Friday, November 30, 2012

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 It is the loss of the banking license, which was revoked by state banking regulators in coordination with the settlement, that is the larger penalty.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.

Thursday, November 29, 2012

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.

Wednesday, November 28, 2012

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.

Tuesday, November 27, 2012

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.

Monday, November 26, 2012

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.

Saturday, November 24, 2012

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.

Friday, November 23, 2012

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.

Thursday, November 22, 2012

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.

Wednesday, November 21, 2012

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.

Tuesday, November 20, 2012

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.

Monday, November 19, 2012

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.

Sunday, November 18, 2012

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.

Friday, November 16, 2012

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.

Thursday, November 15, 2012

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.

Wednesday, November 14, 2012

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.

Tuesday, November 13, 2012

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.

Monday, November 12, 2012

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.

Sunday, November 11, 2012

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.

Friday, November 9, 2012

This Week in Bank Failures

The pop culture phrase “that awkward moment” could easily have been coined to describe the political predicament of Wall Street. After spending two years and something like $2 billion trying to dislodge Democrats and install a one-party Republican government in Washington, it woke up Wednesday morning to find that voters had been moving in the opposite direction. For the next two years it must deal with the newly empowered Democrats that it failed to dislodge, along with other changes in the political winds, such as the likelihood of a less activist Supreme Court for the foreseeable future.

With fewer friends in Washington, Wall Street can scarcely expect the same level of favors it has received from Washington over the last 12 years. And although the changes in policy are not likely to be anything drastic, they still could represent a difficult adjustment for a sector that has come to believe that the government has an obligation to take care of it.

While the United States was busy holding an election, ING was announcing layoffs. It will be cutting 1,000 jobs from its European banking operations, part of a total of 2,350 job cuts planned.

One important consequence of Tuesday’s U.S. election was the formation of essentially a one-party government in California. At the same time, voters there approved a tax increase on the highest levels of personal income. In combination, these changes may make it possible for California to rescue its broken public finance system, and that in turn may take away nearly half of the municipal bankruptcies that otherwise would have occurred in the United States over the next few years.

An Australian court has found S&P liable for some of its sloppy work in rating securities that were sold to Australian municipalities. It is the first such decision holding a ratings agency responsible for actions intended to mislead securities buyers on behalf of sellers.

U.S. banking regulators issued a statement today signaling a go-slow approach to new capital requirements. New rules will not go into effect on January 1, as some had anticipated, and will be phased in over an extended period of time.

About 5 percent of the region affected by hybrid storm Sandy is still without electricity 10 days later, and it is becoming clear that in New York, the transportation network will not be back to normal before the end of the year. This especially affects banks and exchanges in lower Manhattan, in an area that now is effectively accessible only by bus.

The Media’s “Fiscal Cliff”

With the election behind us, there is a lot of talk about the “fiscal cliff” in Washington, the scheduled spending adjustments that combine with the expiration of temporary tax breaks to cut into the federal government’s deficit spending. In a very real sense, the “fiscal cliff” is a non-story. Congress has tied itself in knots and is unable to take action, and the negative macroeconomic effects of the spending cuts are offset by the gains from the expiration of the special-interest tax breaks that, I will remind everyone, got the economy into this mess in the first place.

The “fiscal cliff” story is so big in part to distract from a bigger story that you won’t be hearing so much about: the effect of the automatic post-election spending cuts that have already gone into effect. You must have heard that this was the most expensive political campaign season ever, with mostly anonymous corporate donors spending billions of dollars to influence voters’ opinions. Most of this money was spent on advertising, which means it was revenue for the businesses that carry advertising. This windfall revenue especially boosted television and the U.S. Postal Service. As a consequence, you didn’t hear much about broadcasting bankruptcies this year, and the financial exhaustion that the USPS groaned about in the first half of the year didn’t seem so bad in the second half.

But the party is over. Even after draconian budget cuts in 2013, USPS will continue to operate at a loss. It is in a financial hole so deep it risks a General Motors-style unscheduled shutdown. Fights between cable systems and TV channels, a growing problem before August, will return with a vengeance, until the cable blackouts that occur when TV channels refuse to renew contracts become a daily part of the TV experience. As content providers cut spending to make up for lost revenue, hundreds of television and radio programs will wind down. Cuts are likely in other media too: newspapers, Internet advertising syndicates, social media sites, and others got a one-time revenue boost and now have to fall back on their not-so-rosy regular business plans.

That’s the media’s “fiscal cliff.” You won’t hear too much about it in the news, but no industry can watch this much revenue walk away without feeling the pain.

Thursday, November 8, 2012

The National Nominating Process Is Ruining the Republican Party

There is a structural problem with the Republican Party that puts the party in a vulnerable position for the next presidential election — and I am not talking about the political positioning questions that Republicans are mulling over as they digest their latest loss.

It has to do with the electoral college and the party rules for selecting a nominee. When you look at the electoral map, there are now 21 Democratic states with 252 electoral votes. These are states a Republican candidate has no hope of winning, except in the unlikely event that the party nominates a candidate who appeals to the Democratic ideal of the “common good” (more about why this is so unlikely in a moment). Yet these Democratic states provide 47 percent of the electoral votes, barely short of the total needed for a candidate to win. For a Republican candidate to win, he must essentially sweep all of the remaining states.

But that is in the general election. The Republican nominee is selected in primary elections and caucuses in all of the states. This also means that a Republican can virtually assure himself of winning the Republican nomination just by winning the primaries in the Democratic states. In fact, this is probably the easier route to the Republican nomination. There aren’t so many active Republican voters in blue states like Pennsylvania and Delaware, so it is not prohibitively expensive to target all of them individually, using telephone and direct mail.

Compounding this problem, it doesn’t take many votes to win a primary election. To win a general election in a state, a candidate may need 50 percent of the ballots cast. But candidates can expect to win a primary election with 35 percent of the votes, and occasionally with as few as 22 percent. And, not so many voters participate in the primaries. As an example, the second-place candidate in the Pennsylvania Republican primary this year drew 149,000 votes. Romney could have won the primary with as few as 150,000 votes, barely 1 percent of the people in a state with a population of 12.7 million (in reality, he drew 468,000 votes, but that is still not many). In theory, fewer than 2 million primary votes cast mostly by blue-state Republicans would be enough for a candidate to lock up the Republican nomination.

Even if the process worked smoothly, it is a perverse obstacle course for a candidate, who must be nominated in blue states in the primaries, but then must carry all the other states in the general election. Why are Democratic states even involved in nominating a Republican candidate? The theory is that the party must select a candidate who has appeal in these states too in order to win. But the actual effect, as the Republicans have declined from a national party to a regional one, has become the opposite. With the dominant influence of blue-state Republicans, the party has a strong tendency to nominate a candidate from the political fringe, who then looks almost like a third-party candidate to the majority of blue-state voters in the general election. That, of course, is what happened in 2012.

To see why, consider who the blue-state Republicans are. They are more likely to hold views outside of the political mainstream than the Republican voters in a state like Kansas or Tennessee. After all, most of the mainstream voters in a state like Pennsylvania are aligned with the Democrats. Most of the Republicans in Pennsylvania, then, are voters who don’t easily identify with mainstream values. They won’t vote for a mainstream candidate if a more extreme alternative is on the ballot. This already has forced mainstream Republicans out of the primary process, and it pushes the party to nominate ever more extreme candidates as the party’s national reach shrinks. The extremism of the candidates, in turn, repels still more voters from the party, making it shrink faster and moving it farther from the views of most voters. It is a vicious cycle that probably can’t be interrupted without changing the nominating process. A regional party loses control of its identity if it uses a national nominating process, and this is what has happened to the Republicans.

And that is assuming the primary process is conducted with integrity. But if you look at the political process in the United States as a whole, you realize that the blue-state Republican primaries are the likely target of someone who wanted to spend a lot of money to manipulate the political process. They are the Achilles’ heel of the American political system. The Republican convention, including the party platform and a significant degree of control over the party’s future, could potentially be co-opted by a well-crafted and well-funded message designed to appeal to blue-state Republican primary voters. Given the demographic trends that are weakening the Republican party over time, political opportunists must already be starting to see it an easy target for manipulation.

In fact, this has already happened to an extent. The national Republican party has drifted uncomfortably far from the views and preferences of the average Republican voter, but under the influence of a SuperPAC determined to co-opt the party, it could shift farther, and in an unexpected direction. And don’t think the Karl Roves of the world haven’t noticed this vulnerability. Rove or someone like him may already be at work lining up anonymous corporate sponsors to attempt a party takeover in 2016. If you think this seems unlikely, compare SuperPAC funding in the 2012 election to the funding directly controlled by the Republican committees and candidates. The SuperPACs already have enough clout to overwhelm the Republicans if they choose to.

It is bad enough that Republicans face such a difficult task in trying to win a presidential election in 2016, but they are also at risk of losing control of their own party in the process. The Republican Party is hardly in a position to completely rein in the influence of corporate money, but they can slow it down by changing the nominating formula that, in its current form, hands so much influence to such a small number of blue-state Republicans.

Wednesday, November 7, 2012

Why All the Polls Were Wrong

How can the vote counts be so far off in so many states?

That’s a question that some of Fox News’ pundits were asking as the election results came in last night.

Those of us who live in a “reality-based” political world have a different question to ask this morning: How did it happen that all the political polls were wrong?

For that matter, how could all the pundits be wrong? From CNN to BBC, for the last six weeks and as late as the late afternoon of Election Day, the mainstream media was looking at the election using terms such as “knife edge” and “closest ever.”

We know some of the answers. Journalism has a built-in story bias. If there is any angle to show novelty or suspense, journalists will play that up. It’s a habit a journalist cannot avoid, because it is the “good stories” that are rewarded with reader attention. Similarly, pollsters have an incentive to show that an election is close. When it is, clients pay for more polls. The frequent presidential polls in my state of Pennsylvania dried up in September when it became clear that Pennsylvania was not in play.

Aside from that, some of the poll releases were just false. Republican pollsters, we have heard, intentionally put out adjusted poll numbers to show that Romney had a chance of winning after the polling started to show definitively that he did not. Looking back, it is easy to imagine that there was similar contrivance in some of the senate-race polling. On the Democratic side, fund-raisers had an incentive to emphasize the polls that showed their side with a narrow lead. Supporters wouldn’t give with so much urgency to a cause that might win in a landslide.

If there is a built-in bias in journalism, news publishing has a much stronger bias, which is to support its advertisers. If the advertisers aren’t happy, there won’t be enough money to pay the journalists and other staffers. The corporate executives who make the biggest advertising decisions for television, newspapers, and other media lean heavily Republican. News outlets have to present a face that is friendly to the point of view of their sponsors, even when this is at odds with reality. This is something we see every day, and we have seen it especially in this fall’s political coverage. There were plenty of analysts to be found, even with a cursory web search, to explain why Obama had such an easy path to victory, but the sponsors would not have been happy if these were the pundits who appeared on the news channels.

These are the obvious answers for a “too close to call” election that turned out not to be close at all. But the more important answers are not so obvious. Pollsters in the last three weeks have a strong incentive to predict an election. The more predictive power their late polls show, the more credibility they will have next time. Yet last week, there were still polls showing Pennsylvania as a tie in the presidential election — not accurate at all in a state that the Democratic candidate carried by a five-point margin. Similarly, across the country, polls on average gave Republicans a boost of two or three points, an edge that wasn’t there in reality. Reality has a liberal bias, perhaps, but it is clear, now that many of the votes have been counted, that the mainstream polls, essentially all of them, had a Republican bias all year long. How can this be?

Pollsters imagined more Republicans than exist in reality, but how? Reputable pollsters cannot directly adjust their results based on party identification numbers, because that is one of the results they are trying to measure from day to day. Pollsters must, though, adjust for more static measures, and it is hard to get this right. One Michigan pollster early on showed Romney carrying that state. That result was produced by assuming that the average age of voters casting a ballot would be 55. Republicans are older than any other party in the United States, with an average age of nearly 60, so imagining lots of old voters was enough to give that party the edge.

There is a special problem with having a party whose voters are so old: its numbers tend to decline from pure demographics. Grand Old Party voters are more likely to die of the diseases of old age than the voters of any other voting bloc. From demographics, you would predict that Republicans would lose about 0.5 percent of their voting power every year. Republicans compound this difficulty by having less-than-healthy lifestyles, with higher rates of every lifestyle-related disease from drug abuse to diabetes, so the rate of decline could even be faster than 0.5 percent per year.

But even the pure demographic rate of decline, 2 percent every presidential election, is so shockingly fast in the context of American politics that I think political pollsters are expecting something to keep it from happening. If pollsters are discounting the Republican demographic decline from 2008, that would explain most of the difference between the national presidential polls and the actual election vote counts so far.

Republican strategists are proud to say that their political approach is not “reality-based.” Yet the decline in their numbers is a reality they must come to grips with in some fashion, or their party will just continue to fade.

Tuesday, November 6, 2012

Vote Early

Today is Election Day in the United States, and I want to encourage everyone who is eligible, to vote. Voting is like steering a ship; the more people vote, the more likely it is that the ship goes in the right direction, but if few people vote, it is easy for the ship to go off in a random direction.

This year there will be the biggest get-out-the-vote (GOTV) effort in history. Republicans will make more phone calls to likely voters than they did in 2008, and Democrats will be out on the streets, knocking on doors. If you want to make the Get-Out-the-Vote effort for your party more effective, you can do that by voting early in the day. Then when the GOTV volunteers talk to you, you will be able to tell them that you have already voted, and they can quickly thank you and go on to the next name on their list. If you are committed to voting, by voting early, you may allow the GOTV volunteers to reach more voters who might need the extra encouragement to go vote.

Monday, November 5, 2012

Barack Obama for President

This is a time of change for the United States and for the world, whether we are ready or not. During periods of change, a successful leader is one who gets everyone involved. One hundred percent of the people, working in their own ways, will solve more problems more quickly than any smaller percentage, regardless of how carefully the elite problem-solving class is chosen. When everyone is included, more gets done. Inclusiveness is based on emotion as much as it is on policy. Everyone needs to hear that their part matters, and everyone needs a chance to get involved. Barack Obama is the presidential candidate who fully embodies this ideal of inclusiveness. Other candidates are all too ready to cast aside parts of the country, as many as 47 percent of the people in one famous campaign promise, or they are too attached to their own personal ideas and points of view to hear the other answers being spoken. During his first term, Obama has spoken and worked as if every problem had a solution that a consensus of people could agree on. With the opportunities and problems ahead for the United States, this inclusive approach will be more important than any one specific policy issue. It is reason enough for me to recommend Barack Obama for president.

Sunday, November 4, 2012

A Subdued Economic Mood Post-Sandy

Trees dropped most of their leaves during the four days before the high winds from Hurricane Sandy arrived here. This may have saved the trees from the worst damage — leaves pick up high winds better than bare branches do. But the thought struck me, as I spent a day picking up downed tree branches after the storm, that while we were busy with storm cleanup, no one was raking the leaves.

For the most part, we will rake the leaves. We may just get to it later than we had planned. But if we are raking leaves in the middle of November, that takes time away from Christmas shopping. With less time for Christmas shopping, it stands to reason that the amount of Christmas shopping could be less than usual. Other activities down the line will be diminished as a consequence of the attention to storm recovery.

Trick-or-treating already took a hit. Only an intrepid few went out in search of candy on Halloween itself, with the disruption of the storm still at the front of people’s minds. Supermarkets didn’t sell out of their stock of Halloween candy, and I saw some of it still on the shelves this weekend, awkwardly mixed into the Christmas candy display. More than a few houses are left with a Halloween bucket nearly full of candy, which now may take the month of November to give away. It will be hard to sell these households new candy until the last of the Halloween candy is gone.

Not having time is one thing, but it is just one of many storm effects that may dampen enthusiasm for spending. Just the thought of disaster makes people reluctant to make large purchases. As one indication of this effect, auto sales fell off nationwide as soon as the reports of a hurricane approaching land started to dominate the news. During the approach of the storm, Gap was widely criticized for tweeting that people should stay inside during the storm and shop on the Gap web site. It was an ill-considered suggestion. Danger and destruction nearby doesn’t make people feel acquisitive.

The New York City Marathon was supposed to run this morning, and it easily could have, but the city canceled it. This was partly out of concern for the safety of the participants amid a chorus of political opposition to the perceived cost of the event (never mind that it had already been paid for by the participants themselves). A marathon costs hardly anything as large public events go, so events of actual extravagance may be hard to hold in New York for months to come. One wonders, for example, whether the Thanksgiving Day parade can go forward, with its cost 100 times that of the marathon. The same mood that forced the cancellation of the marathon will put a damper on conspicuous consumption of every kind. It doesn’t feel right to be seen doing anything fancy and possibly wasteful while people are cold and hungry in Staten Island. Even ordinary Christmas shopping would draw angry criticism in New York City this week. When this kind of economic activity eventually comes back, it will be tentative and hesitant at first. There isn’t a chance that New York area retailers will have the kind of blowout Christmas season they were preparing for before the storm.

Power outages affected most of the people in New Jersey and roughly half the people in the region affected by the storm. Millions are still without power almost a week later. The average electricity outage was more than two days. During an outage, most people cannot heat their homes. Oil is a popular heating fuel in this region, and the loss of two days of heating, coupled with the reduced driving during the worst weather, was enough of a decline in petroleum consumption to lower gasoline prices across the rest of the country. Prices may fall in the storm-hit region as soon as new supplies arrive in the next day or two. And there may be a continuing effect. After three days of living in an unheated house at 48°F, I did not immediately heat my house up to 74°F when the power came back on. When the thermometer got to 58°F, that started to feel warm, at least for the first few hours. Having learned how to, I may spend 10 percent less on heat all winter long, and half a million households may have a similar reaction, if not necessarily to the same extent.

Just witnessing the kind of destruction that comes with a storm on the level of a hurricane puts people in a more serious mood, and this shift in mood will take some time to fade. For the next few months, it will a damper on some of the more frivolous and speculative forms of economic activity.

Friday, November 2, 2012

This Week in Bank Failures

Wall Street was in disarray all week, the result of weather so extreme that the New York Stock Exchange at one point had to issue an angry denial of rumors that its building had been flooded. But with electrical tunnels flooded, large areas of lower Manhattan including the financial district could remain in the dark for weeks. Meanwhile, with subway service shut down across the same area, most of Wall Street has no easy way to get to work.

The stock exchanges were closed for the first two days of the week, and when they reopened, the market dynamics were obviously off, with most of Wall Street not represented in the trading. Some buildings in the Financial District experienced flooding for the first time, but remained operational. The transportation problems, though, could bedevil Wall Street for the rest of the year or longer.

Hurricane Sandy and the subsequent northeaster caused damage in 13 states and parts of Canada, but the worst damage was in New Jersey, where tidal overwash made a mess of Atlantic City and dozens of coastal towns. Banks took direct losses when their own branches were flooded, but face larger losses from the damage to homes and businesses financed by bank loans. Early estimates rank Hurricane Sandy and its aftermath around number 6 among the all-time most destructive storms to hit the United States. Before the storm hit, analysts warned that $3 billion in insured property damage was likely. The damage remains to be counted, but is obviously on a larger scale than that. Regulators have offered guidance indicating that catastrophic loan losses from Sandy are transitory in nature and do not indicate a pattern of mismanagement at a bank. Nevertheless, it is easy to imagine weather-related losses sinking a bank already weakened by previous real estate loan losses.

The United States holds a presidential election on Tuesday. Both major-party candidates are staunch supporters of Wall Street and the banking sector, but Romney goes farther in that direction. He has promised to repeal most banking regulation and to allow Wall Street to write financial regulations in those areas where they are needed. Obama, by contrast, has hinted at a modest expansion of law enforcement on Wall Street, particularly when it comes to fraud. Neither candidate has lent any support to proposals to reform Wall Street or to break up or shrink the banking giants.

There was a medium-sized election-eve bank failure in Obama’s backyard with the closing of Citizens First National Bank, based in Princeton, Illinois. The bank had $869 million in deposits and 21 locations. Heartland Bank and Trust Company is taking over the deposits and purchasing the assets.

The failed bank dates back to 1865, but most of its growth took place since 2001 with an expansion into the nearby Chicago metro area. This exposed it to outer-suburban real estate loan losses that depleted its capital. It was the subject of a prompt corrective action order in March.

A small Florida bank also failed tonight. Heritage Bank of Florida had $223 million in deposits and three locations. Centennial Bank is taking over the deposits and purchasing most of the assets.

Earlier this week the NCUA liquidated Women’s Southwest Federal Credit Union. The credit union had 743 members in Dallas, Texas, and $2 million in deposits. Some accounts were transferred to City Credit Union. The NCUA sent checks to other members for their deposits.

Thursday, November 1, 2012

Chaos and Perspective, and the Importance of Not Taking It All Too Seriously

I am writing this post on a mobile phone while huddled under a blanket in a house that has cooled to refrigerator temperatures. That I am able to post at all in a power failure, and in general to keep working productively almost as if nothing had happened, is a testament to the value of current technology. The situation, though, also illustrates the way different people can have vastly different views of the same event, as a result of essentially random occurrences.

Roughly half of the people in the region affected by Hurricane Sandy lost power at some point. But this also means that half of us never lost power. It is the same locally. On the other side of the block I live on, everyone has power. On this side of the block, power went out during the height of the storm, 57 hours ago, and it is not expected to be restored today. This difference may be the result of something as random as which transformers blew up during the storm. If I were in a house on the other side of the block, perhaps watching political reporters on television, it would be easier to imagine that Hurricane Sandy was not such a big deal. In a house with no electricity or heat, where I have to go to a rain bucket to wash my hands, I am constantly reminded that Sandy was, by some measures, the largest storm in the history of North America.

Equally random differences affect our perceptions of more persistent conditions. The underlying chaos that puts us where we are also forms much of our perspective. Knowing that our vantage point is largely the result of random effects, it is easier not to get so attached to the way things appear to us right now, or to our plans and opinions that arise out of that momentary point of view.