing down the Internet the day after the election, when the fake results were announced. According to BBC News, “Because Iran is effectively reading every message, this results in an inevitable slow down of traffic.”

It turns out, though, that governments everywhere routinely intercept text messages, voice messages, and cellular phone calls. And to a limited extent, they can track people’s movements by the movements of the phone, anytime the phone is turned on. Protesters in Iran have had to develop the habit of turning their phones off when they go into certain neighborhoods where stations have been set up just for the purpose of recording phone movements.

In the United States, the NSA made headlines five years ago with their strategy of tracking the movements of everyone who has a cellular phone. And they are still doing it. The theory, apparently, is that if your phone is in the same neighborhood as the phone of a known foreign agent, at the same time, it makes it more likely that you are some kind of spy too. It’s not much of a theory, and by all accounts the NSA has had terrible difficulty getting any useful information out of it, but the mere fact that they keep trying may make you want to shut off your cell phone sometimes.

This is a tough idea for most Americans to relate to, but it is quickly becoming common knowledge in Tehran, where mobile phone arrests are made right out on the street for everyone to see. The citizen reporters there know not to alert the world directly from their phones if they can help it. The mobile phone spies are watching.

Tuesday, June 23, 2009

Squeezing Construction In Between the Rains

On expressways near here, construction has been spilling over into evening rush hour, creating 15-minute delays as drivers have to form a single lane to get by. It seemed like the dumbest thing until I remembered that this construction was scheduled to be done at night. But it has rained 10 out of the last 11 nights, and most of the days too. A construction crew can’t just stand by forever. After all the delays they’ve been through, when a non-rainy day pops up, they have to go to work.

Construction was supposed to be the main program in the so-called stimulus package that would get the U.S. economy moving again. June is usually the best construction month of the year, but inconveniently, there has been rain in the forecast every day this month for most of the northeast quarter of the country. In more than a few areas there has been flooding. I doubt that even the construction that had been planned before the Economic Recovery Act is getting done this month. The rain is slowing everything down.

Surely the weather will be more auspicious than this at some point in the next four months, and all the construction that’s been budgeted will get done. But with the economy already slowing down, this extra slowdown in the construction schedules is a bit of bad luck.

Monday, June 22, 2009

Gasoline Prices Near Peak

U.S. gasoline prices have gone up 54 days in a row, which even after last year has to be some kind of record. Now there are reasons to hope that prices are near their peak.

  • A recent flurry of optimism about the U.S. economy is starting to fade as new statistics come out showing a continuing decline. Economic optimism had lifted world oil prices, and those now seem to be stabilizing.
  • U.S. gasoline inventories are larger than you would expect at this time of year.
  • U.S. gasoline demand tends to be highest around July 4, Independence Day, and then to decline from July through October.
  • Total U.S. employment continues to fall, and this is the biggest factor affecting U.S. gasoline demand. Fewer jobs means fewer people driving to work, so gasoline demand will continue to be soft.

Prices will probably begin to decline in July, but they may not decline by much.

  • Gasoline prices are not so high, one third less than last year. When prices are lower, it is harder for them to fall.
  • Any hurricane in the Gulf of Mexico could disrupt oil or gasoline production, sending prices higher for several weeks. The most active part of the North Atlantic hurricane season is between August and October.
  • Political worries about Nigeria and Iran could provide upward pressure on world oil prices, even if supplies from those countries are not disrupted.
  • If the U.S. dollar weakens, that would drive up prices of all imports, including oil.

Sunday, June 21, 2009

Bally Tries to Keep Going

Seven months into its second bankruptcy, the future of Bally Total Fitness is still up in the air.

Bally tried to find a buyer for the whole chain, but that was unsuccessful. It had better luck renegotiating its locations. It reduced rents for at least half of its locations and is closing about one tenth of its locations this month, using bankruptcy to get out of long-term leases. Many of the locations being closed are in Texas.

That’s a start, but Bally has been unable to work out a deal to reduce its debt load to a manageable level. Instead, a week ago it filed a plan that would see it emerge from bankruptcy under the same kind of staggering debt load it had when it emerged from bankruptcy two years ago. It is basically telling the bankruptcy court, “We know it failed before, but we want to try it again.”

Bankruptcy courts ordinarily disapprove this kind of plan, but supposing the court makes an exception in this case, there is still no more financing out there. Bally has to make a profit to keep going. And that means it has to retain most of its existing customers despite the declining economy, its own declining reputation, and negative public sentiment about the Wall Street banks who will be its new owners. Bally does not have the money to bring back the level of service it provided in the past. Instead, it has to find a way to make customers feel good about what it does now. If Bally can do that, it may be able to stay in business.

Saturday, June 20, 2009

Credit Card Transaction Risks

Every time you make any purchase on a credit card or any payment card, there is the risk that someone is writing down your name and numbers so they can break into your account later. In the largest of the known recent data center break-ins, at TJX, Heartland Payment Systems, and RBS, criminals got away with data from 100–500 million credit card transactions.

If you are a United States credit card holder, the probability that an organized crime group has one of your card numbers right now, along with its verification code and expiration date, is more than 1 in 10 from these incidents alone. And the odds that your card data was acquired in another security leak that has gone undetected is even higher. We used to worry just about what could happen if someone got your credit card, but the risk that all the data on the card could be stolen by electronic means is far higher than the risk of the actual card being stolen or misplaced.

The risk of data being intercepted in any one transaction is small, but it’s a risk that goes up with every transaction you make on a card. And the risk is greater when you use your card out in the world than when you use it on a web site. The credit card network is not yet as secure as the Internet is. It is just another reason to use cash for routine small transactions when it’s convenient.

I have been paying cash all month, or trying to. Most of my transactions are for $30 or less, so they don’t have much impact on the way I manage my cash. It is not always easier to pay for all these transactions in cash, but perhaps it is a little bit safer.

I have worked for years in banking data, and from everything I have seen, I don’t think the current payment system, based on 16-digit numbers that are printed on cards and stay the same for years, will stand up much longer. The 16-digit number system wasn’t designed for the network era. Even after all the enhancements we can think of are completed, it may still be too vulnerable to attack. A single massive transaction attack by criminals could permanently shut down the whole credit card system in a matter of days with relatively little warning. And if using cash for the many routine small transactions will help the transaction processing system stand up a little bit longer, then perhaps it is something people should be encouraged to do.

Friday, June 19, 2009

This Week in Bank Failures

I was wondering about the slow response last year by regulators to banks that were in dire condition, and I was not the only one who remarked on it. Now, reports from the regulators themselves are asking questions about their response in some situations, especially involving smaller banks. Some of the bank failures occurred after banks made drastic and disastrous changes in their business models, changes that regulators saw but often did not look closely at until two years or more had gone by.

Although the regulators could not admit this, much of the problem is political. The Bush administration sought to paint a rosy picture of the faltering economy of 2002–2006, and this created pressure on all the enforcement arms in Washington, pressure to take a hands-off approach to any profitable business. One of the results of this was a pattern of accounting irregularities by which businesses, including banks, reported profits that did not actually exist, while regulators looked the other way.

The risk of this political pressure continues now, as the Obama administration seeks to persuade the public that an economic recovery is underway while the economy itself continues an eerily steady downward slide. A president is always obliged to be upbeat about his country and its prospects, but we are in for trouble whenever that mentality extends to regulators looking at the actions of individual companies. Regulators need to be skeptical in order to discover problems so that the problems can be corrected. This is especially true in banking.

It is important that bank inspectors discover problem banks before the public does. Regulators can respond to a problem bank in an orderly way; all the public can do is rush to the bank to take their money out. That’s something that has happened often enough in the past year to be worrisome; if it becomes a habit on the part of the public, it could get out of hand and temporarily shut down the entire banking system. Already consumers are keeping less of their money in banks because of the perceived risk, and the smaller deposit base makes it harder for banks to operate. Regulators could help restore confidence in the banks by responding more quickly to the obviously hapless banks, instead of waiting for month after month, and headline after headline, before finally taking action.

Consumers remain under pressure with wages flat, employment declining, credit getting tighter, and savings being depleted. As a result, banks are having more trouble than ever with consumer loans, according to reports released this week covering the month of May. Consumer loans may continue to deteriorate for another two years, as unemployment rises further and wages stagnate while prices begin to increase again. JPMorgan Chase and Capital One are particularly at risk to consumer loan defaults because of their aggressive credit card marketing, and Bank of America also because of its outsized exposure to consumers in California.

President Obama introduced a token package of banking reforms Wednesday. The package includes substantive steps toward regulating hedge funds, but the difficult questions about systemic risk in the banking system, the derivatives trade, banking governance, and similar issues are apparently left to be addressed after the health of the economy improves. The issues involved are so complicated that Congress may not be able to schedule all the hearings it will need to hold before the year is over. And events that occur between now and then will probably sweep aside much of the new proposal, as Congress is forced to seek answers to bigger problems that Obama’s plan does not address.

Among the three banks that failed tonight, the largest was Cooperative Bank of Wilmington, North Carolina. It had operated for 111 years and had nearly $1 billion in assets. Its deposits were turned over to First Bank, of Troy, North Carolina, which is also purchasing 97 percent of the assets, with the FDIC providing partial loss protection on the assets.

First Bank is a regional holding company with dozens of offices in North and South Carolina. By adding the 24 Cooperative Bank locations, it gains a much stronger presence in the coastal counties, especially in North Carolina.

Cape Fear Bank failed three months ago in the same area, stung by the faltering real estate market along the North Carolina coast, and the same economic tides may have also swamped Cooperative Bank. The stories are very different, though; Cape Fear Bank was half as big, only ten years old, and seemingly directionless, while Cooperative Bank looked careful and stable by comparison.

Three hundred miles to the west, yet another bank failed in the greater Atlanta area. Southern Community Bank had five offices in Fayetteville, Georgia, and two nearby towns south of Atlanta. It had about $300 million in deposits. United Community Bank is assuming the deposits and purchasing 98 percent of the assets of the failed bank, including the five offices. The FDIC is providing partial loss protection on many of the assets.

United Community Bank is focused mostly on the highlands in far northern Georgia and neighboring areas of Tennessee and North Carolina, but it has a presence in the Atlanta metro area also. The new offices fit with its strategy of adding branches in the suburbs on all sides of Atlanta.

Southern Community Bank had overhauled its operations last year after difficulties with real estate loans, but was then hit with new problems as the national economy declined. By March, 39 percent of its loans had problems.

A smaller bank failed tonight in Kansas. First National Bank of Anthony had six offices and $142 million in deposits. Two offices operated under the name First National Bank of Johnson County. SNB Bank of Kansas is taking over the deposits and acquiring substantially all of the assets, with the FDIC providing partial loss protection on most of the assets. SNB Bank of Kansas is the Kansas presence of an Oklahoma-based bank holding company. This was the third bank failure in the Kansas City area this year.

The FDIC estimates that tonight’s three failures may cost it $363 million. Forty FDIC-insured banks have failed so far this year.

Thursday, June 18, 2009

The End of the Tobacco Party

The Tobacco Control Act is only a small step toward reducing the influence of tobacco on American culture. But before this year, it would have been impossible. Tobacco owned one of the two major political parties. And even if Congress could have agreed on a way to address the tobacco question, the previous president made it clear that he would veto any tobacco bill that reached his desk.

In the 1990s, the Republican party’s strength was built on three bases of support. The most important of these was the tobacco industry, which provided the biggest block of funds to operate the party. To this was added the party’s traditional support among conservatives and the mobilizing energy of religious fundamentalists. This was never a comfortable coalition. Conservatives could support tobacco as a matter of respect for the individual. In the conservative worldview, if smoking is causing problems for a person, it is a problem for that individual to solve, presumably by quitting smoking, and there really isn’t anything the government has to do.

This conservative principle of respect for the individual, however, runs completely counter to the religious fundamentalists’ view of people as basically evil. The so-called conservative Christian political viewpoint, which is actually not particularly conservative or Christian in its ideas, calls for strong institutions to protect society from the actions of individuals. And as you would expect, those strong institutions should primarily be religious institutions. They would rather see a weak government, except in situations where the government can act as an extension of religious institutions. In this worldview, the success or failure of individuals is a result of their success or failure in following rules of religion, and any attempt to interfere with this, such as a legal restriction on harmful activities such as smoking or gambling, is an attempt to weaken religion by propping up weak people.

While it is possible to follow the logic in either case, you can see that it is very strained logic. It is not so easy for a religious person or a conservative person to actively support cigarette smoking as a political position.

But at least it was something the whole party could agree on. Conservatives and religious fundamentalists tend not to agree on very much. Conservatives believe in individual freedom, while religious fundamentalists believe in forcing a narrow construction of religion on everyone. Beneath this split, conservatives believe in the strength of the individual, while religious fundamentalists believe in the weakness of the individual. They are exactly opposite views.

With the passage of the Tobacco Control Act, tobacco will continue to fade from the picture. This leaves these two irreconcilable worldviews to wrestle for control of the Republican party. The party, in the end, can represent only one of them, but which one?

The voters have already spoken on this question. Political conservatives abandoned the Republicans in droves last year, leaving it as a party to be dominated by religious fundamentalists. And a purge has begun, as Republican leaders withdraw support from their elected officials who do not toe the religious fundamentalist line. Even if conservatives later become unhappy with the Democratic party — a scenario that Democrats are taking great pains to avoid — it is probably too late for conservatives to ever regain control of the Republican party.

Wednesday, June 17, 2009

Smoking Ammonia

The new tobacco labeling rules will forever change the way Americans look at cigarettes.

Right now, people think of cigarettes as being made from tobacco. And that is reason enough for a person not to have them. But starting in December 2010, cigarette packages will list the ingredients of cigarettes. And tobacco will be just the preamble to a list of chemicals that may include such things as ammonia.

Of course, I don’t know what the ingredients will be. Cigarette ingredients are a closely guarded secret, not even widely known in the factories where the cigarettes are made. I mention ammonia because it is a harmful, pharmacologically active artificial chemical that scientists have found by analyzing the finished product. But whatever the specifics, the lists of ingredients will surprise smokers who have been trained to think of cigarettes as being made of tobacco. I am sure that some lifelong smokers will read what they have been smoking all these years and suddenly feel very queasy.

A simple change in a label can lead to a quick, permanent change in consumer behavior. It has happened before.

At one time, granola bars were almost as big as breakfast cereal. Then the labeling rules changed, and the FDA required food packaging to prominently show macronutrients, including fat content. Granola bars are loaded with fat, and after people saw how much fat it was, sales of granola bars fell by 90 percent in less than two years. They went from taking up half the cereal aisle to fitting on one shelf in the back.

Something similar happened about three years ago when trans fats got more prominent label mentions. In what is left of the granola bar category, the products had to be reformulated to be made without trans fats. Why? Trans fats are artificial chemicals, the product of a chemical factory, that are of no benefit whatever to the person who consumes them and are known to take apart the body’s cells one by one. Hardly anyone would intentionally buy a granola bar, which is supposed to based on plants, when dangerous artificial chemicals are a featured ingredient. There will be some of the same reaction when people see the list of dangerous artificial chemicals that cigarettes contain. No one should imagine just because cigarettes are addictive that the same thing cannot happen with cigarettes.

Smokers are already self-conscious. When you see a person smoking outside an office building, the person knows you are seeing a victim of the commercial system engaging in a disturbing pattern of self-harm. It’s such a troubling picture that the smoker would rather not have anyone notice them. And that’s now, while they can pretend they are just smoking tobacco.

You can sort of try to explain tobacco as a plant fiber with some kind of history. But if everyone knows you are smoking ammonia? Taking time out, and spending your hard-earned money, to put the output of a chemical factory into your lungs?

When people know the ingredients in cigarettes, there will be no pride in smoking left at all. Even the most dedicated smokers will have to sense that the world sees them, and their chemical habit, in a bad light.

And the list of ingredients is just one of several labeling changes. The cigarettes themselves may not visibly change, but the packs and cartons will look entirely different, and the way people see cigarettes will be changed in a big way. Will cigarettes fall off 90 percent in two years, the way granola bars did? Not likely — cigarettes are addictive, after all. But will most cigarette smokers keep smoking the way they had been, as if nothing had happened? Not a chance.

Tuesday, June 16, 2009

Smoking Is Involved in More Than Half of All Illness

Even with all the other drama going on the world right now, it is hard to overstate the significance of the tobacco bill that Congress approved Friday. It is probably the biggest thing to happen in the United States this year. It is a bigger story than the potential collapse of the banking industry, just because the personal and financial losses from tobacco use are greater than the combined value of all the banks in the world. It is a bigger story than any war the United States has a hand in — more people die every day from tobacco than from military action. With the Tobacco Control Act, the richest nation in the world has turned the corner on one of the deadliest forces in history.

People don’t fully appreciate the harm that cigarette smoke does because they think of illness and disease as being random events with a single, usually unknown, cause. Yet from my work in pharmaceutical research, where we pore over data on billions of signs, symptoms, and diagnoses of illness and draw connections, it is impossible to avoid the conclusion that most or all diseases have multiple causes. And the largest cause of disease, linked to more than half of all signs, symptoms, and diagnoses in all the data I’ve been able to see, is smoking.

One reason we don’t hear much about this is that public health campaigns have tended to cite the most obvious and troubling diseases linked to smoking, in order to persuade smokers that it is a good idea to stop smoking. I think those campaigns have worked. Lungs, heart, blood vessels — we all know that tobacco smoke rips them apart. People like me can look at health data and draw a direct line between smoking and diseases in those parts of the body. But I’ve also seen connections between smoking and other health conditions that haven’t been so heavily publicized.

Insomnia. Smoking-related.

Sunburn. Smoking-related.

Depression. Slow recovery from surgery. Psychosis. Wrinkles. Flu. Memory loss. Itching. Weight gain. Headache. AIDS. Diabetes. Coughing. Joint pain. High cholesterol levels. Cancer. Angry outbursts. Liver failure. Feeling cold. Feeling dizzy. Fatigue. All smoking-related in varying degrees.

And I could go on for pages. The point is, almost no matter what sign, symptom, or diagnosis you might name, most of the occurrences in the data I see are among smokers. Non-smokers make up most of the people in the data, but they don’t have so many diseases or symptoms to report — they don’t get sick all the time the way smokers do.

The connection between smoking and disease is so well known within the pharmaceutical industry that smokers are completely excluded from many drug tests. The smokers’ more frequent illnesses and deaths could make a drug look more dangerous than it is.

Of course, tobacco smoke also causes illness among former smokers and non-smokers. This just means that the harmful effects of tobacco are that much greater than the simple difference in experience between smokers and non-smokers. The link between tobacco and illness is huge. I am not going out on a limb by saying that more than half of all illness is smoking-related.

And so, we could cut back our diseases, our national health care costs, by about half by getting rid of smoking, right? Well, not so fast. Smoking is both an addiction and a cultural phenomenon. As such, it can’t just be whisked away. An individual who wants to quit can do so — though perhaps only after considerable time and effort — but we can’t make that decision as a nation. All we can really do is restrict and discourage smoking and assist those who are ready to quit smoking.

There are those who say that the Tobacco Control Act won’t do much to discourage smoking. If it’s true that people from Philip Morris wrote most of the bill, perhaps they are among the people who think that cigarette smokers won’t be affected by the changes. But anyone who thinks that is mistaken. That is a subject I will turn to next.

Monday, June 15, 2009

Wear Green for Freedom

I can’t deny that I find the stories coming out of Iran gripping. By all accounts, the government did not even make a show of counting the ballots from the election. Instead, there are stories of people escaping with ballot boxes that the government had ordered burned. With the ballots not counted, we can only go by exit polls, which indicate that the incumbent got a little over 10 percent of the vote, far behind the two leading candidates.

The religious junta that runs Iran might have miscalculated when it encouraged voters to think of this election as a real exercise in democracy, because now people are expecting to have their voices heard. And they are saying it is time for freedom to finally return to Iran. The government says it is not that time, and the situation is chaotic.

If you can, wear green today to show your support for freedom. If you look on Twitter today, you may see lots of green pictures as a show of solidarity with the Iranians who are out asking for freedom today.

Sunday, June 14, 2009

Carrying Cash

I’ve given my credit cards the month off, and I’m paying with cash this month. I got more cash than I’m used to when I took my pay check to the bank last week, and I’ve had to carry more cash when I go out to cover the things I buy.

Different people have different experiences with carrying cash. Some just can’t do it — if they have cash, they spend it all, and then they have nothing to eat at the end of the week. For others, it is the opposite — they are reluctant to spend actual cash, but if they have a credit card, they spend as if the credit card balance did not translate into real money.

I am too financially self-conscious to fall into either pattern, but I still feel a difference between carrying cash and carrying a credit card. I feel more powerful with cash. The printed images must have something to do with this. Cash says I have friends who are legendary national leaders with famous faces and names like Lincoln, Jefferson, Jackson, and Grant. A credit card says I can call a toll-free telephone number, printed in small print, that is answered by a small army of trained customer service representatives in India. Not to slight the power of the network that lets people I’ve never seen solve my problems from half a world away, but it is somehow more impressive to have, in my hand, a slip of paper that says I have a friend in Washington. The credit card just has my signature on it. The paper money is signed by someone like Robert E. Rubin. Which signature says more about where I stand in the world?

Suzanne Garland is also using cash instead of a credit card this month, but she found herself using a credit card several times when, after her car failed, it was difficult for her to get to the bank. It’s a difficulty anyone with a 9-to-5 job might have, if the bank is not right next door to their work place. She finally found a gap in her schedule late Friday afternoon when she could get away to the bank and, she says, she got “plenty of cash.” Yesterday morning she noticed how much more careful she was being in her shopping when she had a large amount of cash on hand:

I am much more present when I’m using cash. Credit cards are so easy.

Saturday, June 13, 2009

5 Big Changes

Many people predicted rapid changes in the world when we hit the beginning of the 21st century. Instead, many of the changes did not hit until now. Look at what’s going on, just in the last two days:

  • The election in Iran. It’s the closest semblance of an open democratic election yet in Iran. There is robust participation by young voters, who seem to be favoring moderate candidates. It is also a coming-out party of sorts for women voters there, who are participating with more confidence than ever, and see themselves as voting for such basic privileges as the ability to dress in colors. It helps that Iran’s religious leadership has put the election firmly in the hands of voters, something it did not always do before. The sound bite from Ayatollah Khamenei: “I recommend them to just vote based on their own views and decisions.”
  • A flu pandemic. The World Health Organization had little choice, based on its rules. It declared a flu pandemic after the new factory farm flu was confirmed being transmitted in public places on multiple continents. It is the first flu pandemic in almost half a century. That does not mean it will actually go global, and I still believe that is impossible because of changes in public hygiene. With only 12 cases confirmed so far in India and Russia, it is easy to imagine that the flu will not spread everywhere, but it will certainly be widespread. If past pandemics are a guide, the new flu may kill one out of every 3,000 people in the world, but the WHO cautions that infectious diseases are hard to predict. Meanwhile, geneticists say the new flu virus may have spread for three years among factory farm pigs on multiple continents before it was detected.
  • Broadcast television. It’s June, but across the United States, people were seeing snow — when they turned on their television this morning, that is. First-generation broadcast television ended last night for most of the country. For others, though, the change will mean clearer signals as the digital transmitters get better positioned in transmitter towers. Two or three million households, including mine, did not do anything to prepare for the change. (My house never received analog television, but when I can find the time, I will want to check to see if I can tune in one nearby digital station.)
  • Microsoft drops Internet Explorer in Europe. Microsoft has announced that it will not include Internet Explorer in European copies of Windows 7. It is basically daring the Spread Firefox group to distribute the competing Firefox browser on CD. For Firefox, it is a chance to double their 32 percent market share in Europe at a cost of less than €1 million, so I am sure they will take on that challenge.
  • The tobacco bill. Tobacco is on the way out in the United States, with Congress approving a new law that will change cigarette packaging starting in December 2010. For the first time, tobacco products will have to disclose their ingredients, and the result will be that tobacco will never again be a major part of American culture. (More about this next week.)

And it’s not as if this is a sudden run of news. Earlier this week, Chrysler’s auto-making business was sold to Fiat, North Korea was testing missiles, Apple Computer refreshed most of its product line, and the Taliban army was routed from large areas of Pakistan. It’s a tough time for people who want to believe that nothing ever really changes.

Friday, June 12, 2009

This Week in Bank Failures

The U.S. Treasury announced this week that it has adopted rules on the return of TARP funds, and 10 banking giants are rushing to return the money to the Treasury:

  • American Express
  • Bank of New York Mellon
  • BB&T
  • Capital One
  • Goldman Sachs
  • JPMorgan Chase
  • Morgan Stanley
  • Northern Trust
  • State Street Bank
  • U.S. Bank

These mega-corporations collectively are still relying on a staggering amount of government aid, but now, none of that aid is coming in the form of capital. That gives the banks more financial flexibility, so that they can take more risks, but it increases the chance that they will run out of money later this year or next as the economy worsens. And Congress, already under worse budgetary stress than the banking system is, will not be in any position to help at that point. But at least no one will be able to put any of the blame on Washington should some of these banks go under.

Kitsap Bank, which acquired the deposits of the failed Westsound Bank, has decided it won’t need a TARP loan in connection with that transaction. It had applied for a small TARP loan, but interest rates have fallen since the TARP program was announced, and it can more easily borrow money elsewhere now. To cut costs, Kitsap Bank is about to close one of the former Westsound branches, and may be closing most of the rest in the fall.

South America did not experience much of the real estate bubble that hit banks in the north, but banks there are nevertheless under stress from the decline in the world economy. Argentina’s central bank has temporarily banned dividends from banks in that country. The restriction is likely to be lifted as soon as the economy starts to improve, but is necessary as a precaution now, officials there are saying.

Thursday, June 11, 2009

Saving Health Coverage From Conflict of Interest

Congress is trying to put together a health care reform bill that would move the United States closer to the efficient health care delivery found in most other countries, but it is clear from their efforts so far that they do not understand what is involved.

In theory, health coverage is supposed to provide peace of mind. A person covered under a health plan should, in theory, know that any necessary medical treatment will be paid for. But the current system does not provide that peace of mind to anyone. That’s because no one really knows what is and isn’t covered under a private health plan.

It is a problem of administration and conflict of interest. Health insurers write the documents that tell customers what is and is not covered. They also make the decisions to pay or not pay claims. They have a strong incentive to make their coverage documents appear expansive, to make it appear that they cover most ordinary medical expenses, so that people will buy the coverage. At the same time, they have an equally strong incentive to refuse claims, so that they can keep the money for themselves. The result is that the criteria under which claims are paid are significantly at odds with the coverage documents.

Here is just one way they accomplish this. A coverage document includes coverage for a category of diseases. It includes coverage for diagnostic tests. But for one test to determine whether a certain common disease is present, the insurer will pay only a maximum of $10 in some states and $12 in other states, even though the test costs $55–65, and only a maximum of once every three years for any one patient.

These claims payment rules are secret — there is no way for the patient to find any of this out in advance, and even after the fact, it is all but impossible to figure out. Rules such as these are not on the insurer’s web site and are not known to the insurer’s employees who answer telephone calls. They are certainly not in the coverage documents. The first the patient will hear anything about this rule is in the document the insurance company sends out to tell the patient that the claim was paid in the amount of $10 or $12. This is followed, a day or two later, by a bill from the provider for the remaining $50 or so.

There is, unfortunately, no effective administrative mechanism to keep insurers’ payment rules consistent with their coverage documents. If state insurance regulators cared about these things, all the health insurers would have lost their licenses years ago. Lawsuits often force insurers to pay specific claims to specific customers, but much of the money goes to the lawyers, and there is nothing in that process to stop the insurer from refusing to pay the claim of the very next customer.

Bob Cesca yesterday put it this way:

Even calling it “insurance” is a sick joke. Insurance implies a guarantee, and no matter what we pay, there are never any guarantees. I propose replacing the word “insurance” with the word “maybe?” — including the question mark — as in “health maybe?” Maybe they’ll pay when we get sick. Maybe they won’t randomly hike our monthly premium by 30 percent. Maybe they’ll cover our preexisting conditions without gouging us — that is if they agree to cover us at all. Maybe they won’t let our family members die after refusing coverage.

If we must rely on private health insurance, we need to take the “maybe?” out of the coverage. The biggest uncertainty arises in conflicts between the coverage documents and the claims payment rules, and those conflicts are inevitable if you let the insurance companies write those documents.

Instead, they should be written — with a minimal set of choices insurance companies can make — by a government agency, probably set up within the Department of Health and Human Services. The complete set of claims payment rules should be published so that everyone can see what is and is not covered. Yes, that is tens of thousands of pages, but since the same set of rules would apply to everyone, there wouldn’t be any place to hide any of the “gotcha” that insurance companies rely on now. In place of the vague and confusing language that insurance companies intentionally write for themselves, so that they can do whatever they want, the new rules could be perfectly clear and precise, and when there were problems, they could be fixed in the public arena. And then we can basically do away with the coverage documents, which were never much more than false advertising anyway.

And then, to make the insurers actually pay the claims, we need to put some teeth into the insurance fraud laws. The insurance industry would have you believe that insurance fraud is something done by shady people in bad neighborhoods, yet insurance fraud is committed every day by every health insurance company when they refuse to pay covered claims and when they misrepresent the coverage they sell. Insurance fraud happens mainly because insurers pay performance incentives to their employees who deny the most claims. Those performance incentive payments themselves probably constitute insurance fraud under current law, but it might as well be spelled out explicitly, and then enforced, putting the insurance company executives who are responsible for the most egregious fraud in jail.

I won’t pretend that this is enough to make private health insurance work, but without these reforms, there isn’t a chance — it will just get worse. In the meantime, any proposal that would force everyone to buy into the current broken system cannot be called “universal coverage.” That kind of bill, such as the one currently being considered in the Senate, is not a reform at all, but just a way to steer more money in the insurance companies’ direction.

Wednesday, June 10, 2009

GM Knows Cars — Not

Getting General Motors through bankruptcy is far from a done deal, but if it does happen, the company cannot exactly breathe easier. It still has to make cars that people want and sell them in huge numbers, or it may be back in bankruptcy again a year later. It’s fitting, then, that the man tapped to be chairman at the new GM says, “I don’t know anything about cars.”

GM has been run for years by men who were so sure they knew everything about cars that they were slow to acknowledge or fix the many problems with the cars they made. At the same time, they neglected the customer experience, ran advertising that had the world laughing at them, ultimately refused to write a simple business plan, and in the end reneged on their financial commitments. They thought they knew so much cars that nothing else would matter. With a group like that, it is only fitting to put them under the direction of someone who cares about running a business correctly.

People who think they know everything don’t make effective business leaders. They can run a successful company only if they are out of the office enough to let the workers fix their many mistakes. By contrast, business leaders who know that there is much they do not know are more likely to listen to their customers and to the experts who work for them. It is that listening process that makes a company intelligent, and the new GM will need that, and a lot more, to have a chance of success in an industry that is changing more rapidly than ever before.

Tuesday, June 9, 2009

Why Stalling on the Energy Bill Is a Bad Idea

The energy bill that Congress is working on is starting to look like a big mess. The reason for this is innocent enough: many in Congress are worried that the U.S. economy isn’t strong enough for the big push needed for energy independence. As it stands now, the bill would actually weaken existing rules and postpone most of the hard engineering work in energy until after the economy recovers.

The problem with that is that energy independence is not just a nice idea that the United States wants to work on someday, like a permanent base on Mars, or curing the common cold. The high cost of imported energy, and the resulting trade deficits, are the cause of the recession. Oh, I know people like to talk about the financial system melting down, but the recession didn’t actually start until oil prices hit record highs. And the recession will not be over until we have a new energy strategy in place.

Imagine if the recession ended today and the economy started to expand. By September world oil prices would be back over $100. And then, wham — recession all over again. But really, what this means is that we can’t have a real recovery until the energy problems are partly solved — and we won’t experience strong economic growth until the energy problems are mostly solved. The good news is, these are problems we pretty much know how to solve. It’s basically just a lot of engineering and manufacturing work. What’s more, this is the perfect time to do it, with half a million engineers and millions of factory workers sitting idle. The bad news is, Congress is seriously thinking about putting off most of work on energy till later — and postponing the economic recovery for maybe three or four years.

I think Congress is likely to get the message that the economy, and the work that’s needed on energy to get the economy going, can’t wait for three or four years. There are a number of petitions going around on the energy bill, including one from MoveOn.org Political Action. Congress needs to put together a good energy bill because energy independence can’t wait.

Monday, June 8, 2009

Reduced Hours at the Mall

The malls in King of Prussia have cut back their hours. They are now open only 73 hours a week. And they are not alone. Retail employees recently have been left to monitor near-empty stores for hours on end recently. It’s expensive and discouraging. Retailers, in malls or wherever they are, have to cut back somehow, but there aren’t many ways to do that. One of the few cuts they can make is in their operating hours.

One less hour a day cuts the costs for lighting, staffing, and security by 5 percent of more. The lost sales are only about 1 percent. It’s good for the stores’ income statements, but not so good for retail workers. Many are working fewer hours, and stores have stopped hiring. The reduced retail hiring is sure to show up in a big way in June’s employment statistics, with unemployment likely to hit 10 percent.

Some stores and malls say they are reducing hours just for the summer, but with the economy continuing its steady decline, it is hard to imagine that they will be in a position to expand again when September rolls around. A generation ago it was common for stores to be closed one day a week, Sunday for a business-oriented store, or either Monday or Tuesday for a consumer-oriented store. I haven’t seen a trend of bringing that back, but that could be what comes next if the economy does not turn around soon.

As another indication of the changing times, malls are taking on tenants that don’t sound very mall-like: a public library, a miniature golf course, an auto dealer. These tenants obviously can’t pay the same rent that a store or restaurant would pay, but it is better than letting large areas of the mall go vacant.

Sunday, June 7, 2009

A Week of Credit-Free Transactions

I’ve gone for a week now without using my credit card. Paying for a week of routine transactions in cash didn’t pose any special challenges. My biggest concern was the three minutes it can take to pay for gasoline inside at the cash register. That adds up to about two hours a year and might be reason enough to have some kind of payment card, at least for gasoline. I also had to estimate my gasoline purchase so I could pay for it in advance. The first time I tried this, I was a little over; the second time, under. I suppose I’ll get better with practice.

Economics journalist Suzanne Garland, who is joining me in this credit-free experiment, reports that she used her credit card just once, to buy gasoline for a borrowed car after her car broke down. She may be doing so again — she needs to fit a trip to the bank into her schedule to get more cash, but that may not come until after her car is repaired.

I have gone through most of my cash myself, and will need to get more cash than I’m used to when I take my next pay check to the bank.

I took a day at the beach, in between the stormy weather that otherwise washed out the week. It struck me that I’ve always paid for everything at the beach in cash. So nothing changed there.

On the drive to the beach, though, I paid tolls using EZ-Pass, an RFID payment mechanism which I fund automatically with a credit card account. It’s another example of the recurring online payments that can’t be done in cash. To work efficiently, they have to have some kind of electronic payment. I could have paid tolls in cash, but that would have added about five minutes to my trip. The same as at the gas pump, those minutes add up.

Saturday, June 6, 2009

Not Many Summer Jobs

People had trouble knowing what to make of yesterday’s U.S. jobs report. The decline in the number of jobs in May was estimated at 345,000, much lower than the declines in previous months. I saw an AP headline that erroneously summarized this by saying that layoffs had slowed. We know that’s wrong because other measures are much better indicators of layoffs and business closings, and they show a steady stream of lost jobs going right up to the present. So instead, the jobs number must indicate an increase in hiring, something on the order of 200,000 jobs.

And this may even be a phantom occurrence caused by difficulties in seasonal adjustments. The labor market normally expands in summer with millions of summer jobs. Memorial Day came as early as possible this year, pushing more of that summer hiring into the month of May. At the same time, it is a challenge to take seasonal data from a period of expansion and try to apply it to the current period, where even in summer, the job count is continuing to decline.

My best guess is that the jobs number represents a flurry of hiring of new college graduates, yet the number of jobs involved, a mere 100,000 to 200,000, indicates that most graduates are still looking for employment.

The unemployment rate in May jumped up to 9.4 percent, the highest since the Reagan recession, yet the employment picture is actually worse than it was then, because so many people are working at part-time jobs. What I am hearing is that many new college graduates are working at the same part-time jobs they held while they were in college.

Doubtless others are seeking the same summer jobs that they had last summer. It will be a challenging time for high school students seeking summer jobs this month, as they have to compete with more experienced older workers, some of them college graduates willing to work for minimum wage.

If my take on this is correct, the unemployment rate could increase in June even more than it increased in May. That would put it at 10 percent, something experts such as myself were not expecting to see until around November.

In previous recessions, we have seen the economy improve a year before employment begins to increase. This recession is different. Consumers have much lower access to credit than just last year, and their interest income is negligible (the average savings account interest rate was 0.22 percent according to the last report from the FDIC), so consumers can only spend the money they get from working. With that constraint, it is hard to see how there can be much of an economic recovery before employment stabilizes.

Friday, June 5, 2009

This Week in Bank Failures

The FDIC tried to find a buyer for Silverton Bank, the correspondent bank it took over May 1, but to no one’s surprise, it decided today that there were no buyers out there. Silverton is a correspondent bank, so it could not be shut down abruptly without causing unnecessary distress to the hundreds of banks who were its customers. At the same time, Silverton had no reputation with the general public, so there was little reason for any investor to buy it. The FDIC now says that it hopes to wind down Silverton’s business over the next two months.

I am not sure it will go quite that quickly. As an intermediary in loan participations, Silverton has a management role in a whole portfolio of shared loans, which will now have to be managed directly by the originating banks. Getting Silverton out from the middle of that pile of loans is an administrative challenge with little recent precedent. Some banks may need to hire an extra staffer to keep up with their loan-sharing agreements. It seems safe to say no one knows exactly how the transition will go. But the other pieces of Silverton’s business can be shut down more easily.

One change that may reach consumers is the discontinuation of Silverton’s credit card servicing business. Some consumers will be mailing credit card payments to a different address, some may be receiving new cards issued by a different bank, and some may lose their credit card accounts if the issuing banks are unable to quickly work out a transition to a different credit card service.

There was at least one bid for Silverton, but the FDIC turned it down. The FDIC is obliged to minimize its costs when it resolves a failed bank, and it must have concluded that selling the bank under the terms proposed by the bidder would have cost it more than shutting down the bank and selling off its assets.

The peak of the credit bubble three years ago offered unprecedented opportunities for fraud, and prosecutors and regulators are starting to charge people they believe were involved. This week alone:

  • Real estate developer Thomas Kontogiannis and eight others were indicted in a $92 million scheme, which prosecutors said centered on fraudulent appraisals for buildings that had not yet been built.
  • The Securities and Exchange Commission (SEC) charged three Countrywide Financial executives with making misleading statements about the financial state of that company. One was also charged with insider trading.
  • Two investment managers and a lawyer were charged in a $1.3 billion tax shelter built on phony trades by a shell company on the Isle of Man.
  • The U.S. Supreme Court is thinking of reviewing a case to decide whether U.S. courts might have jurisdiction over accounting fraud at a Florida-based mortgage company, even though the company was owned by Australian stockholders.

Many of the smaller cases around the country involve fraudulent real estate transactions, often involving agents buying a property and obtaining mortgage loans for a straw buyer, a fictional or uninvolved person named as the buyer. Other cases involve a person obtaining multiple mortgage loans for the same real estate. The latter scheme has become such a problem in India that the government there is setting up a centralized database to detect the fraudulent applications.

Bank of Lincolnwood was in court today trying to persuade a judge to order the state of Illinois not to shut it down. But the bank offered scant legal justification for its request, and the court ruled against it. At closing time, the Division of Banking lost little time in seizing the bank and turning it over to the FDIC, which then turned the $200 million in deposits, the two offices, and most of the assets over to Republic Bank of Chicago, also based in the Chicago area. The FDIC is estimating a cost of $83 million for this bank closing.

Bank of Lincolnwood was known to be in financial trouble at least since its first quarter earnings report, which showed a $13 million loss for the quarter. Regulators at that point ordered the bank to raise capital, not to involve its chairman in any lending or money management decisions, and not to accept any deposits above the FDIC insurance limits. The bank lost money on real estate development loans, and several other banks in the Chicago suburbs are said to be facing similar difficulties.

Thursday, June 4, 2009

Petroleum Prices Go Up: Because It’s June

Crude oil today is selling at the highest prices of the year so far, but don’t panic. The prices, around $68 per barrel, are still only half of what they were last year. And prices are going up because it’s that time of year.

Demand for petroleum-based motor fuel, including gasoline and diesel, is higher in June and July because it is the peak of the world’s agricultural season and at the same time, more people go driving in North America and Europe. Demand is not as high as it was last year because not so many people are driving to work, especially in the United States. A switch to more fuel-efficient cars has also started to chip away at demand.

Gasoline prices around $2.55 per gallon might be uncomfortable for U.S. consumers, but they might also be close to the highest levels we see this year. Last year, prices went up so sharply that they peaked early, at the beginning of the summer season. This year, prices have edged up more gradually, so they probably have not peaked yet, but they could be close. Assuming production is not disrupted by severe weather during the hurricane season, oil and gasoline prices might not go up much higher.

Wednesday, June 3, 2009

Money and Attention

Every big economic disruption changes the balance between money and attention. The long-term trend is for more money, less attention. With no time to pay attention to everything we need to do, we spend more money to get things done with less attention. The trend in the last two years, though, is troubling: people have less money and less attention to spare.

Basically, less is getting done. People are as pressed for time as ever, but with less money to spend, they can’t just spend money to make up for their inattention. So people are letting more things slide.

Some of this is just as well. If you don’t have two hours to fuss over what to wear to a pool party or to find the perfect wording for a thank-you note, not much really is lost. But people are also postponing repairs, taking less care of their health, and not keeping in touch with their friends and business connections. A lot more people are flying by the seat of their pants, as the saying goes, and just hoping everything works out right. Statistically, some will get away with it, while others will have everything go wrong at just the worst possible time.

There is no easy answer for this, but at least be aware of the extra risks you take when you let things slide. That way, as soon as the opportunity comes up, you can take care of some of the important things that previously you didn’t have time to look at.

Tuesday, June 2, 2009

Vote No on the Commercialization of Democracy

California’s budget process is broken. It’s under stress because of the difficult economy, but it’s broken because of California’s system of ballot questions. In California, a “proposition” can allow a relatively small number of citizens to force decisions that are binding on the whole state.

Propositions have so limited the state’s budget authority that it many be forced to suspend most highway repairs and close its state parks until the economy improves.

The proposition system in California was supposed to strengthen democracy by giving voters a way to act as a check on the state government. Instead, it has weakened democracy. The proposition system is not really controlled by the voters, but by commercial interests.

The biggest hurdle for a proposition in California is getting it on the ballot. But anyone with tens of millions of dollars to spend can get it done. This money is so central to the process that voters can assume that any proposition they see is a by-product of a corporate advertising budget. And there is a “gotcha” element in propositions — they are legally binding, but voters get to see only about a 20-word summary. Often they end up voting for things that they had no idea they were voting for. Would you sign a contract after reading just a 20-word summary of what it supposedly says? Probably not, and if someone asks you to, you can be pretty sure it’s a business that’s in a hurry to get your money. So how many California propositions are effectively sponsored by businesses that are in a hurry to get the state’s money? Just to emphasize the commercial nature of a proposition, the primary tool for discussing them is the 30-second commercial message on television. Propositions in California are about as commercialized as politics can get, short of actually allowing businesses to pay voters for their votes.

A group that’s trying to change this is Vote No On Everything. In the short run, it’s trying to regain voter control over the proposition process by persuading a small group of voters to vote no on all propositions, except where there is a compelling reason to vote yes. They don’t want to take away the role of the proposition as a check on excesses of state power, but they want to vote down all other propositions. If about 5 percent of voters would reliably vote against the more whimsical propositions, it would make it much harder for commercial interests to sneak ballot measures past the voters.

The “Vote No” strategy is just a stopgap solution, and people are still searching for an institutional solution, which might take the form of an amendment to the California constitution. There has to be a way that ballot questions can act as a robust check on abuses of government power without turning so much power over to commercial interests. A few details of this are clear already: the vote of a small fraction of the state’s voters should not be sufficient to tie the state’s hands; a one-sentence summary on the ballot cannot suffice to bind a state to a much longer document that might say something quite different; and the ballot question process cannot merely be a mechanism to sell control of the government to the highest bidder.

Monday, June 1, 2009

My Country ’Tis A Fee

The very idea that a credit card company would raise rates – as all the major credit card issuers have doubled their rates in the last year – seems absurd in a time of global credit crisis. Raising interest rates now is kicking the American people when they are down. And, there is no accountability on the credit card company to stop making the credit problem worse. The credit card corporations are turning this country into “the land of the fee.” How free are we, really, if strapped by ever increasing fees?

It is this corporate ignorance and arrogance that forces me to stop using my credit card. I thought my bank was better than that, but it turns out they are just like all the other credit card issuers. The bank made the bad choice of doubling its interest rates for its best customers, pushing me into the growing consensus of angry Americans who are tired of credit issuers changing the terms of their “agreements” without their customers’ protests heard.

Today, June 1st, I paid off my credit card and I am rising to the challenge of being credit card free. True freedom is being free of debt and I would rather have this freedom than a credit card any day.