New Year’s Resolution

My new year’s resolution is to pay down debts. Read about this in the Fear of Nothing blog.

This Week in Bank Failures

In 2012 U.S. bank failures slowed down and made a decided move to the eastern half of the country. Most of this year’s 51 bank failures occurred in Georgia, Florida, Illinois, Minnesota, Missouri, and Tennessee. Even in these states bank failures came at a slower pace than in prior years. But by contrast, there was only one bank failure west of the Rockies this year. Aside from Missouri, bank failures in the western half of the United States have virtually come to a stop.

The leading cause of bank failure in 2012 continued to be commercial real estate development projects on the edges of metro areas. Despite all the talk about banking crime, it wasn’t more of a factor in bank failures than in the three previous years.

Changes are in store for 2013. Most notably, emergency deposit insurance, after being extended several times, is finally expiring now. The main implication of this is that payroll accounts will no longer be insured. This usually won’t affect workers who get paid by direct deposit, but those who take paychecks to the bank on Friday might find that the checks have bounced after the bank they were drawn on fails on a Friday night. The loss ultimately falls on the employer, and it is a risk that could lead employers to move payroll accounts to other banks, or even multiple banks, to get the maximum benefit of deposit insurance. If employers get worried about the financial condition of a bank and pull their payroll money out, the deposit flight would tend to accelerate the failure of that bank. Employers who worried could move paychecks from Thursday night to Wednesday or Tuesday to reduce the amount lost in bank failures, which usually occur on Friday night, or they might encourage more employees to sign up for direct deposit.

Also as 2013 starts, we can keep an eye on the previously scheduled federal budget cuts. These translate into 2 million direct job losses, similar in scale to federal government layoffs in 1981 that led to a prolonged recession. Among other adjustments, the Treasury may no longer be guaranteeing some bonds for local governments and institutions participating in federal programs. This change, to the extent that it takes place, will affect the creditworthiness of some borrowers, weakening the risked-based capital position of many banks. All this could change if Congress acts, but those expecting the House to agree on a budget plan have been disappointed before.

Synthesized Voices Join the Dialect Mix

Before this year, most mechanical voices were constructed from recordings of a person speaking, with sentences formed as combinations of recorded phrases and names. Now phonetically synthesized voices are becoming more common. These voices are not recordings of people, but are constructed digitally to sound like a person speaking. They are so convincing, you might not notice that you are listening to a synthesized voice rather than one assembled from recordings.

Voice designers have to choose a dialect for each voice they synthesize, though they likely wish they didn’t have to. A dialect serves mainly to help establish the individual identity of a person, but mechanical voices have identity enough just by virtue of being mechanical in rhythm. The purpose of a mechanical voice is to convey information, so voice designers try for a version of a broadcasting dialect, meant to be clear and understandable to the broadest possible audience, including non-native speakers of the language.

The synthesized version of a broadcasting dialect is a dialect nonetheless, and just as people influence each others’ dialects, people can’t help being influenced by synthesized dialects (and vice versa — voice designers are inevitably influenced by the human dialects around them). People tend to pronounce words consistent with the way they have heard them, and now, synthesized pronunciations are part of that mix. This, I am guessing, will tend to reduce dialectical variations. It especially could help standardize specific words that are correctly pronounced in several different ways. This effect is similar to the way spell-checking dictionaries have standardized the spelling of some words that before 2002 had multiple spellings. I have a feeling, though, that the influence of synthesized dialects will not be so simple as this.

This post originally appeared in Rick Aster’s World.

Dodging Disaster

Dodging disaster was one of the recurring themes of 2012. This was nowhere more apparent than in New Orleans. A major hurricane with the potential to flatten half the city came by, but passed by downstream, missing New Orleans by five miles. Something similar could be said two months later in New York City, which took major damage in the aftermath of Hurricane Sandy, but it could have been much worse if the hurricane had turned toward land four hours later. Loss of life in New Jersey could have been much worse but for a well-coordinated evacuation. When this storm passed by my own house, there were frightening winds, but the trees that might have damaged the house had they fallen had been cut down three months earlier.

Dry weather in the middle of North America cut corn production by about one fifth, but that came within a couple of thunderstorms of wiping out twice as much of the crop and creating spot food shortages. In all, more than half of U.S. counties were official disaster areas at some point during the year, something that had never happened before.

And that was just the weather. We started out the year worried about whether Iran might blow up the Persian Gulf. That didn’t come to pass, and throughout the year, there were more reasons to thank our lucky stars for political disasters in the making that either passed by harmlessly or stayed more contained than seemed possible.

On top of all that, of course, there was the Hollywood prediction that the world would end in a fiery planetary collision on December 21. That was the last date in an ancient Mayan calendar, and though there were credible prophecies of lasting changes occurring around this time, the end of the world was not one of them. It was just something for people to worry about, and to an extent, people did.

Obviously, dodging disasters one after another is not a healthy long-term strategy. It is a sign of a weak foundation. When we put our faith in low-lying roads, glitchy mail servers, uninspected food supplies, and everything else that is just good enough to stand up, we can only expect that things have to go wrong, and often. It is a kind of wardrobe malfunction: too much of the fancy hats and not enough of the sturdy shoes.

Changing that, though, is easier said than done, and in the meantime, the more times we can steer clear of the damage, the more easily we may get to the point where we don’t have to be so frequently concerned about unexpected events.

Shoppers Spending Less Time Browsing

As the 2012 Christmas shopping season winds down, my general impression is that sales were good, up slightly from last year roughly along the lines predicted at the beginning of the season. Traffic, however, was distinctly down from past years, particularly later in the weekend. Also, it seemed to me that fewer people were waiting in line at the post office to mail presents.

If traffic was down while sales were up, it suggests that shoppers are making up their minds more quickly, or they are deciding on purchases before they arrive at the store. This makes sense in an era of search engines and the dozens of other Internet shopping tools. This slight trend may presage a larger shift in the way people shop, with the very time-intensive process of in-store browsing becoming less important.

One example of this comes from my local supermarket. Its web site allows you to pick a store, and then it will tell you the approximate shelf location of product you are searching for. This feature alone can reduce the time of a shopping trip from 25 minutes to 15. The time saving results in a reduction in traffic, but there is no corresponding reduction in sales.

This Week in Bank Failures

There was talk about the “death of Wall Street” when the news came out that the New York Stock Exchange (NYSE) was being bought by ICE. The indignity of the defining Wall Street company being bought out by a relatively new competitor from out of town is compounded by the fact that the stock exchange itself is considered a secondary part of the acquisition, which has more to do with making a quick buck on interest rate derivatives.

It is not just the sale of the stock exchange, along with the almost simultaneous sale of Knight Capital, financially hobbled by a software glitch, that diminished Wall Street and the world of high finance. If last week set new records in banking crime with penalties and indictments, the news this week was even bigger. Every day brought new bombshells, too many to run through them all, but I must mention UBS admitting guilt in falsifying its Libor reports after an investigation that showed a remarkable degree of coordination among regulators and prosecutors in at least four countries. The $1.5 billion in penalties is reason enough to mention the case, but what had Wall Street buzzing was the scale of the documentary evidence. Thousands of internal messages referred specifically to falsifying the Libor reports, and some mentioned improper payments that would appear to meet the legal definition of bribery. The succession of documents makes clear that Libor fraud was essentially a daily occurrence at UBS and deeply ingrained in the company culture.

The wave of legal trouble is most evident in banking in the United States but can also be seen in other countries, such as the former bank executive hauled into court in Ireland, and in other industries, such as the new facts and rumors about Wal-Mart’s bribery practices in Mexico. The wave of indictments can hardly be described as a crackdown, though. Bank regulation is nearly as lax as ever, and prosecutors are still highly reluctant to do anything that might impede a successful large business. It is more that much of the corporate world lost its legal and moral bearings when the global recession arrived about five years ago, to the point where authorities were forced to act.

When the story of the death of Wall Street is written, history will not trace it back to the events of this week, but to a culture of corruption that slowly began to take over the world of finance in the 1980s. It picked up steam in 2001 with the hands-off attitude of the Justice Department toward big business under the Bush and Obama administrations, and unless that policy changes, the wave of corruption will be checked only by the eventual financial undoing of the companies where it has taken root.

Lessons from the New Instagram

The decisiveness of the mass reaction to the changes at Instagram has puzzled more than a few people. How can anyone get excited by a terms-of-service change? some ask. For others, the question is, Doesn’t the company have a right to make money somehow? The discussion has revealed deep splits between people in assumptions about the way Instagram works, and these differing points of view may also hold lessons for the Internet and business in more general terms.

First, it is clear that some people see Instagram as an activity, almost like an evening at a bar. Viewed this way, the photos people post are mere artifacts, like the napkins at the bar. In this view, if there is any work or creativity embodied in the online photos, it is there by accident. Others, though, see Instagram primarily as content. That is, for them, the photos come first, and the fact that there is a social structure of people looking at them is secondary. In this view, some photos are much more important and valuable than others. Creative people, such as photographers, musicians, and authors, seem to fall almost entirely in the second group. Amid their protests there is an element of shock that the company hosting their creative work sees it as being devoid of both creativity and work.

The second major split in perspective probably falls along the same lines. There are some who see Instagram as a freebie, a free service Instagram provides to its users, who pay nothing in return. In this view, there has to be a way that the users can provide some value to the company. Others see Instagram as an exchange, with some people providing the platform that makes it all work while others provide the entertainment value that makes it all interesting. In this view, Instagram would be nothing if it were an empty window with no photos to show, or even if it merely showed a random assortment of photos. It depends utterly, then, on the contributors who provide the relatively few highly interesting photos that give users a favorable impression of the site, and it ought to have a strategy for retaining and encouraging the users who contribute these photos.

It is hardly new or shocking that media people have little respect for content. Radio stations, after all, have never cared what records they play. If all their records disappeared, they would get different ones next week, and no one (they imagine) would notice the difference. It is the same with television networks and programs, cinemas and movies, bookstores and books. If people thought Instagram was different, they might stop to consider that it was originally created by computer programmers rather than photographers. It has always been about the medium, not the message.

It is the people who are trying to persuade the old Instagram’s users not to be shocked by the new Instagram who are the most clueless. It is a human instinct to avoid being exploited, almost the same as the instinct that tells us to get out of the way of a falling tree. People who see themselves as the targets of thoughtless exploitation run first and ask questions later. Telling people in this state to calm down and allow themselves to be exploited, which is the way this advice comes across, goes way beyond missing the point. It may be logical advice within a certain narrow point of view, but it fails to show compassion or common sense.

If there is a business lesson in all this, it is a lesson in branding. If a business makes a change that is shocking to its core constituency, that means it had brand assets it didn’t realize it had. Unfortunately, this information comes only after the value of the brand has already been liquidated. By then it is too late to be of any use.

Instagram’s New Moral Dilemma

If you went by the online comments, you would think Instagram had died. It didn’t, but the photo-sharing site’s announcement that it would start selling users’ photographs for use in advertisements next month was almost like a death notice. This change met with a decisive reaction from everyone I talked to who had an account with the service. They would not be posting any more photos on Instagram. They would be deleting their accounts before the changes went into effect.

It was unanimous. There wasn’t anyone who said, “You know what, I don’t care if that photo of my baby niece’s toes ends up on a billboard for a resort.” No matter who you were taking photos of, it didn’t seem proper to subject them to that kind of risk, however theoretical.

This doesn’t mean that Instagram is about to lose all its users, any more than AOL did when it floated the idea of charging senders 2¢ per message to deliver email reliably. AOL still exists, and there isn’t anything to say that Instagram will go away anytime soon. The people I talk to are pretty aware, tech-savvy, creative, and active online. Most Instagram users, surely, are more passive. It would be a surprise if more than 10 percent of Instagram’s users actually canceled their accounts.

Still, the number of canceled accounts is already alarming in business terms — large enough that by last night Instagram started to walk back its plans. Its reassurances, though, were perhaps too late and too vague to matter to its most active customers. I didn’t heard any of my friends saying, “Oops, false alarm.”

It might be losing only a small fraction of its users, but that doesn’t mean Instagram is going to be okay. The people who care what happens to the photos they take are the same people who care to take interesting photos. With them out of the picture, Instagram loses maybe 80 percent of its interesting photos — or in other words, it is about to get as interesting as a photo album from a family reunion.

Some people expressed a sense of unfairness about the new policy: how can a huge, faceless corporation take your photos and sell them without even telling you? But it is the new need for self-censorship that is the larger issue. Before you can post a photo on the new Instagram, you have to ask yourself: how would everyone feel if this photo were to show up completely out of context somewhere publicly prominent at any point in the indefinite future? That’s a hard question to answer, and that’s why people are now finding it hard to post photos on Instagram.

The easy answer, in fact, is to copy off all the photos and delete the account. A Wired story says that process takes only a few minutes — less time than it takes to sort out the moral dilemmas of even a single photo. So if a few million people have canceled their Instagram accounts this week, it isn’t really a boycott. It’s more the easy way around a difficult moral question that people don’t have time to address.

HTML 5, a Step Closer

HTML 5, the next big web standard, has been declared feature complete. This means there is a limited amount of work remaining before HTML 5 is an officially recommended standard.

We all have already been using features of HTML 5 for three years on sites like YouTube and in mobile versions of web sites, so it is easy to forget that HTML 5 has only been a work in progress all this time. It has been slow to arrive on purpose, the committee wanting to allow plenty of time to discover flaws and unintended consequences in the new web page features before committing to a lasting standard. This is not the usual approach to publishing a standard — usually a standard is published before it is ready, with obvious flaws that have to be corrected after the fact — but perhaps it is the right approach for this situation. There is no great urgency in replacing the latest two HTML standards, HTML 4 and XHTML 1.1, both of which work nicely. It makes sense, then, to take the time to make sure that HTML 5 really is a major step forward.

The development of HTML 5 has been an orderly process. It was early in 2010 that the work of defining the elements of HTML 5 was starting to wind down, and it appeared then that HTML 5 would go final around the middle of 2013. That was when I started to use HTML 5 in my own work. I adopted the pending standard knowing there was a risk that I would have to redo some of my work if the definitions changed along the way. Now there is hardly any risk in adopting HTML 5, and it will probably be used in most redesigns going forward, so that by the time the standard is formally published, it will already have been adopted by a plurality of major web sites.

At Retail, Don’t Shoot the Messenger

“Everyone I know in retail is feeling stressed out.” That’s the assessment of one retail worker I know, and it fits with everything else I have heard locally. It is not that business is frightfully slow — in total so far, retail foot traffic seems to be slightly stronger than last year — but this season’s promotions and initiatives have not been going well, accountants and managers are pushing for more, and the workers on the retail floor can push the customers only so far. For their part, customers simply lack the buying power that retail strategists had planned on for this season. You can hardly blame the customers, but sooner or later it puts everyone in retail in the stressful position encapsulated in the phrase “Don’t shoot the messenger.”

There is more at stake, it seems, this year. Best Buy in particular is facing a hostile takeover, or at least it must seem so to the electronics chain’s employees. If the deal goes through, the new owner, who is out of touch with the current marketplace, could easily run the whole chain into the ground forcing a January 2014 liquidation. That scenario or some other upheaval is likely unless the customers come through this season, yet with the chain’s financial squeeze, product selection has been dialed back aggressively, and customer response has been understandably tepid.

Early this weekend, I saw the kind of heavy turnout you would hope for in the mid-December weekend, but it did not last long. Sunset came on Saturday, and by 5:00 I was asking, “Where did everybody go?” On Sunday, traffic at retail wasn’t much. This early-weekend pattern is something I observed during the last two Christmas seasons. The early weekend makes sense if you picture people shopping with debit cards and cash. When the paychecks come in, they can go shopping. When the money runs out, they must go home.

Retailers should not blame themselves. No amount of glitz and star power can persuade cash-limited consumers to borrow money to finance the retail sector’s next expansion plans. That spending will arrive only when consumer income rises and consumer debt falls — only when the deleveraging is done and the national economy is righted. The level of stress at retail this season tells you that that will come too late to save some of the retail operations that have been struggling this year.

This Week in Bank Failures

As 2012 winds down, it may be summed up as a year of larger changes in banking than the preceding years. Occupy Wall Street, Move Your Money, and Bank Transfer Day might have persuaded a few banking customers of the need to change their approach to banking in 2011, but 2012 was the year that saw the beginning of a large-scale shift in opinions and preferences.

That shift continued this week as the phrase “too big to jail” was invoked in describing HSBC’s role in financing international drug-running and terrorist groups — and that was just part of the troubling conduct covered by a $2 billion settlement with U.S. prosecutors and regulators. As part of that deal, bonuses for some of the bank’s executives will be delayed by up to five years — but there will be no criminal charges for the bank or any of its employees. Prosecutors argued in court that a criminal prosecution of the bank could lead to the collapse of the banking system; therefore, they said, such a prosecution could not be undertaken. It is almost the identical argument that prevented the prosecution of pirates ten centuries ago (that was when pirates were economically more important than they are now). The seedy side of the government exposed in this deal, and others like it this year, has not escaped the attention of the public, or of The New York Times, which wrote:

But this case is the opposite of an anomaly. That the most powerful actors should be immunized from the rule of law — not merely treated better, but fully immunized — is a constant, widely affirmed precept in US justice.

The HSBC deal is widely viewed as having been the subject of an agreement between U.S. and U.K. authorities. In this light, it has been described as a new kind of international bailout, rescuing a business by protecting it from the financial burden of the penalty of law.

And HSBC was hardly alone in the banking crime headlines this week.

• Court papers revealed that Bank of America’s mortgage repurchasing is being investigated by the SEC. The bank this week filed a countersuit against an insurance company that guaranteed some of Bank of America’s fraudulent mortgages. The insurance company had already asked a court to force the bank to honor the terms of its insurance contracts.
• Deutsche Bank, previously thought to be mostly above the fray, was dragged down into it this week as five employees were arrested, and four held in jail, in connection with what investigators believe is a web of tax evasion, money laundering, and destruction of records in connection with the carbon trade. The bank has already revised and refiled its 2009 income tax statement as a result of the problems with these transactions, and it may face a further penalty for the delay in correcting its tax report. Prosecutors have not said much, but the case appears to center around ill-formed or fabricated carbon permit transactions or related derivatives.
• UBS is said to be prepared to enter guilty pleas and pay penalties around $1 billion for its part in falsifying the Libor base rate. The bank has been under regulatory scrutiny in the United Kingdom and United States along with its home base in Switzerland, and several former employees have been arrested.
• Japan’s largest bank, Mitsubishi UFJ Financial Group, announced a settlement with U.S. authorities over transactions it conducted in 2006 and 2007 for countries blacklisted by the United States. Some of those transactions took place in part in the United States and ran afoul of U.S. trade restrictions.
• Standard Chartered Bank settled money-laundering charges in much the way that reports from last week had indicated.

It is not just banks’ alliances with criminal organizations that hurt the industry’s reputation. This year will also be remembered as the year when student loan debt began to overshadow credit card debt, and what more profound way could you highlight the way banks seem to prey on the most vulnerable people than by thinking of the 17- or 18-year-old who took out a student loan in 2012 that may not be repaid until 2052?

The one area where banks in general have made progress this year is in becoming less intrusive when it comes to routine transactions. You don’t stop to think of how this represents a step forward when a bank shortens its contract language from 40 pages to 28, or keeps you waiting for a gasoline-pump card approval for three seconds instead of five, but it is this kind of scaled-down obstacle that moves banks along the continuum from “necessary evil” status toward where they would prefer to be, a necessary part of the background of life. Still, it seems it will be a long time before people think of the banks they deal with with the kind of free-wheeling pride that the phrase “money in the bank” used to imply.

There was one bank failure tonight, surely the last of 2012. State banking regulators closed Community Bank of the Ozarks, which had $42 million in deposits and two locations in the southwestern part of Missouri. Bank of Sullivan is taking over the deposits and purchasing the assets.

2012: Warmer Than Ever

In late winter the weather was so warm it was called Summer in March. When the actual summer came around, it was one for the record books. Now that the end of the year is rolling around, it is no surprise that 2012 will rank as the warmest calendar year ever for the contiguous United States (along with various other geographical zones).

It is not that the entire year has been warm, but it is warm again now, with November-like weather in the middle of December. Not far away in Greenland, above-freezing temperatures in December are another sign of a shifting climate. Realistically, the climate will change almost detectably from year to year for the next two generations before human patterns of activity have a chance to change enough to permit climate to settle into a new, relatively stable pattern.

Choice, Peace, Coherence on 12/12/12

Today is the “12/12/12” date that people have been talking about for several years. The form of the number, if you look just at the digits, could symbolize the kind of pondering that goes into a decision between one choice and another. The the alternation between 1 and 2 could be a way to highlight the comparison that goes into a decision.

If today is a day to think about decisions, many have taken today as a day to focus on the most important decision of our time, between violence and peace. Peace comes not merely from a reluctance to clash, as some suppose, but also from a kind of clarity of thought often described as coherence. This is sometimes also referred to as harmony. If you tune in to the chatter surrounding 12/12/12, you will come upon mentions of all these words. Look deep enough and you will see that they are all pointing toward the same thing.

It Pays to Consider Your Options

A study finding that gay people do better than average in financial matters has had some people wondering how that could be. The lesson certainly is not that it is better to be gay, and the results didn’t correlate to number of children or other obvious household metrics that might be used as an explanation.

My guess is that what this result tells us is that it pays to consider your options, that is, to decide what kind of person you want to be and where you think you will fit in. People who do this are likely to be better off than those who just follow the crowd. In a culture that points everyone in the same direction, it takes a degree of personal initiative and introspection to decide on something different for yourself. Entrepreneurial stories often tell us that the kind of self-awareness that leads to personal change can also lead to success in business, so it makes sense that it might also lead to financial success in more general terms.

Apple’s Plans for U.S. Manufacturing

Apple is saying it will build some of its future computers in the United States. To people who only know the recent history of Apple and the computer business, this might seem a radical new innovation. In fact, though, Apple’s products were predominantly made in the United States until about a decade ago, and trends suggest that U.S. manufacturing will become important again in the future. China might be dominant in high-volume high-tech manufacturing right now, but economists are saying that wage trends and transportation cost trends will probably return an enormous amount of manufacturing work to North America and Europe within the next decade. Apple has a history of getting ahead of trends that it sees as an advantage to its products and operations, so it shouldn’t be a surprise if Apple is ahead of the pack on this trend too. Given the importance of transportation expenses, it makes sense that the new U.S. factories would start with the larger and heavier products that are sold in the United States, that is, with computers and video displays rather than iPods.

The Exact Same Christmas Tree

Imagine if every house had the exact same cut Christmas tree.

That’s the dream, apparently, of some Christmas tree growers and sellers. I’ve seen Christmas tree lots where all the trees are essentially the same — not just the same variety and age, but with no discernible variation in height or weight either, and of course, all offered at the same price. This seems to be a trend of the last twenty years or so. The advantage to the retailer is supposed to be that the more uniform trees are easier to sell. As a customer, you will buy the very next tree that comes off the assembly line or you won’t buy at all — a quick decision that won’t waste the retailer’s time. Those who insist on the tradition of picking a tree can pore through a row of identical trees until a trick of the light makes them prefer one over the others, again, a relatively quick process.

The savings in retail labor, though, results in a loss in value for the consumer. The experience of picking a Christmas tree is part of the experience of the Christmas tree, and when that is taken away, some of the iconic value of the tree is lost. More fundamentally, though, a Christmas tree is a decoration, to be placed in rooms of various sizes and styles, and therefore, the one-size-fits-all approach results in trees that fit poorly in the rooms where they are placed.

The most vexing problem I hear with Christmas trees is the difficulty in finding one that is small enough. This is a particularly ironic problem for the growers, as it is easier to grow a small tree than a large one. Growers have worked so hard to efficiently deliver a tree that reaches the ceiling and towers over the largest suburban living room that they have failed to deliver the smaller trees that people with smaller rooms (or shorter arms or a smaller car) are likely to need. The suggested work-around of removing the bottom branches and cutting off the bottom of the trunk is not only inefficient but awkward and an unwelcome chore. There is a demand for smaller trees, and it is a market segment that nearly half of Christmas tree sellers are simply brushing off.

This Week in Bank Failures

If it seems that high finance and scandal go hand in hand, this is not by accident. If you follow the money that passes through the financial sector, you might reasonably come to see it as a game of hot potato. Everyone who wants to make a killing in finance will try to go into the high-risk transactions because that is where the high rates of return are. The trick, though, is to hold on to the risky transaction just long enough to skim off your share of the proceeds, before passing the risk off on to someone else. This is fundamentally the reason that derivatives exist, but it goes way beyond derivatives. It is the reason so many companies end up getting involved in even very simple financial transactions.

A simple credit card purchase can’t take place without about ten companies getting involved. For a home mortgage, the number might be closer to twenty. It is all about passing the risk along to someone else.

In many cases, the actual risk is not shifted at all, but this does not necessarily matter. If the accounting measures of risk can be manipulated, that may be good enough, especially for a bank, for which risk is one of the critical financial measures. This explains how AIG, an insurance company, came to be the most important company in Wall Street banking five years ago. AIG issued derivatives that allowed it to take colossal amounts of risk, quadrillions of dollars worth, off the hands of the banks. The fact that AIG’s own solvency became something a fiction along the way did not matter for accounting purposes, as long as AIG could manage to stay out of bankruptcy, as so far it has. AIG eventually became a company with no net worth to speak of, but it nevertheless (with government help) was able to deliver the accounting magic that would keep transactions from being listed on a bank’s balance sheet.

When so much is riding on arcane accounting designations, controversy and scandal are all but unavoidable. These stories came up on a daily basis this week. Deutsche Bank hid $12 billion in losses, former employees told the Financial Times. The bank, though, insists its accounting designations of assets were done by the book. UBS was said to be preparing to pay $450 million in fines to settle charges that it falsified its Libor reports. That would be similar to the amount that Barclays paid previously. In a story that sounded like an echo, Standard Chartered was said to be close to settling charges related to its money-laundering past for $330 million, in addition to the $340 million it has already agreed to pay for keeping false records in connection with the same transactions. Standard Chartered apparently created fictional owners for bank accounts to get around money laundering rules in much the same way that a bank might create fictional owners to get around loan underwriting rules.

Banks’ hot-potato treatment of risk could not exist without insurance companies, and there was a similar story this week in insurance, in which Aetna agreed to pay $120 million to settle claims that it systematically underpaid insurance claims.

The size of the fines might seem enormous until you look at the scale of the transactions at issue. Aetna and Standard Chartered both have said that the payments won’t make a dent in their profitability for the quarter, and UBS has already set aside more than enough money to cover its reported settlement.

When even record-large fines are something a bank can take in stride, it tells you something about the relationship between the business and law enforcement. That is, questions of legality may not rise to the level of strategic importance that would make them a concern for the executives, but are often instead a detail to be worked out by the lawyers.

Overlapping Disasters

I woke this morning to news of a damaging earthquake and tsunami in northeast Japan. The tsunami struck so quickly there was no time to evacuate the damaged nuclear power station in Fukushima, though in practice, workers only needed to climb one flight of stairs from the basement to get out of harm’s way.

Today’s earthquake will probably count as only a minor disaster after pavement and bridges are checked, but still, it seems that disaster news has become so frequent it is overlapping. The death toll exceeds 500 in a Philippines typhoon, and there is continuing news from a dozen other disasters of recent weeks.

There is always talk about doing better in the physical preparations for known disasters, and we may also need a more effective approach in recovering from the news of disasters. For many people, the report of a disaster casts a shadow over the whole day, and if this happens on more days than not, that is a problem in itself.

The New Discount Grocery

Big box supermarkets are not going anywhere, and are, in fact, getting larger in floor area, but most of the growth in the grocery business is in small-format stores. These include liquidators, farmers’ markets, produce markets, natural and health food stores, and discount grocers with limited product selection.

Aldi is opening new stores like this one every month.

The Aldi store entrance leads into the snack aisle, which takes up one fourth of the total product display area.

It is this last category that is hardest to understand. Is there really a place for the Aldi store that opened near here today? Aldi’s specialty is impressively low prices on a broad selection of snacks, but it requires grocery shoppers to make compromises in almost all other areas of the shopping experience. You won’t find your favorite brands, there are only token selections in canned food (40 cans to choose from) and frozen food (just two freezer chests, pushed together, with a scant selection of frozen entrees), bread and bakery items are truly awful, and most of the other categories you would expect to find in a grocery store are missing entirely. Aldi only grudgingly permits shopping carts, takes payment in cash, and expects you to bring your own bags. Is this what people want in a grocery shopping experience?

Well, perhaps so, based on the turnout at the grand opening this morning, and the fact that it is something other than a big-box supermarket may be the biggest factor in Aldi’s favor. The enormous selection you find in the traditional large supermarket is something of an illusion. Only a small fraction of the products are things you actually want; the rest are placed there at the behest of the food manufacturers, who hope to eventually persuade you to select their products instead. By contrast, at a discount grocer, you don’t find shelf on top of shelf filled with ill-conceived and unpopular products, and there is a fair chance that you will find something resembling what you actually want, and in only five minutes or so.

The trend away from big-box grocery stores may represent the same cultural forces that are taking their toll on big-box stores in other categories. Among them: big box stores rely heavily on sales circulars delivered inside local newspapers, and the under-45 crowd, hardly an insignificant part of the economy, isn’t as easily impressed either by the newspaper format or by the temporary price manipulations that the sales circulars represent. Sales circulars aside, supermarkets tend to have the highest prices you can imagine for most of the products they sell, so it is easy for a shopper to suspect that there must be better deals somewhere else.

Aldi takes pains to confirm those suspicions. Prices are especially good on high-profile items such as potato chips, American cheese, carrots, and Christmas candy. If you look for low prices, you can find them. But if you are trying to put together food you could live on for the week, Aldi is an exercise in frustration, and it may not be much cheaper than the supermarket across the street. I saved about $5 on a grocery bag of snacks and produce — not necessarily worth the trip if you have to go on to another store for the rest of your food. Other discount grocers specialize in different product areas, but the shopping experience is not very different. My feeling is that it is just a matter of time before shoppers recognize that discount grocers are ultimately offering another version of the same illusions that bothered them in the supermarkets.

Denmark Repeals “Coconut Oil Tax”

Denmark is canceling its fat tax, also known as the “coconut oil tax” because the tax was levied most heavily on coconut oil. The sales tax was supposed to discourage the kind of overeating that leads to obesity, yet it was levied on all food products without making any distinction between healthy and unhealthy foods. It was based, quite arbitrarily, on estimates of each product’s saturated fat content. Half a century ago, it was thought that people gained body fat by eating food high in saturated fat, but new evidence says the more harmful form of fat is polyunsaturated fat, which was perversely exempt from Denmark’s tax.

It was a bad idea for a tax to begin with. Compliance costs were the highest of any tax I can recall, as they required a complicated computation of saturated fat content for every food package. It was, as I mentioned, targeted arbitrarily. Like all food taxes, it was heavily regressive, as people who have the least money to spend spend the highest proportion of their income on food. On top of all this, which was known when the tax was first implemented, the experience with the tax was disappointing. There was little indication that people changed their eating habits, and when they did, it was not in the direction of healthier food. People got around the tax, at considerable inconvenience and expense, by eating in other counties when possible and smuggling in coconut oil and other high-fat foods from other countries. The expense of these foreign trips led people to spend less on all products sold in Denmark, making the tax a drag on the national economy.

The experience is almost the opposite of New York City’s restaurant trans fat ban, which forced people to eat healthier substitutes — any natural fat is healthier than trans fat — and which had no indications of people looking for ways to get around the ban by eating in other jurisdictions. I am sure there are lessons in these comparisons for people who propose future health- and food-related taxes and rules.

Planning for a Post-Nuclear Japan

Two years haven’t done anything to improve the look of the nuclear power industry in Japan. Safety inspections that were supposed to reassure the public instead revealed a culture of lax standards and complacency in nuclear operations, and there continue to be revelations about the nuclear disaster at Fukushima that show it to be worse than previously thought. For example, we now know that huge amounts of radioactive water leaked into the ocean almost from the moment the tsunami hit and that substantial leaks continue up to the present. Meanwhile, popular support for nuclear power has proved to be much less than what the industry thought it had. And so, Japan finds itself making plans for a transition to a post-nuclear future.

The transition is hesitant at first, with no obvious path forward, but that does not mean the nuclear plants continue to operate while people figure things out. A premature proposal to restart reactors this year brought 100,000 middle-aged anti-nuclear protestors to the streets to call for a different solution in a rare show of mass public sentiment. So instead, Japan is importing as much natural gas as it can and is looking for other short-term measures to take. Energy sources for a post-nuclear Japan may be a big problem for many years to come, but in Japan, no one disputes that nuclear power has also become a big problem.

Cigarettes Become Less Prominent in Australia Stores

Australia’s ban on cigarette logos has gone into effect, after tobacco companies’ legal maneuvers were exhausted. Brightly colored cigarette packs were replaced on Saturday with standardized packaging in muted colors, showing pictures that illustrate the health consequences of cigarettes. The cigarette brands are the same as before, but are shown only in plain text.

The logo ban has had one immediate effect at least. The prominent cigarette displays in many stores are no longer so prominent. That is because the bright colors and strong contrast of the previous packaging is replaced by something that doesn’t call attention to itself from a few steps away. From the other side of the store, the new cigarette display might be mistaken for wood paneling or cardboard boxes. It is only when you get close enough to see the medical pictures that you see how repulsive the packages are. The combined effect — nondescript from far away, repulsive up close — creates the impression that the store is displaying the cigarette packages by mistake, and in a way, that is correct.

My hunch is that it won’t be long before retailers go to the next step of hiding the cigarette displays, a step that other retailers took as long as 20 years ago. Moving cigarettes to a less prominent location is an easy way to make a store look more welcoming and friendly to the majority of customers, all the more so now that the packaging colors have been taken away. Stores aren’t likely to stop selling cigarettes in large numbers, though — not until the number of cigarette smokers falls quite a bit more.

An Illustration of Data Size and Storage Costs

I participated this year in National Novel Writing Month (NaNoWriMo), a loosely organized effort in which writers worldwide try to write the first draft of a novel during the month of November. The specific goal is 50,000 words written during the month. I wrote a 50,000-word first draft of the science fiction novel The Only Band in Town. In total this year, participants logged 3,288,976,325 words, and this sum provides a nice lesson in proportion when it comes to work and data storage.

A novel is a lot of work. The point of the gimmick of putting this effort into the single month of November is to keep people from fretting over so many details that it takes years to write a first draft. When you talk about 3 billion words of fiction, that represents lifetimes of work.

Yet the cost of storing all this work? Fuhgeddaboudit. Obviously, novels from all over the world aren’t all collected in one place, but if they were, this year’s 3.3 billion words would not quite fill the USB flash drive shown here that weighs less than 10 grams and sells, today, for $16.

Just eight years ago, the costs of data storage were significant. Just last year, the cost of a 32-gigabyte flash drive was twice the current price. Even the heartless cost-cutting that cash-strapped corporations engage in can’t keep up with the decline in cost of data storage. They could squeeze another 15 percent out of this year’s already inadequate storage budget, and that would still mean more than enough storage for all of next year’s work, just taking into account price cuts that have already taken place.

Work is expensive. Data storage is not, not anymore. Our thinking has not entirely caught up with this shift in proportions. Here are three more comparisons to make this point:

• The annual electric bill for the file server room (including cooling) may be greater than the cost of all the hardware.
• The time you spend making a backup of your computer files is more valuable than the storage space you use. (You might as well make a backup whenever you can spare the time.)
• The world spends more money on data security than on data storage.

Think about this way. Buying a USB flash drive is easy. Keeping track of it so that you don’t lose it takes real work. Finding one of your files among all the files you have saved can take minutes, hours even. Data storage is no longer the major cost in storing your work.

This Week in Bank Failures

The way banking laws are written, a bank should not be involved in crime at all. In practice, regulators are reluctant to withdraw the banking license of a bank that appears to be knee-deep in a criminal enterprise. Often regulators are content to just order banks to clean up their acts. In the more egregious cases, individual employees may be barred from future employment in banking, but the bank’s liability is limited to regulatory penalties that are rarely much larger than the bank’s ill-gotten gains.

But there are cases that can cause a banking license to be revoked, as we saw during Thanksgiving week when First Bank of Delaware agreed to shut down to settle a series of federal actions. The FDIC and Financial Crimes Enforcement Network found that the bank’s internal controls were not sufficient to prevent it from being involved in systematically fraudulent transactions. The Justice Department was pursuing a related court case against the bank. The bank agreed to pay $15.5 million, including $15 million in penalties and a $500,000 trust fund to reimburse customers whose deposits were stolen.

The specifics are hard to piece together, as they often are when cases are settled, but it looks like the bank sought out customers whose business model was based on forged e-checks, then went to some trouble to avoid discovering the magnitude of the fraudulent transactions. The Justice Department said the bank “originated more than two million debit transactions — worth more than a hundred million dollars” for these customers. The $15 million in monetary penalties, then, would be larger than the transaction fees the bank collected for criminal transactions, but not necessarily much larger. It is the loss of the banking license, which was revoked by state banking regulators in coordination with the settlement, that is the larger penalty.

The lesson would seem to be that a bank that compromises the integrity of the financial system will be dealt with more harshly than one that merely acts as an agent for smugglers and military enemies. Even criminals and tyrants need bank accounts, but if a bank’s activities are illegal and are also an active threat to the banks around it, then it seems its banking license is fair game.

First Bank of Delaware transferred its deposits and about $80 million in assets to Bryn Mawr Trust Company, a small bank based nearby in Pennsylvania, with a subsidiary in Delaware. The bank’s remaining assets were transferred to a liquidation trust, for eventual distribution to stockholders.

Corruption has been a major theme in the ongoing transition of power in China’s ruling party, with the party trying to shake a growing popular perception that it is corrupt through and through. Among the changes are new regulations limiting some forms of fringe benefits for bank executives. Banks in China have long paid living expenses, at a shockingly extravagant level, for their top executives, and the new rules will largely eliminate that. Rules that already limit the money that state-owned banks can spend on executive cars will now also apply to jets, yachts, houses, and the like. Related new rules limit the style and scope of entertainment that banks can buy. The new rules go into effect in December.

State regulators in Vermont closed Border Lodge Credit Union, which had 1,097 members. It was a very small credit union with only one regular employee. The FBI had been investigating the credit union after a routine examination by state officials raised concerns about its operations. The NCUA will be liquidating the credit union, but has said it could take as long as two weeks to verify the deposits and make payments to the members.

Tracing California’s Largest Floods

Is the pattern of flooding in California in recent years an abberation, or was the relative absence of flooding there during most of the 20th century just good luck? Soil studies and other historical evidence is suggesting the latter. A Scientific American story released on the web today, “Megastorms Could Drown Massive Portions of California,” talks about California‘s worst flood:

The intense rainstorms sweeping in from the Pacific Ocean began to pound central California on Christmas Eve in 1861 and continued virtually unabated for 43 days. The deluges quickly transformed rivers running down from the Sierra Nevada mountains along the state’s eastern border into raging torrents that swept away entire communities and mining settlements. The rivers and rains poured into the state’s vast Central Valley, turning it into an inland sea 300 miles long and 20 miles wide. Thousands of people died, and one quarter of the state’s estimated 800,000 cattle drowned. Downtown Sacramento was submerged under 10 feet of brown water filled with debris from countless mudslides on the region’s steep slopes. California’s legislature, unable to function, moved to San Francisco until Sacramento dried out—six months later. By then, the state was bankrupt.

Intense flood events seem to have hit California about 200 years, the story says, and could become more frequent with changes in climate. The weather events involved can’t be anticipated much more than a week in advance (though meteorologists are working on it), and such a flood now would be a disaster the state is in no way prepared for. Even without a flood the state government is in serious financial distress with little flexibility to respond to even routine problems.

Flooding is on people’s minds in the northern half of California this week with minor flooding occurring across a wide area today.

Retailers Confirm Weak Early November After Sandy

In the aftermath of Hurricane Sandy, I wasn’t in a shopping mood. I was cleaning up storm damage and dealing with power outages and other problems. (For many people, the power outages and related problems continue a full month later.) The national election and a follow-up storm a week later added to the slow-down feeling when it came to the idea of shopping. And I haven’t returned to the stores quickly. Checking my accounts this morning, I found that I have spent hardly anything, aside from repairs, in the month since the storm hit.

In the aftermath of the storm, it was easy to see that people were not spending at their usual pace, and reports from retailers are confirming this. The Reuters story (at CNBC) “Same-Store Sales Hit by Weak November Start” lists Target, Macy’s, and Nordstrom among retailers reporting only the slightest year-over-year growth in November same-store sales, only half of what analysts had predicted — and that in spite of a healthy total for Thanksgiving weekend.

Most people affected by the storm a month ago have surely returned to their regular shopping habits by now, but a smaller number facing more serious effects, having to rebuild houses, seeking new jobs, navigating transportation difficulties, or waiting for local stores to reopen, may not return to a semblance of normal shopping until spring or summer.

Transportation-Related Hiring Trouble in NYC

Recruiters are having a hard time filling specialized and technical positions in New York City. The problem is transportation. Damage in the aftermath of Hurricane Sandy affected tunnels, trains, and tracks, making it harder than ever for workers to travel to work in Manhattan or through it to other parts of New York City.

At first, most employers in the area put their hiring plans aside to try to get through the initial storm cleanup. But now that some companies are trying to restart their hiring, they are finding it hard to recruit candidates who live some distance away.

Candidates in places like New Jersey, Long Island, or Brooklyn are understandably reluctant to consider work in Manhattan with the current flawed transportation system. Just getting to a job interview requires a commitment of a whole day, and if you get the job? The additional hour of commute time each way is a strong deterrent, even for a job that otherwise seems like a solid career move. Workers who have any other options are better off waiting until spring or summer, when the transportation system comes back, before considering such a move.

Some of the new jobs will be filled by workers who live close enough to the workplace to not be so affected by the transportation breakdowns. Ideally, more of the vacant jobs would be filled this way. A partially qualified candidate from the neighborhood might be trained to meet a job requirement in less time than it would take an employer to wait for the transportation system to be fully functional again.

HP Refuses to Talk, Threatens Lawsuits

Hewlett-Packard is doubling down on its story about accounting irregularities at Autonomy, a company it acquired last year. Today it said it is preparing legal action against the company’s former executives, most of whom it dismissed early this year. Possibly there is some factual justification for Hewlett-Packard’s huge allegations, but as days go by and no such information comes to light, in spite of journalists’ ready access to many of the company’s former employees, it adds weight to the presumption that there is no basis for the accusations. If a company was recording its revenue two times over, which is what Hewlett-Packard’s write-down implies, every employee must have had some indication of this, and any auditor would have discovered it early on.

There are penalties for a company making baseless allegations against its own people, and among the most serious is a loss of credibility in the stock market. The tough talk about a criminal case that so far doesn’t exist hasn’t done much to bolster Hewlett-Packard’s stock, down 2.9 percent today and by more than half from its February peak. If Hewlett-Packard does file a case against its former employees, Hewlett-Packard’s board members and executives will then be legally obligated to answer questions, and then we may actually get to the bottom of this story.

Black Friday Weekend Wrap-Up

As I try to summarize the Black Friday weekend reports of seasonal U.S. shopping, it comes across as the same kind of strained positivity we have seen after Black Friday weekend in recent years: signals are mixed, but retailers and analysts want to focus on the positive because it would be too awful to focus on the more negative indications.

Black Friday sales were lower than any recent year, but perhaps that is no more than the shift of some after-midnight sales to the before-midnight period of Black Friday Eve, this year’s big innovation at retail.

There is clearly a problem with Black Friday Eve, though, from retail’s point of view. The evening store openings, as early as 7 p.m. on Thanksgiving Day, overlapped with the time slot that many families traditionally use for Thanksgiving dinner. This conflict in turn led many families to scale back their Thanksgiving plans. The Thanksgiving tradition calls for a feast, but you can hardly leave one of the family behind at home, washing the dishes while everyone else drives off in a turkey haze to go shopping. So I saw many families opting instead for pre-packaged Thanksgiving dinners, essentially a family-sized TV dinner that supermarkets were offering. The eat-and-run Thanksgiving dinner is much easier to prepare and clean up, but it is also much smaller, and that has to make a big dent in grocers’ Thanksgiving-week sales numbers. There was also a larger drop-off on Saturday, the day after Black Friday, than I remember seeing in past years. If we could look at retail totals for the weekend, my guess is that the Thanksgiving shopping losses at retail more than make up for any gains in Christmas shopping on Thanksgiving.

My own area is barely recovered from a major storm, the later stages of Hurricane Sandy that passed by a month ago, so I was looking to see if the shopping that didn’t get done early in November was being shifted to Black Friday. Perhaps that happened, but I could not find any indication of it. In places hit harder, particularly midtown Manhattan, it was easy to see that the larger stores were trying to put a good face on a shopping season that found storm survivors not in a shopping mood.

Nationally, I believe this year’s holiday shopping season has to be bigger than last, a simple matter of demand dynamics. There were fewer large retail liquidations over the course of this year, giving shoppers fewer chances to wrap up their gift-buying at liquidation prices. But that is not such a large effect, and the three-week lull that is sure to follow now will find retailers in the middle of December desperate to unload Christmas merchandise at deep discounts — the same as the last two years. Shoppers who wait until then may be rewarded with discounts every bit as compelling as what we saw on Black Friday, and of course, this is part of the reason for the early December lull that this year also includes almost a full week of November.

After the Madness of Black Friday

Today is the third day of the extended Thanksgiving weekend in the United States. It is the day after Black Friday, the busiest shopping day of the year. Many retail stores are just as accessible today as they were yesterday, yet the number of shoppers is far more manageable. Early this morning, at 7:34, I stopped in at Home Goods. It is safe to say that no one was breaking down the doors. It appeared I was the first customer to enter a store that a full four minutes before had opened its doors early. During the first half hour there were perhaps five more customers in the store. Store employees were busy restocking displays depleted by the previous day’s shoppers.

This made me think about the evolution of doorbusters, the surprising early-morning discounts that Black Friday has become known for. These discounts were first introduced as a token reward for shoppers who were willing to come out early, at 7:30 or 7:00 or 6:00, before the mid-morning crowds arrived. They were intended, that is, to reduce the risk of overcrowded conditions in the stores. Somehow doorbusters evolved from that into big-ticket, limited-quantity discounts that brought the biggest crowds to the store when the doors opened, creating the frightening situations in which hundreds of shoppers jostle for position at the closed doors of a retail store at 5 a.m. or, a recent innovation, midnight, and where store managers must make contingency plans in case the crowds actually do break down the doors before the planned opening time.

As I shopped in a nearly empty store in the early morning I thought, “This is what Black Friday ought to be like.” I imagined what it would be like if the extended hours of Black Friday could create a low-pressure shopping experience. But, of course, today is just one day after Black Friday, and most shoppers have the option of skipping Black Friday entirely and shopping today instead. And of course, I am not the first person to think of this. From what I have heard, yesterday was, in some ways, more low-key than the Black Fridays of recent years, as many shoppers, like me, kept their distance from the shopping madness.

On my way out of Home Goods this morning, I drove past Best Buy. It was 8:00 a.m., but the consumer electronics giant was not yet open. It did not have enough staff to open for extended hours on Black Friday and on the next day too. But shoppers did not understand this and walked up to the store’s front entrance in one small group after another only to read the sign and walk away. This is a particularly ironic problem for Best Buy, the only major retailer that is believed to actually lose money on Black Friday because of the size of the discounts on big-ticket items. It needs shocking discounts to get customers into the store, or at least that is the rationale, and Best Buy has come to accept that it will not sell enough other items to make up for the losses on the headline items on Black Friday. For Best Buy, Black Friday is something of a publicity stunt, an annual chance to remind customers that they still exist. But they lose so much money on Black Friday that there is some doubt that they will still be around to do it again in 2013. It would seem Best Buy would be better off to have only token Black Friday sales, and to reserve enough energy to open their store early for the customers they turned away this morning, customers who would actually be profitable for the store.

This, of course, is the kind of thinking that is part of the next stages in the evolution of Black Friday. The hype has gone too far if many people’s first thought about Black Friday is the hope that, this year, no one gets killed. If Best Buy has to wonder how it will make up its Black Friday losses in the coming weeks and months, it is a sign that Black Friday has gone so far it has become self-defeating. Black Friday was named for the hope that a day of solid Christmas-season sales would put a retail store in a profitable position, known as “black” in accounting jargon, for the year. In the end, that profit has to be there, or the whole event will have to be changed around again.

I am not anticipating bank closings tonight during the extended holiday weekend. This Week in Bank Failures will return next week.

Did HP Make Up the Autonomy Story?

On a day when Hewlett-Packard should be focused on selling its products to U.S. consumers shopping at Black Friday sales, it instead finds itself on the defensive, trying to prop up its story of bad accounting at a company it purchased last year. After a couple of days of statements from the people involved, there is so far nothing to support Hewlett-Packard’s worries or to justify the $9 billion write-down of Autonomy it announced on Tuesday. The allegations that sounded plausible three days ago now seem more likely to have been made up.

In any business takeover, but especially of a business that sells something abstract like computer software, there will have to be retrospective accounting adjustments, as the interpretation of transactions is adjusted to match the practices and interests of the acquiring company. That is doubly true when the two companies’ books are done according to the rules of two different accounting standards bodies. So far there is nothing to indicate that the supposed problems at Autonomy rise above this level of adjustment.

The lens, then, has to be turned back toward Hewlett-Packard. Hewlett-Packard has acquired companies before, but few of the directors and executives involved in those acquisitions are still around, so is a lack of continuity at Hewlett-Packard getting in the way of routine business transactions? Hewlett-Packard showed what looked like a paranoid streak in its last management reshuffle, and that was not the first time, so is that same paranoia behind this week’s wild allegations? And if so, is the $9 billion write-down just the latest in a series of expensive mistakes from a board that has come to see the world as a hostile, unwelcoming place? If a company is this suspicious of a subsidiary, how long can it be before it is wrapped up in endless litigation with its suppliers, customers, and affiliates?

In its conference call, Hewlett-Packard hinted darkly at criminal charges that may be forthcoming against Autonomy employees and its own auditors and advisors. Yet if the story about Autonomy turns out to be unfounded, it is the leadership at Hewlett-Packard that investigators will be taking a close look at. When you are a corporate officer, there is a thin line between making up excuses and making false statements to investors. With what we know so far, it is impossible to tell which side of the line Hewlett-Packard was standing on this week.

Still Time

Late yesterday afternoon we got definitive word that Wonder Bread is shutting down. Their remaining workers know today that they no longer have a job. Many other businesses, though, got through this week well enough to open up again on Monday. For those workers, today is a day to be thankful that they haven’t been laid off — yet. Others are thankful that they haven’t yet run out of money, or their home hasn’t yet been foreclosed on, or that sea levels haven’t yet risen up high enough to flood their street.

That kind of thankfulness on Thanksgiving might strike some as pretty lame, as it focuses on troubles that quite possibly are on the way soon. It is nevertheless a more powerful version of gratitude than it might appear on the surface. It gets at the heart of what the emotion of gratitude is about. In a temporal sense, gratitude arises out of the recognition that there is still time to make the transition to what comes next. To put it another way, gratitude is the opposite of the dread or panic that sets in when time has run out.

An extra few months or years to get ready for a change can make all the difference. It can transform an unwelcome change into a chance to do something new and better. It is this time to take action that matters. Whenever you take the time to feel grateful, is is a recognition that there is still time for whatever it is you are doing.

The Last Fiscal Cliff, 1981

For those who wonder about the broad economic impact of the federal budget cuts scheduled to go into effect next month, there is a historical precedent to look at. In 1981 federal budget adjustments took away roughly 1 percent of U.S. jobs. The result was the Reagan Recession, a recession described at the time as the worst recession since the Great Depression. Next year’s cuts are on a larger scale, but probably still less than 2 percent of U.S. jobs.

There are, to be sure, important differences to consider. The Reagan administration had strong political incentives to create a recession and boost unemployment, incentives the current administration does not share. The biggest share of cuts next year will fall on defense contractors, in accordance with their share of the federal budget, and there, the impact on consumer spending is minimized. By contrast, defense was exempt from the 1981 cuts.

Some people looking ahead to the scheduled spending cuts of 2013 suggest that the large-scale job cuts can occur without causing a recession. Alas, there is no precedent for that. But the experience of 1981 suggests that the turmoil of the recession of 2013 may go unnoticed by most, and may be largely forgotten by the end of 2015.

Computer Revenue Drops

The declining revenue in the PC business is a sign of decline in the corporate sector globally. Corporations buy most of the computers, so when computer sales are dipping, it is a sign of financial stress in the corporate world.

The latest report from Hewlett-Packard showed a 7 percent decline in revenue, and there are other indications of a decline in the corporate computer segment. Magazines that serve this segment are the thinnest I have ever seen. With its newest operating system, Windows 8, Microsoft is all but abandoning the multi-application, multi-display power user that characterizes the most important corporate users, electing to focus instead on the mobile and home markets.

No one should imagine that corporations are are using computers less, but they are getting by with older computers than ever before, and saving their money for more pressing expenses.

What a Solar Cell Is in Physical Terms

I have written at great length about the potential for solar power, but I have never taken the time to describe what a solar cell is in physical terms. It is an important detail to mention because the physical form of a solar cell is part of the reason why I am convinced that solar cells will be all over the place in the future.

Appearances can be deceiving. If you look at the solar cell of a pocket calculator or similar device, it can look like a cut square piece of metal. Look at a solar panel set up on a roof or a lawn, and it may look like a black piece of glass. These superficial views are not too far off the mark, but they don’t get at the heart of the physical properties of a solar cell that make it work.

Most solar cells are made from silicon, a common material that is not a metal, but has some of the properties of a metal. A solar cell is made of at least two layers of silicon. The two layers are adjusted with other minerals to make them different from each other in their electrical properties, but these other minerals are present in such small amounts that this is a detail you can’t really see. Conductors, such as wires, are added to each surface to carry away the generated electrical current.

The front layer of silicon has to be thick enough to soak up the sun. The thought of a lump or sheet of metal-like material is more than is actually needed. When you think of sheet metal, you probably think of something at least one millimeter thick, but the surface layer of a solar cell does not have be much. A thickness of 16 micrometers, the thickness of household aluminum foil, is enough to take up almost all the light that comes along. Most of the thickness of a solar cell, then, may come from the layers of attached glass or aluminum that protect the cell from breaking.

If most of the physical material of a solar cell is intended for protection against physical impact, then solar panels can be integrated into other devices intended for physical protection. Solar-cell roofing tiles may be the most obvious possibility here, but there are others. Bricks, walkways, even windows could, in principle, incorporate solar panels. For windows, these would be solar cells made thinner so that a third of the light could pass through.

If you think of the weight of aluminum foil, you realize that solar cells are perhaps not too heavy to build into vehicles. With the right design, solar panels could be integrated into the upward-facing surfaces of a vehicle. A vehicular solar array would not generate nearly enough electricity to operate the vehicle, but if it could add just one or two percent to the daytime range of an electric vehicle, or extend the battery life by a similar amount, that would be a welcome addition. (Here’s a story of a record-setting motorcycle powered by a solar array. The array is not on the motorcycle itself, so you’ll have to use your imagination for that part.)

Silicon is one of the most abundant minerals. The use of solar cells is limited mainly by the cost of manufacturing. With current manufacturing, solar cells are efficient enough for use only in installations that are built to optimize the solar power result. It helps, for example, if solar panels can be tilted toward the sun, pointing toward the equator at an angle matching the latitude of the installation. When manufacturing costs go down by one order of magnitude, though, solar cells will be cost-effective in less than optimal installations. And when costs fall below that level, we will start to see solar panels everywhere. I am not saying this will happen soon. But looking at the long run, it seems inevitable.

Slimy Restaurants, and Why We’re Better Off Without Them

There are groups organizing boycotts of Papa John’s and other restaurant chains that are taking public stands against health care. Apparently, to draw a boycott, all the CEO of a billion-dollar restaurant chain has to do is talk loudly and often about firing all its full-time staff and limit the hours of its part-time staff in order to avoid paying the cost of health insurance. Health coverage was also an issue in the closing of Hostess Brands. The bakery fell apart in a matter of weeks after it took away health benefits from workers.

“Boycott” may not be quite the right word, then. Papa John’s really could close down if customers stay away because they are turned off by the idea of businesses that go to great lengths to avoid paying for health coverage. So could Applebee’s, Red Lobster, and Olive Garden, and other restaurants that jump on this bus. It’s no secret that U.S. restaurants have not been doing so well in the last five years, and if they give customers an extra reason to stay away, some of the locations could have trouble paying the rent.

But in truth, we are better off without businesses whose business mentality is based on exploiting their workers and their customers. Some pundits are asking if it is fair to boycott a restaurant or food manufacturer just because it opposes health care. This question makes more sense if you turn it around the other way: Do you really want your food handled by workers who are forced to work sick, potentially spreading infectious diseases to you? Or, given the choice, are you personally better off buying food from a business that cares enough about health to provide regular health coverage to its workers?

You can’t see the infectious disease risk when you buy restaurant food, and so the more slimy restaurants don’t pay much attention to that aspect of their product. They focus on what you see and what you can taste, and not much more than that. This is the same mentality that leads restaurants to use the cheapest ingredients they can get away with, or to imagine that MSG is a spice, or to mop the kitchen floor only on days when the health inspectors are coming. In the food business, the health coverage question is not just about fairness for the workers. It is also a marker of businesses that care what happens to their customers.

There is a lot of talk about a Denny’s franchise that is adding a 5 percent surcharge to all menu items, supposedly to cover increases in costs from providing health coverage to workers. This approach provides at least five ways for customers to take offense. These include the victim mentality of the restaurant owner, the dishonest prices shown on the menu, just the idea of a surcharge, and the use of the place of business to make a political statement that relatively few customers are likely to agree with. But the worst thing about it, if you are a customer, is the suggestion that the restaurant sees the health of its workers, and by extension, its customers, as an afterthought.

Restaurant chains have closed before — it happens every year. The world changes, and businesses that fail to adapt to the changes eventually fail. It will hardly be surprising if some of the next restaurant chains to close will be ones whose executives are publicly seen with their thumbs up their noses, even if only metaphorically. And after they are gone, we won’t miss them any more than we remember the restaurants that closed in past years. In our role as customers, we are actually better off without businesses like these.

This Week in Bank Failures

The traditional architecture and public image of a bank present it as a powerful, stable institution, with nothing ever denting its heavy stone exterior. If bank workers take the facade too literally, though, they can come to think of banking as a field in which there are no consequences. The Financial Services Authority (FSA) is arguing against this spirit of complacency in a letter calling for restraint in bonus awards by banks doing business in the United Kingdom. The way the FSA sees it, a bank’s bonuses must take into account failures and deficiencies in the bank’s operations, such as the possibility liability for false reports to Libor, out-of-control trades, or money laundering. It is a call that is mostly falling on deaf ears, with executives, traders, and academics arguing that bonuses should be more individually focused, and paid based on individual performance, even if the bank making the bonus payments is in a downward spiral because of its collective mistakes. So if banks continue to reward workers handsomely even when they post losses, is bank failure the only penalty for bad banking?

Perhaps. Consider the story of one junior UBS trader who lost $2.3 billion of the bank’s money. On the face of it, the story paints a picture of absent managers content to assign responsibilities without looking in to see what their workers were doing. Aside from the large loss, it is a story repeated across the industry, where managers use financial incentives as a substitute for practices, procedures, and oversight. The case of this trader is in the hands of a jury now, which could decide to send the trader to jail. It must be a highly technical case for the jury, which can hardly be expected to credit any of the witnesses or find sympathy for either the bank or the trader, but must nevertheless make a determination as to the meaning of a series of derivatives trades. If this is the mechanism the banking industry is relying on for accountability, it is a perilous mechanism indeed.

This is also the week that the Federal Housing Administration (FHA) went broke. It has gone through its $15 billion line of credit at the Treasury and may not be able to guarantee new mortgages in large numbers until the housing market recovers a decade from now, or Congress takes some action. Some observers say the FHA can expect a bailout soon, but others don’t see how that is possible with Congress deadlocked on funding for ordinary government operations. If there is no solution for the FHA, this could be the beginning of the end for the secondary mortgage market, though that would not necessarily be an unwelcome change. As a stopgap measure, the FHA will be raising fees. This will result in higher mortgage interest rates from the largest mortgage lenders, and could create an opening for more local banks to get into mortgage lending in a small way.

The Fed has released the macroeconomic scenarios that the giant banks will use in constructing the next round of financial stress tests. These tests are meant to measure the likely financial impact on banks of prolonged recessions in Europe or Asia. The three scenarios assume that banks in the United States will face far more benign economic conditions that those currently faced by banks in countries such as Spain and China. Even so, at least four of the U.S. banking giants are expected to fail at least one of the stress tests. These banks will then be required to take steps to boost their capital.

State regulators closed Hometown Community Bank in Braselton, Georgia, a short distance northeast of Atlanta. The failed bank had $109 million in deposits. South Carolina-based CertusBank is taking over the deposits and purchasing the assets.

Wonder Bread Faces Liquidation

Wonder Bread, which has been in bankruptcy all year, may go into liquidation as soon as tomorrow. The bankrupt bakery’s CEO said the liquidation was prompted by a strike of one fourth of the company’s workers, but there are larger challenges just around the corner. If the strike ended, it might delay the liquidation by only a matter of days.

The liquidation of Wonder Bread will not be a great surprise. A reorganization plan filed a month ago had so many gaps there was some doubt about whether the bankruptcy court would approve it. It featured an 8 percent cut in worker wages, along with what looked like a 50 percent cut in benefits, but it left Hostess Brands with just a few short months to patch most of the flaws in its business plan.

The fundamental problem for the company that makes Wonder Bread, Twinkies, and other junk food is that consumer habits around junk food are changing. Prices for junk food have to rise because they are energy-intensive products, and perhaps prices have gone up just enough that consumers now see Wonder Bread as a luxury item rather an everyday item. It is not that there is an abrupt movement by consumers away from junk food, it is only a subtle long-term trend, but if more consumers are saving Wonder Bread for special occasions, that does not add up to enough interest in the product to keep a huge national bakery company operating.

The difficulties in selling junk food are also seen in McDonald’s, which today let go its U.S. division president after a 2 percent global decline in sales. McDonald’s is still running off a recession-related burst of consumer interest which boosted its U.S. sales starting in 2008, but which showed signs of beginning to fade by 2009. The novelty value of junk food can’t be maintained year after year, and McDonald’s costs are so high that people can seek out a real-food restaurant lunch for about the same price.

If Wonder Bread can’t find a business model, the whole category of factory-fresh junk food may be done for. That is, it may be too expensive for trucks to deliver fresh junk food to grocery stores more often than once a week. People wanting junk food will mostly be left to choose between items made on-site, like donuts and supermarket cakes, and items that have an extended shelf life, like candy and frozen cakes.

The Wonder Bread and Twinkies brands will surely survive, but they won’t be the same. The recipes will have to change to fit into their buyers’ business plans. The same engineering that makes Wonder Bread (and Hostess Brands’ other products) so fluffy also makes them hard to distribute. There may be plenty of sentimental attachment to the old recipes, but from a nutritional standpoint, they won’t be missed. Human digestion is not meant for food so fluffy, and the mismatch is such that some scientists have argued that these foods have no net nutritional value at all. There is a fair chance, then, the same redesign that makes Wonder Bread easier to distribute will also move it one step closer to being real food.

Three Things That Might Have Peaked in 2012

It is sometimes hard to tell when a category is reaching its peak and beginning a decline. Here are three categories that may have peaked in 2012.

• Office supplies. If the “paperless office” means anything at all, then eventually, people will have to start using office supplies in smaller quantities. The stress at Hewlett-Packard is one indication of that. A more specific indication comes from the latest quarterly report from Staples, which showed revenue down 3 percent from a year ago. Most office supplies and equipment have to do with paper documents: printing them, filing them, mailing them, even stapling them. As people are not printing documents quite so often, all of this is declining.
• Text messages. I wrote a year ago about how uncool and low-tech text messaging had become compared to more recent innovations, particularly Twitter. Also this year Apple began re-routing some text messages that go from one iPhone to another so that they bypass the telephone system. Now there is a report that the total volume of text messages has declined for the first time ever.
• Oil. There is a buzz about oil this week after the IEA released a rosy report about the future of oil production. The IEA forecast pins its hopes on huge oil production volumes from fracking in the contiguous United States, but a consensus of engineers and scientists say that is not only unlikely, but absurd. The IEA’s report also does not properly take into account the increases in the cost of extraction as the oil that remains is harder to reach. In the past, IEA reports have been sober and realistic, but this one reads like an oil industry lobbying report. Why would the IEA be so eager to exaggerate the future prospects for oil? Whether it is because of political influence or to avoid a panic (the two most common theories), it lends credence to the thought that the oil industry is already under the kind of stress that would occur as revenue begins to decline. So it may be that oil is near its peak or that it already hit its peak volume at some point this year.

Republicans Need to Drop Heartless Image and Talking Points

Most Republicans do care what happens to people, but that is not necessarily what voters remember. Last week’s election highlighted weaknesses in that area of the party’s image. The popular perception that Republicans don’t care about people is broader than political strategists had recognized. It is a perception created and reinforced by a non-stop series of publicly unacceptable Republican expressions during the campaign season. Consider these memorable incidents:

• Asked why he would put the interests of corporations ahead of those of people, presidential candidate Mitt Romney famously told us that “corporations are people.” Separately, Romney could not even remember who he had beaten up in high school.
• Romney endorsed and actively supported a Senate candidate, Richard Mourdock, who described rapists as agents of God’s will. It is important to note that when Mourdock said this, it was not an ill-considered, off-the-cuff answer to a question, but a practiced talking point presented in an official debate and substantially reaffirmed the next day.
• Another Republican Senate candidate, Todd Akin, implied that most claims of rape, including any in which a woman got pregnant, were false. More than a few party leaders jumped to his defense in the following days after national party committees cut off his funding. In a similar vein, Rep. Joe Walsh, while running for re-election in Illinois, said there was no connection between health issues and pregnancy. Akin and Walsh both made up science facts to support their positions.
• The two biggest applause lines during the Republican primary-season debates were advocating death as the preferred solution to a problem. In one, an audience member called out “Let him die!” as a suggested public response when a hypothetical person who is not wealthy becomes critically ill. In the other, the audience cheered the hundreds of executions conducted under the administration of Gov. Rick Perry, then a candidate for president.
• Sen. Scott Brown, campaigning for re-election, spent a week falsely complaining that a group of very real asbestos victims were phony and that an opposing candidate had falsified her ancestry, without having any evidence to support either claim.
• Republicans sent out post cards falsely accusing Democrats of raiding Medicare spending at the same time that the Republicans’ own budget calls for the rapid elimination of Medicare.
• Donald Trump, a week before the election, was beating the drums trying to get a presidential candidate to release his college transcripts.
• Delegates to the Republican National Convention had to be removed from the convention floor after they participated in acts of violence and harassment against workers at the convention.

These expressions at least verge on sociopathic in their lack of regard for what happens to people, lack of concern for truth, and cluelessness about what it means to have a reputation. Of course, you can recall much more offensive examples than this in comments of Republican-leaning pundits, who have at times this year called for everything from assassinations to armed insurrection.

For the Republican strategists who might dismiss this list as isolated incidents that don’t make a big impression on the voting public, the election results suggest otherwise. On election night, people were talking about the way the “rape guys,” as the Republican rape apologists came to be identified in popular culture, lost their respective elections, but so did all the candidates I mentioned above.

This lack of regard is not a new trend that just popped up in Republican talking points last year. Four years ago, we remember hearing Republican candidates offer scathing indictments of the point of view of people who had a college education. These comments came from the presidential and vice-presidential candidates, among others, and were often worded in a way that could not have offered by someone who had stopped to consider that college graduates were real people who had feelings.

It is easy to find Republican leaders who don’t understand why the aggressive and often heartless comments that voters remember from this campaign season would present a problem for the reputation of the Republican party. A consensus of the party’s leaders recognize the problem, though, and have had enough. You could see signs of this in the subdued tone of last week’s conference call among the Republican caucus of the House of Representatives. Yet the message is not sinking in easily. Republican strategist Karen Hughes might have written in Politico, “And if another Republican man says anything about rape other than it is a horrific, violent crime, I want to personally cut out his tongue,” but the rest of her post-election analysis shows that aside from this one issue, she too fails to appreciate how far off the mark Republicans’ talking points were this time around.

Disaster Fatigue and Decision Risk

Imagine this scenario. Your already long 10 hour workday, including two hours of commuting to Lower Manhattan, has been stretched out to 12 hours because the trains aren’t running. When you get home at 7 p.m., you do what you can to fix the damage to your own house, but other post-storm problems keep interrupting, including having to go out to get drinking water and waiting in line for gasoline. Regardless of how long everything takes in this new post-storm reality, you still have to get to bed by midnight so you can get up in the morning and do it all over again.

For some who live in residential towers without power, every day includes the task of walking down twenty flights of stairs and returning up the stairs with gallons of water. It is no wonder that fatigue is becoming one of the biggest problems in the aftermath of hybrid storm Sandy. People are temporarily living lifestyles that wouldn’t be humanly possible to maintain in the long run, yet they have to keep things going somehow for a few more weeks until more repairs are done and conditions return to something resembling normal.

The news is part of the cycle of fatigue. Every change leads to new adjustments, and even unfounded rumors can force people to make unfamiliar decisions. The decisions themselves compound the fatigue. Even people at a safe distance from the disaster can experience fatigue after weeks of disaster news. The struggle to understand what things mean is potentially exhausting in itself. A common psychological adjustment people make is to start avoiding disaster-related news, and this can be accompanied by the imaginary picture of the disaster scene already cleaned up. The news media supports this illusion by withdrawing disaster coverage as soon as audience fatigue starts to set in.

Among its various economic effects, fatigue diminishes productivity and increases the risk of injury. The biggest economic problem with fatigue, though, is that it reduces the quality of the decisions that people make. Life goes on and people are forced to make decisions. The damage from Sandy may be substantially fixed two years from now, but some of the consequences of the bad decisions people make during this time will have longer-lasting implications than that.

Much of this risk can be avoided just by postponing decisions or making arrangements on a smaller scale. For example, if a disaster has just wiped away your office, it is probably not the time to rush to sign a long-term lease on a new office. Instead, look for something that will work for the next few months, until things settle down.

Post-Sandy, a Long Slog Ahead

Most Americans, and the national TV networks that serve them, seem ready to put the Sandy story behind them. The huge northeast storm, a cross between an Arctic storm and a hurricane, has been cleaned up in most of the places it hit, and things are getting back to normal for most of the people affected.

In the hardest-hit areas, though, things are still a long way from normal. There are still a quarter million electric customers, or about 0.1 percent of the whole country, without power. Commuting into Manhattan takes an extra two hours per day because of the closed rail tunnels, and there is nothing to indicate that that situation will be resolved before January. It will take more adjustments of various kinds to get things working in a reasonable way in the interim. And if that doesn’t happen and if the problems drag on and the local political discussion gets nastier than it is already, as many as five percent of the city’s workers and residents could take jobs elsewhere and go away permanently. Some will move away when employers decide that lower Manhattan is more trouble than it is worth. At the margins, some planned layoffs will be larger than they otherwise would have been because of the scale of logistical problems in New York.

Cleanup in the hardest-hit shore towns will take years. Even if it is carried out with more energy and drive than we have seen in New Orleans, it still takes years to repair and rebuild wood-frame construction with salt-water damage. In the bigger picture, storm recovery may be a permanent part of the landscape now. The post-Katrina recovery is not very far along yet. Along the same lines, there is not much reason to imagine that the post-Sandy recovery will be completed before the next big storm hits.