Britain Grows Tea

It is hard to picture Britain without tea. It is, after all, the only country where “tea” is the name of a meal. Yet all that tea is imported. For generations, it came from colonies that were prized mainly for their ability to supply tea, such as India. Britain itself was too cold to grow tea, until now.

A tea farm in the far south of England is growing Britain’s first domestic tea. Reuters reported on this trend in a Thursday story, “Climate change brings tea and apricots to Britain.” Britain’s first tea farm got off to a slow start in 1999 but has seen its harvest grow to an expected 10 tons or more this season. That is bigger than it sounds. If a teabag is 2 grams, that’s 5 million cups of British-grown tea this year.

The tea farm in England is not just a reflection of climate change. It also shows the effects of the increasing costs of transportation. Tea is not very heavy, but even tea is costly enough to transport that it is worth the effort to try to source it closer to home.

Cars Move Forward in News Hole

Yesterday, while the news media was so obsessive in covering the lack of action on the U.S. government debt ceiling that even news junkies were starting to zone out, the White House took advantage of the news hole to release new efficiency standards for automobiles. This is an action that is far more consequential than anything than happened yesterday in Washington on budgetary and financial matters, because it sets a 14-year goal to double the average fuel efficiency of cars. The White House estimates this will save consumers $1.7 trillion during that period, and of course, the savings are higher going forward as more older cars are replaced by electric cars. This estimate is based on assumptions about how far people drive, how rapidly they replace their cars, and the price of oil, but never mind that: you end up saving more in total if you skip some trips and wait a few extra years before you replace your old car. Of course, the higher oil prices go, the more fuel efficiency matters. The point is that the country can save a fortune in energy imports just by moving forward on automobile technology, and it’s a progression that’s absolutely necessary to return the U.S. economy to an even keel. One hopes that it won’t really have to take 14 years to get there, but if so, it is better to start now.

A quick look at the amount of money at stake, remembering that nearly half of U.S. imports are energy, shows that this is a bigger deal than the fiscal strategy negotiations going on in Congress. It puts that conversation in a different light: the federal budget is such a difficult problem only because most of the solutions have been taken off the table. Of course, fuel efficiency is not just about money. The carbon dioxide emissions that are involved are a matter of concern in their own right, all the more so this year with the North Pole at risk of melting out.

Positioning this announcement in the news hole, even if that happened by accident, worked well politically. The right-wing political strategists were too preoccupied with their dream of a balanced budget amendment to offer even a feeble push back on the subject of cars. By the time they get around to it, it will be too late. With the policy already in place, they will be trying to take away people’s fuel-efficient cars. With gasoline prices likely to exceed $10/gallon by 2025, drivers won’t give up the promise of fuel efficiency so easily.

This Week in Bank Failures

With some kind of Monday-morning financial train wreck in Washington now looking more likely than not, how would a default or a partial government shutdown affect the pace of bank failures? Much depends on the Fed’s reaction, but I doubt you would actually see more than one or two banks fail after losing liquidity because of problems with Treasury payments.

No, the greater risk to banks comes via changes in consumer behavior when people’s incomes are interrupted. It is important to remember that it is not just federal employees who are at risk, but also employees of state governments, hospitals, and construction contractors, along with retirees, unemployed workers, and others, and the extended families of everyone who is directly affected. The shock to consumer incomes would result in missed loan payments from the consumers themselves, but also from businesses that depend on consumer spending. That, over any extended period of time, could result in a new round of bank failures, and there is little the Fed can do about that. And it is important to note that this is not merely a risk of a government default, but also of the more severe austerity budgets that have been proposed in Congress as alternatives.

As long as there is a sign of a default, banks and money funds will no longer be able to freely purchase Treasury bonds. Some people at Treasury have said that bond auctions will have to be suspended, or at least drastically reduced in size, if the debt ceiling continues to loom, because there won’t be many bidders for the bonds as long as they are considered potentially illiquid.

Regardless of next week’s drama, bank failures rolled on tonight. A $2 billion bank failed in Indiana. The OCC closed Indiana’s Integra Bank, which had 52 branches in 4 states, $1.9 billion in deposits, and $2.2 billion in assets.

Old National Bank, also of Indiana, is paying a 1 percent premium for the deposits and is also purchasing the assets. The $19 million dollar premium (with the exact amount depending on the actual deposit balances today) is, to the best of my recollection, the largest the FDIC has received in the current sequence of bank failures.

A series of acquisitions five years ago, particularly in the Chicago and Cincinnati areas, left Integra Bank off balance and unable to recover from the economic turmoil that was already underway at that point.

The bank was founded in 1850 and named Canal Bank amid hopes that a new canal would lead to a boom in the Evansville economy. But the canal failed in less than 20 years, and the bank changed its name again and again over the years. It took on the Integra name in 1999 along with the goal of becoming one of the largest banks in the country. Instead, by the end of last year, it had a negative net worth and no realistic prospect of digging itself out of its financial hole.

Small banks failed tonight in Virginia and South Carolina. In Virginia, state regulators closed Virginia Business Bank, which had one office, in Richmond, and less than $100 million in deposits. The failed bank will become a branch of Xenith Bank.

In South Carolina, the OCC closed BankMeridian. It had three offices, in Columbia, Hilton Head, and Spartanburg, and $215 million in deposits. It opened in 2006 as the largest new bank in the state’s history, and grew rapidly over the next two years, a disastrous scenario that likely sealed the bank’s fate regardless of what else it did right. Problems in the real estate market that were already evident in 2006 never did turn around, and by betting big as the economy continued to sour, the bank never gave itself a chance to find out what it could do. Although it was making bad loans from day one, it took until the end of 2009 for the bank’s management to realize the trouble the bank was in. The deposits are being taken over by regional bank SCBT, which is also purchasing the assets.

We are nearing the peak of the quarterly bank failure cycle, as regulators react to the financial statements for the quarter that ended four weeks ago. The pace of bank failures is likely to continue for the next five weeks before slowing down for the end of the quarter.

China Implicated in Korea Break-Ins

A CBC story says a series of major Internet break-ins Tuesday in South Korea originated in China. While China is the most common host for Internet crime in general, the shape of this attack would seem to tie it to previous attacks on Google, which were almost certainly state-sponsored. If the snooping on consumers in Korea was also the work of the Chinese central government, it is surprising in how public the operation was and the degree if paranoia and desperation that would have to have been present in the strategic thinking behind it.

Post Offices Closing

A plan to close about 3,000 post offices in the United States reflects emerging efficiencies in retail in general. It is not just that the number of mail pieces is declining, with most personal messages now online. More of the business of mail is being done online too, and when customers do visit the post office, improvements in technology are making the counter transactions go faster.

Post offices are not going away, but some of them have become too small to function effectively as standalone operations. It is the same way that record stores shrank until most of them closed. The USPS suggests that the village post office of the near future will be inside another business, such as a grocery store or drugstore. At the same location you may find a video rental kiosk and a selection of greeting cards — two other business categories that became too small to stand on their own.

The “Taxpayer’s Association” Takes Over

In the 1980s and 1990s, groups of religious extremists posing as “taxpayer’s associations” gained representation on school boards across the United States, and took control of thousands of them, promising cost-cutting and tax cuts. But these supposed taxpayer advocates weren’t so much interested in efficiencies as they were in destroying public education. By making the public schools as dangerous and ineffective as possible, they hoped to drive more students to privately owned religious schools. Of course, in most places, voters didn’t want their schools destroyed, and after they learned of this secret agenda, they voted the “taxpayer’s association” candidates out at their next opportunity.

Something similar is happening in the debate over the debt ceiling. It’s pretty obvious that something fishy is going on with the House members who claim to be interested in cost containment, but rejected the compromise package that had $4 trillion in budget cuts. That’s a level of cost-cutting that previously would have been considered unimaginable. Obviously, they aren’t interested in ways to make the budget work. What they really want is to see the government shut down.

The voters, of course, won’t stand for it — but the next elections are more than a year away. The taxpayer’s associations that took over school boards knew, for the most part, that they would have a hard time getting re-elected. That didn’t deter them — their objective was to do as much damage as they could during their one or two terms in office. I am afraid that this is also the perspective of 30 to 50 of the newer House members. Ideally, they would like to change the system, but realizing their views are too unpopular to make that a realistic possibility, they are looking for ways to blow up the system. It is a sad commentary on the polarization of U.S. politics that despite the extremists’ small numbers, they may yet get that chance.

Less Driving This Year

With higher prices for fuel, U.S. drivers are driving less. The total distance driven on all roads and streets in the United States declined 1.9 percent in May compared to the year before, according to estimates from the U.S. Department of Transportation. That puts aggregate driving distance in the range of 2003–2004, despite the population growth since then.

The reaction to this year’s fuel price increases is more rapid than in 2007–2008, suggesting that people have learned to become more aware of the costs of driving.

Now Is the Time to Start Shutting Down the Federal Government

It is several days too late to avoid lasting consequences to the United States’ financial reputation. Higher interest rates over the next several years will affect not just the federal budget, but also budgets of government units across the country. Individuals and businesses will be paying higher interest rates too. Yes, all this is happening just because the federal government is in bankruptcy.

The Treasury thinks it probably has enough cash left to get through the next nine days before everything comes to a crashing halt, but such things can’t really be predicted with that kind of precision. The time to start the government shutdown is now.

No matter which way I look at the cash flow numbers, it looks like it will be necessary to shut down essentially everything we think of as the federal government to keep it whole financially. It won’t be like a snow day or budget impasse when the government continues to operate without its “nonessential personnel.” If there is no money left, it is also hard to justify keeping most of the “essential” government employees on the job. But on the other hand, agencies whose work is entirely paid for by user fees will remain open as long as the money keeps coming in. Yet the money to pay the White House or Congressional staff, to operate the federal courts, or to pay for health care and retirement benefits won’t be there — nine days from now. So why are the National Transportation Safety Board, the National Park System, and the Food and Drug Administration still operating today?

Of course, more likely than not there is already a committee secretly at work on this at the White House. And if there are political reasons not to announce anything at all until it is patently too late to avoid it, I won’t second-guess that strategy. But politics aside, Monday is the day to warn national park visitors that the parks will be closing Wednesday at noon; to tell the airlines that they are now on their own when it comes to aircraft safety; to cancel inspections at food factories; to start locking down most of the military bases. Because it will be a bit of a help to have those details already worked out a week from now when the real shutdown begins.

Borders Liquidates, a Victim of Growth Strategy

Book publishers won’t have Borders to kick around anymore. But while book publishers may have been the ones who forced Borders into bankruptcy in January and into liquidation this month, Borders is ultimately the agent of its own undoing, and conventional management theories are ultimately to blame.

The reason Borders ended up broke was that it spent every nickel it had on expansion, particularly during the troubled economic times of 2005–2008. And an expansion of what? Borders was a lively place in the 1990s with attention-getting live events and the most complete inventory in the business, but after about 1999 it turned into an empty shell of a retailer, with a random selection of products and a small, disempowered staff. What do you accomplish by expanding that? But this is what the management textbooks say to do. When there is an economic downturn, it is said to be the perfect time to grab market share, and that is exactly the strategy that Borders was following. The textbooks are wrong, and Borders’ new market share, in a couple of months, will be zero.

Borders began liquidating all 399 of its remaining stores yesterday. There is a hope of keeping 15 stores open with a new owner, but those are liquidating too. If a store is sold, much of its inventory will still have to be liquidated, which probably would involve taking it to the stores that are closing. Given the number of stores involved in the liquidation sale, it is easily the largest sale in the history of books.

This is not good news for the book business. The Borders liquidation will give many of the more avid readers more than enough books to read for the fall, winter, and spring while providing minimal revenue to wholesalers, publishers, and authors. It will draw shoppers away from other bookstores not just during the liquidation itself, but for months beyond it, and hundreds of smaller bookstores may fall as a result. Even Barnes & Noble has warned that it expects to lose money all this year because of the Borders liquidation.

Book publishers face similar pressure, and with fewer stores open, will have fewer selling opportunities going forward. We will know this has had its impact if publishers start announcing mass postponements of book releases to preserve their capital.

Borders no doubt thought it was being clever by expanding into a downturn, the way the business textbooks say to do. Obviously, Borders’ executives were not the only ones who read those textbooks, so Borders could not be the only large U.S. business whose expansion plans sailed into the teeth of the sluggish economy. Some of the mass hiring of last year and this will turn into mass layoffs next year as companies find themselves overextended just as their competitors are turning things around. It will be shocking if we don’t see larger companies than this in liquidation before next year is over.

This Week in Bank Failures

Financial reports from banks this week have held few surprises, aside from a new earnestness from executives about cutting expenses. With tight underwriting stifling demand for loans and consumers fleeing from experiments with new fees, banks will be starting to close branches and other facilities this fall. They won’t be moving quickly because it’s not so easy to tell which places should stay open and which should close.

A billion-dollar bank failed tonight. Bank of Choice was based in Greeley, Colorado, but most of its 17 banking locations were in the Denver area. Bank of Choice had been operating under a prompt corrective action order since March. The bank had bet heavily on commercial real estate development, and struggled to keep its equilibrium after the real estate market cooled. A new president hired last year put more aggressive collection efforts in place, but it made little difference.

Kansas City-based Bank Midwest is taking over the deposits and purchasing 80 percent of the assets. For Bank Midwest, the purchase represents an expansion into an adjacent state. It will be keeping the Bank of Choice name for the Colorado branches. With this acquisition, Bank Midwest’s holding company is planning its first public stock offering.

Two small Florida banks failed tonight. LandMark Bank of Florida had $247 million in deposits and 6 locations in central Florida. SouthShore Community Bank had $45 million in deposits and 2 locations on the mainland side of Tampa Bay. Deposits and assets are being transferred to Tampa-based American Momentum Bank.

The NCUA placed a credit union into conservatorship today. The regulator took control of Saguache County Credit Union, which has 3,000 members in Colorado.

Cutting Up Credit Cards on the House Floor

Here, courtesy of Amanda Terkel at Huffington Post, is a bit of political theater worth noting: Rep. Hansen Clarke cutting up credit cards on the floor of the House. He is making a political point: there is a connection between personal debt and government debt. Part of the reason the national debt is so troubling is that U.S. household debt is out of control also. It’s the total amount of debt, in comparison to the total economy, that determines the degree to which debt drags on the economy. Everyone who has any debt can participate in reducing it. “Stop . . . buying things you don’t need with money you don’t have,” Clarke says, moments before taking out the scissors to cut up one credit card after another in a Cookie Monster-like scene.

U.S. household debt has, at least, stopped its relentless upward march of the previous half century. If it is not yet declining convincingly, I believe that is just a matter of lag, the time it takes for people to adapt to new ways of living and form new habits. But it’s easy to see that attitudes have changed, and that credit cards, loan payments, and leases don’t have the cachet that they had in the past. The United States collectively is a long way from the financial strength that will balance out all the things we want to buy, but the desire is there, and that’s how it starts.

Institutional Corruption Meets Civil Society — Finally

Ireland is just about the most loyal Catholic country you can imagine.

Until today, that is. A new government report implicates the Catholic Church not just in a pattern of rape and torture of children that went on for years, but in a coverup effort that reaches all the way to the Vatican and continues to this day. The prime minister’s speech today spoke of “a frankly brazen disregard for protecting children,” of “delinquency and arrogance,” “dysfunction, disconnection, elitism,” and “narcissism.” These are not the words you would expect to hear from Ireland to describe the Catholic Church. It would be unthinkable a decade ago for an Irish politician to suggest that “the Vatican needs to get its house in order.” Today’s headlines were accurate enough in describing the speech as an “unprecedented attack” on the church. But the government in Ireland is not sticking its neck out in trying to cut through the Catholic Church’s stonewalling, or in brushing aside the church’s response so far, which at its heart is a plea to be seen as above the law. The government’s statements reflect the thoughts of the general public in Ireland. This is not really a tale of a battle between one powerful institution and another, but between civil society and institutional corruption.

And the consequences for the Catholic Church are not just rhetorical. A proposed law will subject people who work with children to closer scrutiny. A consequence of this law will be that a significant fraction of church employees will be found to be not fit for their posts.

This turning point in Ireland comes not so long after a similar moment in Brazil, though the issues in Ireland cut deeper than a case of one innocent rape victim condemned to die by heartless church officials in Brazil. It is fair to say that if the Catholic Church’s standing is eroding in places like Brazil and Ireland, it is eroding everywhere.

And this is not just a story about the Catholic Church. A similar story outline is unfolding today across the Irish Sea, where the corrupt global institution trying to place itself above the law and to impede a criminal inquiry is News Corp., and where the support the institution was so certain it had a mere nine days ago, which was said to include the prime minister and most of parliament, seems to have evaporated. And while executives are focused on the problems in the United Kingdom, the criminal probe of News Corp. has spread to the United States and Australia.

I don’t believe either of these stories could have taken place last year. That they are taking place now is a sign of a broader trend, which I have written about separately, of people taking institutional power less seriously. People used to fear the Pope and Rupert Murdoch. Now Murdoch is going to great pains to try to position himself as a law-abiding member of society, and politicians are asking the Pope to do the same. That is no small change.

Fukushima’s Radioactive Beef

It is not safe to store hay outdoors.

Not in the Fukushima area, anyway. Japan and its farmers are finding this out the hard way after radioactive beef was found in stores in Tokyo. The beef had 5 times the legal limit of radioactive caesium. This is not an alarming level, but it is also not a pattern you would want to continue.

Food authorities traced the radioactivity back to grasses that were stored outdoors and took on radioactive dust from the air. A ban on Fukushima beef will likely be announced in a few days after the details are worked out.

If the grass is radioactive, it seems fair to guess that plants of all kinds are radioactive. This is a problem that can last for decades. Germany is still finding radioactive wild boars on a daily basis. The boars become radioactive after eating mushrooms, which concentrate the radioactive minerals released in the Chernobyl disaster. It may take another century in Germany before anyone would consider hunting boars without a Geiger counter. No one can yet say when the Fukushima area will again be a place to raise beef cattle.

Books Down, Gold Up: Whither Words?

If you can’t put your money in books, perhaps you could buy gold.

The link is purely speculation, but it is a plausible story after the events of yesterday. The deadline for bids in the Borders bankruptcy auction passed apparently without any qualifying bids. During the hours that followed, gold prices spiked, hitting a new all-time record.

There are, to be sure, other reasons for the price of gold to go up — among them, concerns about both the euro and the U.S. dollar, with investors worried about sovereign defaults in both places and a possible wave of financial bankruptcies to follow.

Still, whether they are connected or not, gold and books are moving in opposite directions.

It is perhaps not so surprising that no investment funds were eager to take on the debt associated with the Borders bookstore chain. What is surprising, though, is the reason behind the lack of bidders for the chain as a whole. According to reports, multiple major U.S. publishing houses would not agree to grant going-concern status to the lead bidder, if it were to be the buyer of Borders. These publishers’ books would have to be taken out of Borders stores and liquidated separately next week, a messy and probably contentious process that would make keeping the stores open more trouble than it was worth. If the lead bidder could not get this concession from most of the publishers, there was no point in any other bidder making the attempt. That, and not the absence of interested parties, is the reason why there were no bids. But what this means is that book publishers collectively decided they were better off forcing Borders into liquidation.

I am not sure why that would be. Perhaps the publishers felt certain that a reconstituted Borders would soon fail again, and they thought their interests were better served with a liquidation happening this summer rather than next — but if so, that is a view not shared by most financial observers or the bankruptcy court. Perhaps they worried that keeping Borders’ stores open increased the risk that all the U.S. bookstore chains might fail. Whatever the specific reason, the industry is turning back from its previous view that more books on more shelves in more stores was the way to maximize the industry’s revenue. The new view is that the greater advantage is to be found in having fewer stores with smaller inventories. That is, the book industry as a whole is in retreat.

Meanwhile, gold — the one form of money that is fully understood without any written words to identify it — is ascendant. It is as if people are turning away from words. That is not really the case. People are consuming more information in the form of written words this year than ever before, including this blog as one small example. Words, though, do not merely inform. Words are also the elements that form the complex arrangements among many people, making possible such things as financial systems and retail chains. Clearly, in that arena in recent years, something has gone terribly wrong.

Arctic Sea Ice in Record-Breaking Decline

After a spring season of near-record ice melt in the Arctic Ocean, the Arctic ice extent map has moved into record territory again this month. Ice extent is declining several days ahead of the previous record season of 2007, and six weeks ahead of the long-term average. Arctic ice melt in recent years has been very much affected by the weather, but not so this year — major swings in the Arctic weather patterns have barely perturbed the extent graph’s downward trend. The graph is smoother than in a typical year. Statistically, a smooth graph may be the result of many small, independent effects, and that may be what is going on with the Arctic ice, which is thinner than ever before seen and has broken into small pieces, a pattern we are not used to seeing.

The current weather pattern is one that historically is not so favorable for ice melt, but instead is associated with an unusually high flow of ice from the Arctic Ocean into the Atlantic Ocean along both coasts of Greenland. In spite of that, the map seems to show continued rapid melt and not so much ice flowing out. Perhaps with the unusually thin ice, much of it is melting before it reaches the area of Greenland. With the ice broken in smaller pieces, perhaps there is nothing to clog up the flow of ice, so that it no longer matters which way the wind blows. Or with so much open water between the ice, the water is absorbing more sunlight and may already be warm enough to make the week-to-week weather fluctuations irrelevant.

But if the ice melt is no longer responding to the weather, then there is nothing to stop a new record low ice extent from occurring, conceivably as early as four weeks from now. If the melt were to continue on the straight line of the last two weeks, all the ice would melt away before the sun went away in September. Realistically, the melt will slow down at some point, but the warmer the ocean becomes, the later that will occur. With more surface water exposed to the sun than in any previous July, the Arctic Ocean must be warming faster than in any previous July. The current conditions, with thin, free-flowing ice covering such a small area this early in the season, have never before been observed, so we don’t know what might happen.

Murdoch, Redefining Damage Control

In the one week since the last issue of News of the World went to bed, the News Corp. scandal has continued to grow day by day. News Corp. CEO Rupert Murdoch flew to London to try to save his U.K. CEO and his bid for the Sky News channel, but has been forced to retreat on almost a daily basis, to the point where it became a trending topic on Twitter today to offer Shakespeare quotes illustrating Murdoch’s declining fortunes. This can be seen under the hashtag #shakespeare4murdoch, and among the many applicable quotes was this one that I offered:

“The breaking of so great a thing should make a greater crack.” —Shakespeare

To recap, not only did Murdoch’s lieutenant in the U.K. ultimately resign, but so did a top editor at the Wall Street Journal (also owned by News Corp.), who had biting criticism for his former employer hours later. Murdoch was forced to withdraw his Sky News bid after parliament was prepared to vote almost unanimously to request such a move. Now parliament is considering new media ownership rules that will almost surely require News Corp. to sell off or shut down at least one more London paper and divest most of the 39% share it currently holds of Sky News. News Corp.’s protestations of cooperating with authorities and conducting its own internal investigation are no longer being taken seriously. In Washington, the U.S. Justice Dept. has begun an investigation of News Corp. at the request of dozens of members of Congress to see if similar lawbreaking had occurred in News Corp.’s U.S. operations, which include Fox News. It is a similar story in Australia, where News Corp. felt it necessary to angrily denounce suggestions that it may have routinely worked outside the law. Back in London, Murdoch narrowly managed to avoid testifying before parliament this week. He is spending the weekend getting advice from lawyers about which questions he must not answer when he testifies next week.

It occurred to me that people may never look at breaking news the same way again, having learned that many of these stories were uncovered (or in some cases, fabricated) only on the basis of illegal spying. Is it “breaking news” or “break-in news”? But more than that, the News Corp. saga has redefined damage control. Unused to making public statements, the upper management of News Corp. has repeatedly offered more damage than control. Each successive statement reinforces the impression that the company’s executives are so insular and out of touch that no one in the office is familiar with the responsibilities of a law-abiding citizen. Even a full-page newspaper ad today, written in the form of a letter from Murdoch under the auspices of an outside public relations expert, failed to convey a recognition of either the seriousness or the scope of the situation. Today’s letter starts out with the assertion, “The News of the World was in the business of holding others to account.” This, of course, is a pointedly self-serving characterization of a paper better known to its readers as a sleazy tabloid. It is hardly a fitting way to start out an apology for a decade-long pattern of antisocial behavior. One observer pointed out that we have seen this kind of damage control already this year. Between December and January, the president of Tunisia tried to undo the public relations disaster created by his own corrupt government, but he was always several steps behind, offering too little, too late to make a difference. After less than a month, the president of Tunisia was fleeing for his life. A year ago, a public relations expert could have advised Murdoch that the regular secret meetings between company executives and top government officials would not look good when the public learned of them. But I am afraid it is too late for that now.

This Week in Bank Failures

Even in the relatively benign scenarios of the new stress tests, many of the largest European banks don’t have enough capital to cover the likely fluctuations in the asset portfolios they are holding. Bank stress tests are based on scenarios in which nothing surprising or out of the ordinary happens, so they aren’t good predictors of failure. Some observers criticized the stress tests for not considering the possibility of business failures or government insolvency, but it is useful to see that some banks could find themselves in a precarious financial state even if nothing particularly noteworthy happens in the broader economy.

Downgrades continued all this week, with Standard & Poor’s warning today that it would, in effect, downgrade Wall Street if a partial U.S. government shutdown occurs in two weeks. The federal government default and shutdown, tentatively expected on August 2 if Congress fails to act, could happen several days sooner, financial observers said this week, noting that after today, the Treasury has nothing left in its bag of financial tricks. Most of the consequences may still be avoided if the House takes action in the coming week, but the House has unrelated matters on its schedule, so it is looking increasingly unlikely that a federal government default can be avoided. In this scenario, emergency action would be needed worldwide in early August to keep banks from closing their doors.

At closing time tonight, two state-chartered banks in Georgia were closed by state regulators. High Trust Bank and One Georgia Bank, both of the Atlanta area, each had under $200 million in deposits. Ameris Bank is assuming the deposits and purchasing the assets.

One Georgia Bank was chartered in 2006 and was affected by problems in the economy from the beginning. It had fired its CEO last year and hired consultants to try to improve the bank’s flagging fortunes.

Two High Trust Bank shareholders were among a group sued yesterday by the FDIC, which claims they took out many fraudulent loans from Haven Trust Bank, where they were the two largest shareholders, contributing to that bank’s collapse. Their High Trust Bank stock, now worthless, was used as collateral for multiple loans. The loans may have been taken out just to create bank deposits to make the banks appear more solvent than they were. The FDIC sued a total of 15 insiders at Haven Trust Bank seeking to recover funds diverted from the bank before it was closed by regulators in 2008.

State banking regulators in Florida closed First Peoples Bank, which had 6 branches along the east central coast. It had just over $200 million in deposits. Premier American Bank is assuming the deposits and purchasing the assets. The failed bank’s holding company had received $6 million in TARP funds in 2008. At its peak, the bank had a stock market value over $30 million, but that declined to $1 million by the end of 2009. Premier American Bank is taking over the deposits of the failed bank and purchasing its assets.

A small bank in Prescott, Arizona, was closed tonight by state banking regulators. Summit Bank had $66 million in deposits. The Foothills Bank is paying a 0.25 percent premium for the deposits and is also purchasing the assets.

The NCUA liquidated two credit unions that were in conservatorship. Borinquen Federal Credit Union, in Philadelphia, had 8,600 members and had been in conservatorship for less than a month. Vensure Federal Credit Union, in Arizona, had 100 members and had been placed in conservatorship in April. In both cases, the NCUA found no plausible way to restore the credit unions to solvency. The NCUA mailed checks to members for their insured deposits. Each credit union had less than $10 million in deposits.

Lighter Products

Two vignettes from my work this month point to a current trend in product design: designers and engineers are looking hard for ways to reduce the weight of the products they design.

Mouse

Two weeks, ago, I noticed that my computer mouse wasn’t working quite right. Occasionally, mouse clicks were registering late, or not at all. I did not really want to drive to a store to buy a replacement — the fuel costs of the trip would be a significant fraction of the cost of a mouse — so I ordered a mouse from an online store. I ordered two music CDs with it in order to reach the store’s free shipping threshold. When the box arrived today, its total weight was less than 1 pound. The mouse itself weighed in at an impressively light 60 grams.

It arrived just in time too, as my old mouse had declined to the point of spontaneously double-clicking at unpredictable times. The old mouse, which I had used for only two years, was an already light 100 grams — light, that is, by the standards of 2009. But in two years, the industrial designers managed to shave 40 percent off that weight. I wondered whether the light weight of the mouse would make it more difficult to do fine tracking, for the single-pixel tolerances I need in graphic design, for example, but it actually wasn’t any harder to pick out the right pixels with a 60-gram mouse than it had been with the 100-gram mouse that I had before (before it started to get wonky, that is).

The potential disadvantage of a lightweight device is that the slightest impact can knock it out of position, but at my desk, the mouse sits on the extended keyboard shelf, out of danger, so it’s not so likely to get bumped by accident. I do notice it takes less energy to move the lighter mouse around.

Book

A new version of SAS (9.3) came out this month, so I am preparing a new edition of my book Professional SAS Programmer’s Pocket Reference. As I work on the content of the book, the people involved in the book printing are looking for ways to make the new 6th edition lighter than the 5th edition.

When the 1st edition of the book came out in 1994, it weighed about 400 grams, or nearly a pound. At that point, no one paid much attention to how much a book weighed, and the publisher opted to make the book bigger than it needed to be in the hope that the larger size would bring it more attention on the bookshelves.

By the time we got to the 5th edition, the weight had shrunk to 210 grams. That happened even though the book was expanded considerably along the way. Paper mills have been hard at work on lighter-weight book papers, and the latest guess is that the 6th edition may weigh just 160 grams.

Lighter books are important in the book business because of higher fuel costs. The book publisher and distributor may spend more for shipping a copy of a book than it paid for printing it. The biggest part of the cost of a printed book is the cost of the paper, which has to be delivered from the paper mill to the printing plant, so there are costs on that side of the process too (though the paper-shipping costs are less if the book printer is near one of the Great Lakes, so that the paper can be shipped by water).

 

It is mostly the cost of fuel that is making product designers so keenly aware of the weight of their products. Fuel prices have tripled in barely a decade and it is fair to guess that they will double again in the coming decade. But customers don’t want to pay more if they don’t have to, so if there is any way to squeeze some of the weight out of a product, we will hope to find it.

Air travelers are as much a part of this process as the product designers are. If you only get 65 pounds, more or less, then every ounce matters. If you are preparing to travel by air, you may find yourself weighing and comparing your possessions.

The level of detail that goes into making products lighter is surprising. A bottle of water is 1 gram lighter because engineers redesigned the cap to be 4 millimeters shorter. Yes, that 1 gram matters. We have come full circle from the “heavy duty” era of half a century ago, when the heavy weight of a product was held to be reassuring. Today, many purchasers are happy to pay extra for lighter versions of products.

This trend will accelerate as energy costs increase. If a mouse can be lighter, why can’t a steering wheel be lighter — or a lamp shade, a mirror, or a paper clip? In each case, you can be sure that product designers are already looking into it.

This post originally appeared in Rick Aster’s World.

More Consumers Paying Cash

From what I am hearing locally, there is a new trend to cash at retail, with many of the same people who made the transition from credit cards to debit cards in 2009 now moving on from debit cards to cash for most purchases. Why are people using cash more often? Paraphrasing some of what I’ve heard (much of which is second-hand):

• The bank is discouraging debit card use. The bank charges transaction fees for debit cards after the first 35 purchases in each month, encouraging people to use cash for smaller purchases. Or, the bank limits debit card purchases to $300 per 24 hours, encouraging people to use cash for larger purchases. Some people have adjusted by using debit cards only in limited categories, such as pharmacy purchases, movie tickets, table-service restaurants, and gasoline, but are paying in cash for groceries, routine store purchases, and fast food.
• There might be debit card fees. The bank is sure to add new fees eventually, and if you don’t rely on the bank so much, you won’t get socked with those fees during the month when you first discover them. It is easier to not use banking services so much than to keep track of all the new fees that banks charge. This line of thinking is a sign that the social contract between consumers and banks is breaking down.
• Cash just seems simpler. Cash hasn’t changed significantly in the last 50 years, so this just means the debit cards have become subjectively more complicated than they were five years ago when people were using them for the “convenience.”
• I don’t know, I hadn’t noticed. For whatever reason, the debit card habit didn’t stick. The perceived value of the debit card faded until it was below the threshold of consciousness, at which point the potential for using the card was forgotten. Maybe the novelty of the debit card wore off. One man I talked to stopped using his debit card because he lost his online banking password and couldn’t check his account balance, then forgot to start using it again after he got a new password. Most of the people in this category are still carrying their debit cards and using them for online purchases, and hadn’t noticed until I asked that they were no longer using them for in-person purchases.

None of this is enough for me to call it a lasting trend, though my hunch is that that is what is on the way. There was a trend toward cash early last summer that didn’t turn into anything big, but now that banks are planning more fees, there may be more impetus behind the movement from cards to cash.

The move from credit cards to debit cards, and now from debit cards to cash, is part of a process of consumers becoming more conscious about their spending, which in turn is an necessary part of consumer deleveraging. As consumers become more financially conscious, banks and other businesses that sell to consumers will have to scramble to catch up. If people continue to pay for many of their purchases in cash, it will be a sign that this trend is picking up steam.

Social Networking’s Club Rules

The early social network Six Degrees might not have outlived the dot-com era, but it lasted long enough to demonstrate that everyone is connected to everyone else. This is an important consideration that has been neglected in the design of most online social networks since.

A social network that excludes or denigrates categories of people based on arbitrary rules is a broken social network. Anyone who goes in and takes a look around will see that many of the key people are missing. Indeed, one of the weird things about the major social networks at this stage is that leaders of every kind are starkly underrepresented. Today is a Tuesday, a record release day in the United States, and you’ll find discussions of today’s new records on social networking sites, but the musicians themselves are, for the most part, not part of the discussion. Entertainers, executives, writers, designers, athletes, coaches, teachers, and others who are the focus of attention in much of the real world are pushed to the background on social networking sites, or are not there at all.

And it is not just a lack of leaders. Social networking sites have arbitrary rules that exclude people, including rules about the names people can have. Users whose first names happen to be the English spellings of Greek letters are routinely banned from Facebook. Others have been barred from joining because their names are the same as the names of celebrities. Supposedly this is meant to prevent Facebook users from signing up using aliases, yet these users generally find that they can keep a Facebook account only if they sign up with a name other than their own. Of course, not being able to use your own name makes social networking a bizarre challenge. Google+, for all its improvements in enabling collaboration, repeats this same mistake. Of course, it makes it hard to use Google+ as the platform for a collaborative effort if some of the members of your working group are prevented from signing up.

There are, of course, other issues with names. Many celebrities, writers, and stage performers work under commercial names so that they can have private lives. And they are not the only ones who want to have private lives. Lots of people are dating someone who not all their friends would approve of, or work for a company that some of their friends are boycotting. Facebook has said that private lives are a thing of the past, and Google has suggested that people abandon their private lives, as if personal activities were all drug addictions, religious cults, and seamy affairs. But keeping the different areas of your life from colliding is a not merely a concern for people who have crimes or sins to cover up. Microsoft executives can’t get caught carrying an iPhone; the agent representing the Yes/Styx tour has to assume a lower profile if he wants to attend the Def Leppard/Heart show; a person studying to learn a new skill area in order to change jobs can’t have that course of study put together with their current employment. In real lives, things often clash with each other. In short, life is too complicated to squeeze into an online identity that is all in one place, formless and dimensionless. Yet that is what social networks so far force you to do.

Google+ was thought to improve on this with its use of circles, yet so far, the circles seem to only add to the confusion. Real-life social circles form autonomously and change continuously. Google+ social circles, by comparison, exist only in your imagination and require hours of online maintenance. With the inevitable confusion surrounding circles, the potential for faux pas in Google+ are higher than in any previous social setting, and this may prove to be Google+’s downfall. If you let the cat out of the bag on Google+, the only way to slink away in shame may be to withdraw from the network entirely, at least for a period of time. We’ve seen this kind of thing happen often enough on Facebook, which doesn’t have the same potential for confusion. It is one of a series of hurdles preventing Facebook from reaching critical mass, the point at which the people already in the network provide reason enough to join. Google+, in its early form, can be expected to have higher turnover than Facebook, so it may have even more difficulty approaching critical mass.

Which brings us back around to the ultimate problem with social networks. With most of the important people excluded, marginalized, or pushed to the background, a social networking site can’t reflect the social network of the real world. It is more of a club than a network, where membership comes first, and who you know is a detail. Of course, Facebook has always presented itself this way — go to the web site, and all you find is a demand that you sign up before you can get in. Needless to say, no real-world social network works that way — that is the way a private club works.

For all the talk about the conspiracies that take place in clubs, clubs have never become very important, because the focus is always on what is going on outside the doors. The social marketing people know all about this, of course. The keys to success in social marketing are names and links — they serve as road maps to the world outside. But really, almost everyone in social networking sites today is has this same outward focus. After all, the real world outside the doors is still where the important people are and where the important action takes place.

China’s Real Estate Bubble Bigger Than Officially Reported

China’s real estate development bubble is bigger than the recent state audit showed.

Moody’s said it has identified, from banking reports, specific loans that were excluded from the audit report. The discrepancies are enough to bump up the total local government debt in China from the reported $1.6 trillion to $2.1 trillion. Of course, there are surely additional loans that neither the Chinese central government nor the banking regulators know about. Moody’s worries about what may happen to the banks financing some of this debt.

In a cryptic statement today, China said it would be holding local government officials accountable for the level of debt held by their local governments. This does little to reduce the scale of the current debts, but it’s a statement intended to warn officials away from excessive borrowing in the future. Debt levels are being added as a factor to consider in officials’ performance appraisals, hurting the employment prospects of the officials involved in large-scale real estate speculation.

Local governments are more directly involved in real estate development in China than in other countries, and unusual levels of local government debt there may fairly be assumed to be related to real estate projects. Many of the projects could be legitimate and valuable, of course, but China has a long history of letting initiatives in all areas of the economy grow much larger than any conceivable justification. The rest is the same as in any country: the excess real estate development projects do not result in revenue to make payments on the loans.

Millions of Underemployed Workers

A week ago, I posted “Only the Underemployed Can Save Us,” suggesting that people who are underemployed are in the best position to solve many of our new problems. What I didn’t emphasize at that point was how many people are in that group. More American workers are underemployed than ever in history.

About 10 million U.S. workers have part-time jobs because full-time work isn’t available to them. A larger number have become free-lancers only because they can’t get a permanent job anywhere. And still more are working at very easy jobs far beneath their skill levels because it is the best they can manage.

Add on a million workers who have been unemployed for only a week or two, and millions more who want to work but are waiting for the job market to improve. It may be true that most workers are stuck in some way, facing the stress of their jobs or of long-term unemployment, but perhaps as many as one out of every seven workers are in a favorable position to observe problems and find solutions.

When a News Room Becomes a Crime Scene

For the most part, journalists try to keep themselves out of the headlines. When news stories focus on the actions of journalists, it is usually a sign that something has gone wrong.

That was more evident than usual today in London as News of the World prepared the paper’s final edition. Reporters came from around the world hoping to get a glimpse of the final afternoon at a newspaper that was closing after being in operation for 168 years, and after being at the top of the headlines for five days straight.

News of the World had been dogged by scandal for years — among other transgressions, it had been caught breaking into the voice mail accounts of celebrities — but this was different. The paper had broken into the voice mail of a missing girl who was later found murdered. It was commonly believed that the paper had bribed police officials to get advance word of police news, but this was seen in a new light when investigators said the amount of the bribes was more than £100,000. Amid these two revelations, one prominent advertiser said it was pulling its ads. A former editor, now a prominent political figure, was indicted. It emerged that the paper had also broken into the voice mail of the close relatives of perhaps 4,000 military service members who had been killed in the line of duty. Six more major advertisers pulled out, one pulling all ads from the paper’s parent company. Realizing that there was much worse news on the way, the paper announced it would be closing. Staffers were reminded that any of them might be suspects in the ongoing investigation. More arrests followed this morning. So many advertisers called to pull their ads that the paper elected to run its final edition without any commercial ads at all.

The news room may not have been officially designated as a crime scene, but that is effectively what it was today. Reporters had to complete the final Sunday edition without the benefit of e-mail, which had been locked down at the request of the police. At the end of the afternoon, the editor led the staff out of the building so they could face the assembled press outside together. Meanwhile, more than half of the most-read stories in today’s U.K. news are the stories about the newspaper investigation. When a newspaper reaches this level of controversy, it surely has no credible way of operating, and when tomorrow’s paper is printed, it will be treated more as a souvenir than as a news source.

The scandal shows no sign of dying down. The paper’s owner, Rupert Murdoch, is en route to London to try to rescue his U.K. executives (including son James), his bid to buy a satellite TV channel, and his company’s stock, which has lost $3 billion in market value in the last three days. Yet Murdoch risks being arrested during his visit if documents tie him to the wiretapping conspiracy. Meanwhile, the prime minister’s job is in jeopardy because of his close ties to the paper, and pundits are asking if the unfolding scandal is “Britain’s Watergate,” noting the similarity to the illegal spying activities of officials in the Nixon administration in 1972.

In the United States, observers are already asking whether cable channel Fox News, which has the same ownership and a similar business model, might meet a similar fate. There is no whisper of a wiretapping conspiracy or other legal troubles inside Fox News, but its journalistic lapses are legendary and have already cost it all of its major advertisers and forced it to cut its staff significantly. Fox News may come under closer law enforcement and political scrutiny now that its parent company is in retreat and its owner, under investigation.

This Week in Bank Failures

Sheila Bair leaves the FDIC tonight at the conclusion of her term in office. Her tenure there will be remembered for her outspoken opposition to the too-big-to-fail system and for navigating the biggest financial squeeze in the history of the Deposit Insurance Fund.

A ratings agency downgraded Portugal without explanation this week. This, coupled with the continuing financial difficulties in Greece, makes a new banking crisis in Europe almost a certainty. According to one study, 18 of the largest banks in Europe will need new government support in the coming months.

The effective deadline for Congress to take the United States out of bankruptcy without causing lasting harm to the country’s financial reputation was probably Wednesday, and the day passed with no hint of action. A disappointing jobs report today puts more stress on the federal budget and makes it less likely that the House of Representatives will be able to come up with a budget plan it can agree on. It still, of course, has the option of raising the debt ceiling without a budget plan, as was always done in the past, but there is no sign of that happening either. The thumb-twiddling reaction to the government bankruptcy increases the chances of a government shutdown in August. If that were to happen, it would diminish the solvency of banks worldwide that hold U.S. government securities as assets.

Layoffs are coming to some of the largest banks starting this month. The banking industry as a whole has shed a few jobs since its 2008 peak, but it will probably have to shrink by 30 percent to stay competitive.

Two billion-dollar banks failed tonight. First Chicago Bank & Trust had 3 branches in Chicago and 4 more nearby. The bank was created five years ago in a merger of two community banks, but ran into trouble almost immediately with problem loans. It had been seeking some $50 million in needed capital for more than a year. Northbrook Bank & Trust Company is acquiring the deposits and assets, paying a 0.5 percent premium for the deposits. Northbrook and its parent company Wintrust have now acquired six failed banks in the last year.

Colorado state banking regulators closed Colorado Capital Bank, which also had 7 branch offices. First-Citizens Bank & Trust Company is taking over the deposits and purchasing the assets. Colorado Capital Bank’s financial position had been declining since last year, and the FDIC had designated it as critically undercapitalized two months ago.

Also in Colorado, Signature Bank failed. It had 3 branches and $65 million in deposits. Points West Community Bank is taking over the deposits and purchasing the assets.

With the three failures tonight, there have been 51 bank failures so far this year in the United States. This is a noticeably slower pace, barely half the pace of the previous two years. However, the problem bank list has not been shrinking, and there are few indications of banks recovering from their financial woes, so the pace of bank failures is likely to pick up again at some point.

Gaza Cracks Down, Breaks Down

A news report about Gaza caught my attention yesterday. The government has started to enforce a law banning men from being hairdressers.

It might seem like a small thing, but more than a few men will be thrown out of work by the crackdown, and it is just the kind of corrupt and petty bureaucratic micromanagement that set up the revolution in Tunisia.

Just as importantly, it undercuts Gaza’s international support. It had been doing fairly well at persuading the world that it was the victim of forces outside of its control, but if its top priority is to put people in jail based on cultural prejudices, it is hard to make the case that its difficulties are anything beyond its own making. It is, at least, a contradiction for Gaza to jail its own workers while asking for outside help.

Could there be a revolution against Gaza’s repressive government? It won’t happen based on a single day of arrests, obviously, but the government is in a weak position to begin with, so if it continues to demonstrate corruption in such public ways, its authority could break down in relatively short order. Don’t forget that it was corruption that led Gaza to drive out its previous government.

Institutional Power LOL: When Powerful Institutions Make Dumb Mistakes

When one of Fox News’ Twitter channels reported a bizarre news story in the early morning of Independence Day, the buzz surrounding this strange event wasn’t about the false news, but about Fox News’ inept response. People were amused that Fox News seemed to be blaming Twitter for the problem even as it failed for nine hours to remove the errant messages, which Fox News claimed had been posted by an unidentified third party.

The tone of the reaction was a sign of the times. No one was shocked or baffled to see a series of obviously false statements coming from a major news source. Perhaps it was baffling to see how slow the network was to respond, but no one was shocked by the degree of neglect. People have come to expect to see this kind of stumbling and bumbling on a daily basis from supposedly powerful institutions. If a bank fails to show up in court and neglects to pay the money it owes until the sheriff has come and locked the door to the branch office, people just shrug and say, “Well, you can’t expect a bank to be on top of things when it comes to money.” It evokes a similar reaction when a news headline indicates the opposite of what the story says or a safety agency drafts guidelines for the use of a chemical that has been banned for decades. You can easily think of a dozen other examples.

Within the last seven years, people’s expectations of power have changed. We have come to expect inconsistent and careless behavior from the most powerful institutions, and when it happens, we cite it as just another example of what we have to put up with. I summarize this reaction as “Institutional power LOL.”

Although the failings of the powerful lend themselves to jokes, there is more than a touch of unease beneath the surface. This worry is not unwarranted. It is a sign of a systemic problem when powerful institutions routinely make dumb mistakes. These are some points to consider:

• Institutions help to stabilize the economy and society, and they slow the pace of cultural change. As people take institutions less seriously, we can expect to see a series of startling economic and cultural changes.
• Powerful institutions now are less respected for what they can do and more feared for what they might do by mistake. Doing business with a powerful institution may now be seen as a calculated risk rather than the safe, conservative option.
• The management saying, “Work smarter, not harder,” covers a 30-year trend of businesses paying less and less attention to the external impact of business decisions. The current generation of management theories is leading institutions of all kinds to make more and bigger mistakes.
• So far, customers seem eager to help businesses correct their blunders, so that businesses can mostly stay out of trouble just by listening well, but it is a mistake to rely on customer feedback as a measure of competence. If the level of complaints drops off, it could be a sign that customers have given up hope.

Historically, when power and competence become too widely separated, that is when rapid changes can occur. Bankruptcies, disasters, and revolutions are easily averted when the people in charge know what they’re doing and are paying attention. But when business leaders and policy makers are making decisions in a bubble, that’s when things can break down with little warning.

One Million Obese Americans

Try to imagine 180,000 obese adults living in Texas. 90,000 in Michigan. And 10,000 more in West Virginia. All in all, 1 million obese American adults.

And that’s just the increase since last year. Already 27.2 percent of U.S. adults were obese, and the rate jumped up to 27.6 percent in just one year.

The obesity map (courtesy of CalorieLab) shows an obesity trend with little sign of slowing down.

You might hope that a population that was working fewer hours than before would have more time to devote to staying healthy and losing weight, but it doesn’t work that way. In general, adding more difficulties to people’s lives doesn’t make it any easier for them to solve their existing difficulties. Rather, the more problems a person has, the harder it is to solve each of the problems. This is one of the reasons why lifestyle problems tend to cluster in the same places.

Compare the state obesity map above, which is based on a Centers for Disease Control survey, to the state smoking map below, from the National Cancer Institute. Smoking rates, fortunately, are not nearly as high as obesity rates, but if you look at the states with the highest obesity rates, from West Virginia to Oklahoma, they also have some of the highest smoking rates.

Conversely, if you look at the states with the lowest obesity rates — Colorado, California, Washington, and Hawaii in the west, along with most of the northeastern states, you also find relatively low smoking rates.

Smoking is a special kind of problem because tobacco is addictive, but prescription drugs occur in nearly the same geographic distribution. This can be seen in the map below, from The Kaiser Family Foundation site statehealthfacts.org. The map shows prescriptions filled per capita by state in 2009.

States with the most prescriptions also tend to be the states with the highest rates of tobacco use and obesity. It’s no secret that some prescription drugs cause obesity, or that obesity and tobacco use cause illnesses that may be treated with drugs, but that isn’t the whole story. Lifestyle problems don’t exist in isolation. All of these rates reflect problems that are more likely to occur, and less quick to be solved, among people who already have multiple lifestyle problems. Perhaps to an extent these are problems that can be addressed in isolation, but the real solution is something more abstract. At the risk of sounding vague and fanciful, these are all problems that tend to be solved when people reach a higher level of success in life.

Looked at through this lens, the news of 1 million more obese Americans since last year is not a hopeful sign. It really represents 1 million more people who have been beaten down by the economy. It makes sense, when you look at it this way, that the largest increase in obesity is seen in Michigan, the state facing the toughest economic challenges. Finding a way to expand the economy will help, but we also need to look for ways to change the workings of the economy so that not so many people end up its victims.

The Festival Economy

I take a special interest in festivals because they form one area of the U.S. economy that is actually growing and looks likely to continue to grow over the next twenty years. Today, Independence Day, is nationally the biggest festival day of the year, with daytime events in almost every town, followed by fireworks displays in places that didn’t already hold them on one of the last three evenings.

Festivals don’t get the economic respect they deserve because at many of them, most of the work is done by unpaid volunteers. The lack of pay means the event won’t show up in the economic statistics but doesn’t diminish the value of what is created. When you look at all the costs involved, festivals are a surprisingly cost-effective experience and community-building exercise, and that is one of the reasons I expect them to continue to expand in the coming years.

What Is the United States’ Default Interest Rate?

It is becoming clear that there are many people, including people in Washington, who don’t fully appreciate the difference between one interest rate and another. When they hear that the United States government is days away from falling into default by failing to make interest payments, it doesn’t bother them at all. Some politicians have said they’re not so sure a default will affect anything. But the effect of a default becomes obvious when you consider the effect of interest rates.

It is easy to see with a credit card account, so imagine it this way. You know you have to make payments when the bank says you should. If you aren’t careful about doing this, you find that your interest rate changes one day. Perhaps it was 4.9 percent yesterday, and today it’s 29.9 percent. And it’s going to stay at that higher level. You may have to pay off your entire balance, then wait several months before the bank will consider lowering your interest rate to 4.9 percent again. In the meantime, your new interest rate of 29.9 percent is what you have to deal with.

This is a really big deal if your credit card balance is $10 trillion. If you thought it was hard to pay the interest charge of $40 billion every month, imagine how hard it will be to pay $250 billion month after month. If it was hard to balance the budget before, it may not be possible now that you have to tighten your belt to the tune of another $1 billion per day.

The big question, though, is this: what is the United States’ default rate? No one really knows, but so far, there is no indication that it will be different from anyone else’s default rate. It will probably be somewhere between 22 and 34 percent. Anywhere in that range, interest payments would be larger than federal tax revenue. That means, at that point, even if we shut down the entire federal government and continued to pay all our taxes, the United States would still continue to fall deeper in debt day by day. And this is not some far-off, distant, hypothetical scenario. It is just days away from happening — and just because of an interest rate change.

The important thing to understand politically is that Congress created this problem by putting the federal government into bankruptcy. It can solve the problem at will, just by voting to take the federal government out of bankruptcy. But it has to act soon, within the next few days. The federal government’s interest rate has already started to creep upward.

Only the Underemployed Can Save Us

American culture tells us what we’re supposed to feel about employment, and more particularly about unemployment and underemployment. If we can’t work continuously in our area of skill, we are supposed to feel left out, rejected, overlooked. This is such a clear expectation that it may be hard to remember that it is just a cultural assumption and even harder to imagine that there is any special importance in people who are underemployed. But right now, only the underemployed can save us.

Most businesses this year are under so much pressure just to carry on their pattern of operations, and avoid getting shut down, that it is hard for them or their workers to think very far beyond that. It is a similar story in most government agencies. Those who are unemployed for more than a few weeks may similarly be under too much personal stress to look at any problems other than their own. It falls, then, mostly to those of us who are underemployed to take a look at the world’s problems.

In this period of global stress and rapid change, substantial problems are occurring with alarming frequency as we go along. In most years, and as recently as 2009, we would look to institutional power to solve these problems. But institutional power isn’t what it used to be and in 2011, petitioning government and big business to solve our problems is a painfully ineffective approach. Institutions have problems of their own and can barely be expected to listen politely. Many of these institutions are on their way to failure and will actually have to be replaced — and by whom? It falls to anyone who has the time, energy, and imagination to pay attention to the way things are working, identify problems, and think of creative solutions. Most of this, as I explained, will have to be done by people who are underemployed. It’s not the most obvious thing to do when the world isn’t recognizing your talents and you are all but shut out of the action. But who else is there?

This Week in Bank Failures

Debit card transaction fees will be cut by more than half in October. The fees, deducted from the transaction amounts that banks pay to merchants for debit card purchases, will be limited to a maximum of 21 cents under the new rules announced by the Fed yesterday. Fees won’t decline much for the largest retailers, which have already negotiated favorable deals for themselves, but smaller retailers currently have to pay whatever the banks charge, and they don’t know the size of the fee in advance. Separately, a federal appeals court upheld the constitutionality of the provision, saying that Congress has the authority to regulate banking transaction fees.

Taylor Bean & Whitaker CEO Lee Farkas was sentenced to 30 years in prison for orchestrating the $3 billion fraud that brought down his own company and Colonial Bank last year. The fraud began when Taylor Bean & Whitaker ran out of money in 2002 because of bad mortgage loans, but it was not discovered until Farkas helped to arrange a fraudulent TARP application for Colonial Bank.

Several settlements were announced this week over mortgage-backed securities that weren’t properly described when banks sold them to investors. Hundreds of these cases will be settled over the next three to five years, eventually costing banks in the United States and Europe more than $200 billion in total.

Last weekend there were actions on three credit unions. Borinquen Federal Credit Union of Philadelphia and O.U.R. Federal Credit Union of Eugene, Oregon, were placed into conservatorship. The two credit unions combined have 11,000 members. St. James A.M.E. Federal Credit Union of Newark, New Jersey, was liquidated and its member accounts transferred to North Jersey Federal Credit Union. It had 1,000 members.