This Week in Bank Failures

The combination of currency controls, frozen deposits, armed guards, and TV cameras worked to prevent a mad dash to the banks in Cyprus when they reopened yesterday after a 12-day holiday in the island’s worst banking crisis. There was no reason to rush off to the banks because you wouldn’t get much anyway. Cyprus’s second-largest bank, Cyprus Popular Bank, did not reopen, and at times there were doubts about the other megabank, Bank of Cyprus. It is safe to say that Cyprus will not be quite the offshore banking center it was last year and will have to rebuild its economy. On the other hand, confidence in the EU €100,000 deposit insurance standard was somewhat reinforced by the political maneuvers of the past week.

The handling of the crisis, though, has shaken confidence in the large banks across Europe, all the more so after two top officials hinted publicly that the era of bank bailouts was over and the era of bank liquidations had begun. A generally uniform process for liquidation of large failed banks is planned to be in place in 2015, but the Cyprus Popular Bank liquidation borrowed its core ideas from that future system. There was a two-day stock market sell-off in Europe, reflecting the higher interest rates and larger capital needs that banks in Europe now face.

The news might have been buried by the Cyprus headlines, but a trend toward more vigorous criminal investigations of banks has been palpable this month. Standard Charted Bank was forced to walk back recent comments that sought to disown its admission of guilt in recent settlements of money-laundering offenses. Similarly, in Spain, the discovery of secret derivatives contracts, hidden in a safe and kept secret even from the bank’s accounting staff, is being treated as a possible fraud and coverup. This is the kind of crime that, as I have mentioned before, could easily be prevented by a simple law requiring that all derivatives contracts be registered and published. An increase in legal activity against banks could also be felt in Italy and the United States.

Foreign exchange manipulation by banks is a subject of particular interest in the United States these days. A court hearing on Thursday in a government case against Bank of New York Mellon is an indication of where banks stand with respect to the law. The bank was arguing that Congress meant for banks to be exempt from a law against fraud in currency transactions, even though the statute itself does not say so. The argument in essence boils down to, “Well, obviously, banks are above the law, everyone knows that,” and the judge was not hearing it. Banks’ influence on U.S. law has declined drastically since the period from 1999 to 2004 when they were powerful enough to get laws changed almost at will.

Australia was not particularly involved in the Libor rate-rigging scandal, but it has decided to shut down its current base rate, known as BBSW. BBSW was set in much the same way as Libor, by averaging interest rate reports from banks, but five of the largest banks involved have dropped out of the interest rate panel because of their problems with Libor. A new Australian base rate will be based on tracking actual market transactions.

Last week, the NCUA found a credit union to assume the membership accounts of I.C.E. Federal Credit Union, which it liquidated the week before. Accounts were transferred to Kinecta Federal Credit Union, based in Manhattan Beach, California.

Twitter As a Lesson in Finality

If you’ve written for print, you know about finality. When the final proofs are approved for a book, it really is the that’s-it no-looking-back kind of final. That’s what the public will see. It is the same thing when a newspaper is put to bed. If you don’t write for print, you still might write on Twitter, which is based on a streamlined platform that has some of the same finality. There is no sense in feeling regret when your misspelled words are retweeted — they will have to serve, because it is too late to fix them. But on the other hand, it is good to recognize those moments when you are in no condition to tweet. In Twitter, as in any medium, you can only share the moment you are in, but some moments have more value to offer than others.

After the Cyprus Deal, Two Follow-Up Questions

Analysts and the mainstream media have gradually been coming to realize that there was more to the Cyprus issue than merely striking a deal, and the headlines say those nagging questions were the reason the U.S. stock market declined today. The more immediate question is how Cyprus will prevent an all-out run on one or more of its banks when the banks reopen tomorrow. A few details of currency controls have been announced, but based on what I have heard so far, they seem to be far too loose to keep the banks open. It will not be a big surprise if the Cyprus government or the ECB have to intervene again before the week is over.

Looking forward a few weeks, what will happen to the banks in Europe now that bondholders are no longer too big to fail? That was the big change, remember, from last week to this week, as the EU disowned its previous policy that bondholders had to be protected at all costs. The cost of borrowing for banks will creep upward. Some banks, apparently, are already talking about suspending dividends so that they do not get caught short.

More Tap Water, Less of Everything Else

I heard that soft drink sales are down, an unexplained trend that seems to be about 5 or 10 years behind the same pattern in beer. When I looked into this, though, I found that other beverages are also declining — not coffee, tea, energy drinks, or green drinks, but pretty much everything else: milk, juice, soft drinks, alcoholic beverages, you name it, it’s dropping off pretty much across the board. In the case of milk the declines might be blamed on higher prices rather than declining demand, but as we have seen before, a temporary increase in the price of an already expensive product can change people’s habits and lead to a permanent decline in consumption.

So people are drinking more tap water? That’s what the evidence seems to point to. There is no way to measure the consumption of flowing water as a beverage, though. Drinking is only an incidental use of municipal water, less than 1 percent of the total delivered, so even a drastic change in the amount of water people drink wouldn’t register. Drinking water also comes from wells and springs, and the volume of that water, in general, isn’t measured at all.

I know I have been drinking more water and less of everything else in the last five years or so, but I am as much at a loss to explain the trend in my own style of living as I am when looking at the aggregate trends. I had vague thoughts of saving money and losing weight when I switched to water, and that makes sense. Water is the least expensive zero-calorie beverage out there. It’s logical, but I don’t think that it really explains anything. I have lots of thoughts about improving my health and finances, and most of them don’t lead to long-term action. Water is the beverage of last resort, and perhaps that is a more important factor. Water is easy. It’s what you have when you didn’t plan ahead. People pressed for time are perhaps tiring of the planning and storage that other beverages require.

I think there may be a rejection of the existential emptiness of beverages too. We have long known that soft drinks were nothing more than flavored, sweetened tap water, but somehow now that thought is sinking in. Even orange juice may be mostly tap water — that’s if it says “from concentrate.” It’s that view of beverages that makes people say, “Why bother?” If you are going to drink tap water, you might as well get the real thing, undisguised and undiluted. But that reaction has not caught up to coffee and energy drinks — at least not yet.

For EU, a Psychological Breakthrough

It took all night to reach a deal, and details are thin at this hour, but the EU has dropped its insistence on protecting stockholders and bondholders in the Cyprus megabanks. One will be wound down “immediately,” which I think means without reopening in the interim. The fate of the other may be marked as TBD, to be determined, like so many other details in the plan. The important thing from the point of view of the EU is that the EU has given up whatever leverage it had to force the bank to stay open. If Cyprus finds that the bank is insolvent it will be obliged to close it.

This is a stunning about-face for the EU which as recently as last Sunday was still holding to its insistence that megabanks could not close. It was that stubborn policy that was putting the future of the EU and its member countries in doubt, and backing away from it, even if it continues to say that Cyprus is a special case, has to be considered a psychological breakthrough. Perhaps Europe can change after all.

That said, things will not be easy in Europe. There is no stopping the deposit flight from EU banks that the EU set into motion a week ago. This will hit some banks more than others, but now, at least, there is the possibility that banks that are fundamentally unstable can be wound down.

This weekend showed the EU to be weaker than it appeared even last Friday. Talks went late into the night mainly because it was so hard for the key EU nations to agree among themselves. Germany and France appear to be the key stumbling blocks in the EU, but perhaps that is only because they hold so much influence at this point.

Cyprus, for its part, avoided the broad confiscation of deposits that the EU had put forward a week ago. Insured deposits will be protected. Uninsured deposits in the megabanks, though, will be frozen, apparently available to pay bank debts in Cyprus but not for any other purpose. These deposits will be released only as bank assets are sold to make cash available, likely a ten-year process. With so much doubt about the true market value of many of the assets, it would be hard to make any other arrangement. By the same logic, one hopes that payments to bondholders will be similarly frozen, if they are not actually suspended.

The EU created the financial pressure on Cyprus by creating a crisis in Greece, on which Cyprus so much depends. It then escalated the problems in Cyprus a week ago by insisting on a policy that didn’t make any sense. The EU keeps repeating how small Cyprus is. It is important not for its financial scale, but as a sanity test for the EU. If it cannot make policy that passes the sanity test in one place, how will it make effective policy when it needs to in the heart of the EU?

Plutocracy and “Ringfencing” at EU and Cyprus

There is something wrong with the banking system in Cyprus. The banks have been closed all week, and will not reopen Monday, so it is easy to say that now. It is also easy to say that nothing is being done about it and that the bone-headed approaches of both the EU and Cyprus to the problems will do more harm than good whether implemented or not. The fact that no one seems to have a good solution doesn’t mean we should be silent with our criticism. It is, after all, better to do nothing in a situation spiraling out of control than to take detonator in hand and blow up a whole country and perhaps a continent with it.

What is harder to say is why the people making the decisions are so far off the mark. At the risk of simplifying a complex situation, the answer in a word is plutocracy. The people making the policy decisions are so far removed from the situation on the ground that they seem unable to predict or even observe the reactions of the ordinary people involved.

By all accounts, the new president of Cyprus was caught off guard by the street protests that followed the EU-backed proposal to seize a fraction of all deposits in the country, between 1/15 and 1/10 depending on the size of the account. In a time when decisions have to be made to navigate through the most unexpected of consequences, we are ill served by being led by a man who cannot foresee the most obvious and predictable of reactions, who cannot hear the voices of those around him who can. One result is the late word that parliament will not meet today ahead of tomorrow’s international deadline. I must assume leaders have abandoned a problem-solving approach and are pinning their hopes on an all-or-nothing vote after tomorrow’s European huddle. For their part, EU leaders are not much more helpful. They are still in denial about this week’s deposit flight in their countries’ banks. The code of silence about deposit flight is a hindrance in this instance. There is too much talk about “ringfencing” Cyprus (is that really the word?) and no talk at all about action and reaction in Paris and Rome. Finance ministers and prime ministers alike seem to think their statements have no consequences in the cities where they say them, but only out in the four corners of the world.

Five days ago I hoped that Cyprus could take a deep breath and figure out what to do. The former came, but there has been too little of the latter, with half of this critical week wasted on a feel-good trip to Moscow.

What has to happen? Above all else, the government in Cyprus has to show that it will be measured and lawful in its actions. That is more important than the question of how many banks can reopen next week. One of the problems with the deposit forfeitures as originally proposed is that it inverted the bank resolution sequence. If there is not enough money at a bank, the sequence of forfeitures is common stock, then preferred stock, then bonds, then uninsured deposits, then the deposit insurance fund. Insured deposits are forfeited only after there is no deposit insurance fund left. In proposing to do this sequence in reverse, grabbing insured deposits first while protecting stockholders and bondholders from losses, the president of Cyprus was showing a willingness to prey on the most vulnerable people at home in order to protect the interests of anonymous billionaire-investors abroad.

This inversion did not happen out of ignorance or accident. It probably came about at the EU’s insistence, from the vain hope that by avoiding the smell of bankruptcy, ratings agencies might be persuaded that the EU is not in trouble. I don’t doubt that some ratings analysts might be fooled for a few weeks, but there are worse things in the world than ratings downgrades, and if ordinary people in the EU (and U.S., for that matter) hear that the financial situation has gotten so bad that the rule of law is breaking down, those consequences will follow.

Sighted: Open Water in the Arctic Ocean

Everyone who has been watching Arctic sea ice knows you wouldn’t be seeing open water in the Arctic Ocean at this time of year. I am not an expert, but even I know that exposed sea water in the Arctic in March would freeze over in barely a day. For more than a week, we have been seeing signs that open water is starting to form at points around the Arctic — from visible and infrared satellite pictures, radar, even webcams — but everyone including me, it seemed, agreed that it could not really be the case — maybe in May, but not now.

But we were wrong. There is open water in the Arctic, and not just at the edges but in the Lincoln Sea, the world’s northernmost bay. We know this because yesterday a plane went there with scientists to take a look. The report and photos (from Christy’s Greenland Blog) were sobering:

Of interest, and shock to our science team, was the fact that there was a lot of open water (called leads) out over the northern sea ice, which is usually densely [packed] and thick. These leads were unexpected and certainly due to a warming climate.

I wondered after all the heat the Arctic waters took on last summer, how a normal ice cover could possibly form this winter. Superficially it looked like it did, at least at first, but the oceanwide breakup of the ice over the last six weeks says something is wrong. It looks like steam coming off the water in the photos from yesterday, and that suggests that the ocean is simply too warm to support the kind of ice we were used to in the past. It is a paradox that ice can survive at all over an ocean that maintains a temperature well above freezing all year long. Perhaps the surface layer of cold water is thinner than before, so that patches of warmer water from below are mixing in or poking through at spots. But whatever the explanation, the melt season is underway with a vengeance.

Lessons from Michelle Shocked’s Career-Ending Rant

It could not happen often that folk venues get emails and calls from friends saying, “You really should cancel your upcoming show.” That helps to explain how Michelle Shocked’s tour could come to a stop so quickly.

It all happened after the alt-folk singer went into an out-of-character rant Sunday night in the middle of her set. The supposed topic was Shocked’s newfound opposition to gay marriage, but it was an ugly extended outburst, disturbing regardless of the listener’s views and even if the words “gay” and “marriage” could have been bleeped out. The singer pointedly and emphatically insulted the audience members, until most of them had retreated to the bar or the exits. At that point, the club’s manager apologetically called off the rest of the show, turning the sound and stage lights off.

Similar episodes occur at least once a month in rock and hip-hop circles. You hear of a disheveled show interrupted by a drunken rant from the star. Usually this is followed by a statement of apology the next day. The artist carries on, albeit with lowered expectations, diminished status, and smaller audiences. Entertainment reporters may slant this story in that direction just because they have written that story before.

The Shocked case was different, though. Shocked’s contempt for the alt-folk scene that had supported her throughout her musical career was perhaps too obvious, and the defiant tone and absence of an apology couldn’t have helped. Perhaps ordering audience members to live-tweet her self-described bigotry was a mistake. Perhaps, as one observer suggested, alt-folk just isn’t big enough to support a former star with an oversized ego. Folk music has stronger word-of-mouth than other music genres, and that must have been a factor. Whatever the reasons, the next day word came of venues canceling four of Shocked’s next shows. Within another day, all the remaining shows were called off and the tour was over. A vaguely planned fall tour will surely not happen either, given the circumstances. The abruptness of the response is nearly as shocking as the original outburst.

The most important cautions to draw from this episode are perhaps the most trite. Anyone can tell you not to bite the hand that feeds you. Some things are better left unsaid. When you have to say something unpleasant, say it in just a few words — don’t go on and on about it. If you declare yourself the enemy of your customer, you can’t be surprised if your revenue declines. Standing on principle, as Shocked thought she was doing, doesn’t give you a license to be impolite. Principles are beautiful, so if you have to be ugly to say what you are saying, then it is not about principle — you are just being angry. It can be hard to find the right balance, but if you are out of control when you are talking, it is entirely possible that the balance is not there. The message that comes out when you are speaking from a place of contempt might not be the one you want the public to hear.

There are indications that Michelle Shocked was tired of music anyway, but if someone in her position wanted to be a folk singer again, she would have to start by having a better feeling about it. The center of a good performance is a good feeling that can be shared between the performer and the audience, exactly what was so conspicuously absent here. The Maya Angelou quote applies especially to performers: “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

Reform by Quiet Competence

When changes are urgently needed, putting a new leader in place is one of the first things we think of. But all too often, especially in the corporate world, we think in stereotypes. A reformer is supposed to be brash, loud, possibly angry, someone who doesn’t hesitate to draw attention to himself — a bull in a china shop. U.S. corporations in trouble almost always have their most important executives replaced with new leaders of this style.

I am sure there were thoughts along these lines in the Roman Catholic Church too. But the new pope was a surprising choice, a quietly competent advocate for the poor, for an institution that has spent the last century and more trying to conquer the world. On the surface at least, it was not a bad choice if you are hoping for change, and that was clearly a priority for most of the cardinals who had a say in the decision. Pope Francis, whose style of reform seems to tend more to quietly fixing things than to getting into arguments, may find a way to put a dent in the endemic corruption of Vatican City that ultimately overwhelmed and subsumed his predecessor.

If reform by shouting has a record of failure in the Vatican, it has not done so well in business either. How many great corporations have blustered their way right into bankruptcy court — or have pre-announced bold and risky programs that led them, after several tumultuous years, right back where they started? With the Roman Catholic Church’s appointment of Pope Francis, observers are finding reason to hope that it may, for now, avoid that kind of downward spiral.

EU Shoots Itself in the Foot

Today the Cyprus parliament is expected to approve a special tax on bank deposits, which will confiscate 6.75 percent and up of all bank deposits in the country. The plan has created a run on the banks in Cyprus, forcing them all to close. If there is action today, the banks may be able to reopen tomorrow, so some sort of action is expected.

Or maybe not. After all, the emergency session of parliament was already postponed from yesterday to today, a strange move when the country’s financial future is on the line. But then, everything about the situation is strange. The stiff tax on bank deposits would be shocking if Cyprus had come up with the idea on its own. But instead, it is adopting the measure at the insistence of the EU. This is puzzling in more ways than one.

First, the tax on its face appears to violate the EU deposit insurance law. Perhaps that legal difficulty could be avoided by exempting the first 100,000 euros of deposits from the tax, or something similar. But regardless of the details, it is a sign of weakness in the EU that an official EU delegation is requiring a measure that other EU officials are decrying as illegal.

The thought of a tax that would confiscate about 1/15 of every bank account was enough to lead to a run on the banks in Cyprus, forcing the banks to close, though most were ready to close for the weekend anyway. But what of banks in other EU countries? If the EU requires a deposit tax in Cyprus this week, with no advance warning, how long before it pushes a similar measure onto Spain . . . Ireland . . . even Germany? And with banks paying essentially zero in interest on deposits, there is a strong incentive for ordinary depositors to withdraw much of their savings from the banks and keep it in currency. I am not expecting a run on the banks in Italy or Greece this week, but given the degree of concern about the story among consumers across Europe, a degree of deposit flight, perhaps in the neighborhood of 5 or 10 percent, seems almost inevitable. This loss of deposits might not seem like much, but banks are so highly leveraged that a 10 percent loss of deposits is enough to take a bank from the edge of stability to the edge of ruin. In normal times, a bank can adapt to deposit flight by selling its assets to other banks, but that is not an option when deposit flight hits all banks at once. The European Central Bank will be forced to devise a new mechanism to prop up the banking system, this time in its entirety.

Setting aside the question of the stability of the banking system, a loss of deposits on this scale is ordinarily expected to lead to a monetary contraction large enough to trigger a snap recession. In other words, everyone in Europe will suffer from this decision.

And for what? The measure was supposed to save the banks in Cyprus, but whether the tax goes ahead or not, those banks are about to lose between one fourth and one half of their deposits. If the tax does not go ahead, depositors have every reason to worry that the government could change its mind next week or next year and reinstate the tax, again without warning. Actually, that is a risk even if the tax does go through — perhaps, like so many austerity measures, it could be repeated. And if the tax does go ahead and depositors have 1/15 of their deposits confiscated, many will not fully trust the banks again for the rest of their lives. Many of the depositors in Cyprus are tourists or foreigners who can easily move their money to a better “safe haven.” The political theory is that people will not move their money because they will realize it is already too late. I have a hard time imagining that working in practice. Absent some dramatic development that I cannot imagine at this point, the banks in Cyprus will be ruined regardless of what happens next. If cooler heads prevail, parliament will let the banks stay closed while they work on a more rational way forward. That is the only hope of avoiding disaster in Cyprus at this point.

That will not solve the problem for the EU, though. With deposit flight soon to undermine the banks across Europe, the EU will be plunged into crisis. The strange thing about this whole sequence is that there was no external event that forced the EU into this kind of action. It was entirely self-inflicted, every bit as much as the October 2008 financial collapse that the Fed and White House engineered in the United States. The EU essentially just shot itself in the foot. It is an injury that may hurt for a long time to come, and with so many other things uncertain at this point, there has to be a degree of doubt about whether it will ever walk again.

This Week in Bank Failures

Indications of inflation turned up in the latest economic reports in the United States and the United Kingdom. This is a favorable development for the banks. To state it as simply as possible, banks need more money to get themselves out of financial trouble, and inflation makes money easier to come by. The current inflation may not help, though. Most prices are being held relatively stable by consumers’ reluctance to pay price increases. At the same time, in a related matter, employers are extremely reluctant to pay employees even the current going rate for the kind of work they are hiring for. It looks like U.S. inflation would be 8 to 10 percent if not for these two factors.

There is a way in which inflation works against banks. Price increases prompt people to look for ways to economize, and banks would lose some of their customers and fees. At the same time, though, banks would have to pay their employees more. Thus, although inflation would be good for banks’ balance sheets, it would erode their income statements and force them to scale down faster than they are already doing.

The NCUA liquidated two California credit unions today: I.C.E. Federal Credit Union, 942 members, Inglewood, and Pepsi Cola Federal Credit Union, 558 members, Buena Park. The NCUA will reimburse members for their insured deposit accounts. It promises letters to members of the two credit unions next week. I.C.E. Federal Credit Union served employees of the city of Inglewood. Pepsi Cola Federal Credit Union served employees of the Pepsi Cola Bottling Company.

The Real Problem With NYC’s Sucralose Law

The New York City law that would have banned a smattering of soft drinks is not going into effect because a court found it “arbitrary and capricious.” That is something laws are not allowed to be, and it was a problem with the NYC “sucralose law” from the start. A law is supposed to address a substantive public problem in a rational way, and not merely codify someone’s whims and prejudices. There were procedural errors in the law as well, but the exemptions written into the law, for milk, condiments, alcohol, sucralose, and so on, are the real problem. A law that says it intends to improve public health should not include special protection for things known to be harmful to health.

The most glaring problem was the exemption for sucralose and other artificial sweeteners. The law was originally presented as a ban on large soft drinks at restaurants, but you can more accurately describe it as a law requiring larger soft drinks to be sweetened with sucralose instead of sugar. In theory, forcing people to drink sucralose instead of sugar ought to help them lose weight, but whenever that question has been scientifically studied, we have found that “diet” soft drinks lead to weight gain even more surely than sugar drinks do, so there is no scientific justification for their exclusion from the law’s restrictions. And don’t get me started on the health effects of milk, which have been studied even more thoroughly than soft drinks have. It just doesn’t work to introduce a law for the private benefit of manufacturers of a few arbitrarily selected products and say it is for public health.

Excess Food and Painful Death at Heart Attack Grill

I wrote about changes at Olive Garden, and that made me think of a different restaurant. As Olive Garden is experimenting with smaller serving sizes, Heart Attack Grill takes the prevailing trend to its logical extreme: painfully large portions at insanely high prices.

Heart Attack Grill promotes itself as having food so unhealthy and portions so large that you are likely to die on the spot. There is an ambulance (fake, unfortunately) permanently parked out front. The boldness of the concept won the restaurant a ton of free publicity initially, and that included a degree of support from the beef industry, but the talk is not nearly so loud now that customers are actually dropping dead (from, yes, heart attacks).

One of the dead was a 29-year-old employee, a story that might have persuaded some observers that eating badly can kill you even if other factors are in your favor. Eventually, the number of victims becomes enough to persuade the skeptics that the “heart attack” in the restaurant’s name is something to take literally. Meat is scientifically known to do harm, including clogging arteries for hours, in proportion to the amount eaten. It isn’t so surprising, then, if eating unusually large amounts at once might sometimes kill a person quickly. As long as Heart Attack Grill is open, it will serve mainly as a reminder of the dangers of food in excess, and of beef in particular, and that isn’t something the beef industry will want people thinking about.

Olive Garden Tries to Reverse the Serving-Size Trend

Olive Garden says it is going to try “smaller plates,” a restaurant way of saying it is reducing its serving sizes. The prices will be lower, and the restaurant chain hopes the lower prices help win back customers. And the smaller plates? In restaurants, plates are a necessary optical illusion to make the food look like it is the right size. If you plan to scale back the food, you have to scale down the plates to match.

Olive Garden has seen its customer count slowly erode along with its reputation. Opinions of its food quality and its faux Tuscan style have faded as the restaurants have remained relatively unchanged over the years, a measure of a public slowly changing its mind about what food should be. Some customers were lost late last year when the public reacted badly to a plan to cut costs by laying off all full-time workers, and that’s another reason Olive Garden is looking to shake up its image.

The issue of labor costs is not unrelated to the question of portion size. It takes chefs and servers only slightly longer to make and deliver a portion twice the size of what a person would rationally eat. A larger serving at a higher price makes the food itself a larger proportion of the cost, and the labor and real estate costs relatively smaller. As long as the larger portions persuade customers that they should pay more, whether they eat the excess food or not, it is favorable for the restaurant and server. But obviously, there are problems.

The food waste is a problem. In this strategy, one third to one half of the food in a restaurant entree is not really used as food, but just to create an illusion. If the customer eats the amount they really want, the excess is often just thrown away. If the customer eats the excess food, that may be worse. A stuffed customer leaves feeling at least vaguely uncomfortable, and with excess body weight that may have health consequences. There is also the issue of the higher prices, which may be an obstacle for most customers.

So beyond a certain point, the high prices and even the large portions themselves deter customers. U.S. sit-down restaurants in general have been pushing uncomfortably beyond that limit for the last 20 years, and the reputation and profitability of the sector have suffered. How often do potential customers pass by a restaurant like Olive Garden, looking for alternatives because they are “not that hungry”? This will happen less often if customers see prices and portion sizes shrink. With its other problems, it will be tricky for Olive Garden to find just the right balance, but if it does, other restaurants are ready to try to copy its approach.

This Week in Bank Failures

When all the layoffs in the United States in February were added up, the banking industry was the leading source of layoffs. It is a measure of an industry that has belatedly realized it grew too large.

U.S. stress test results are out, with one giant bank failing the test. The bank that would likely be in financial difficulty in a mild national recession is Ally Financial, whose Residential Capital mortgage division is in bankruptcy. At the other end of the scale, Citibank’s balance sheet is so improved it is planning a $1 billion stock buyback.

What if the Fed had to face its own stress test? It would fail from all the distressed assets it holds. To avoid calling attention to its weak balance sheet, the Fed will not want to sell off its assets quickly. More than any commercial bank, the Fed can afford to be patient. It may also be better off financially, just by saving on transaction costs, if it holds most of its distressed securities until they mature.

At closing time tonight came word of the closing of Frontier Bank in Georgia. State banking regulators closed the bank based in LaGrange, Georgia, with nine locations and $224 million in deposits. HeritageBank of the South is assuming the deposits and purchasing the assets.

Cracks in the Ice and the Central Arctic Route

It is a funny time of year to be watching Arctic sea ice. The ice that forms in January and February tends to melt in March and April, making the four months something of a wash. In the last three weeks, though, ice-watchers have been amazed at a network of cracks in the ice that have spread out from Point Barrow to cover almost the entire Arctic Ocean. What does it mean? Beyond the obvious, that even the best ice is not very thick this year, no one knows, because this is something that has not been observed before.

The detail seen here, from March 6, shows a degree of ice breakup not normally seen during freezing conditions in the Arctic Ocean. Ellesmere Island is the dark area in the bottom of the picture. The North Pole is in the thinner ice near the upper right corner of the picture. Some of the thickest remaining ice can be seen, relatively intact, on the left side of the picture. The widest and most visible cracks are 10 kilometers across. The exposed water re-freezes within a few days, but with ice that may not get very thick before it melts away in April or May.

In the meantime, word of the vanishing ice is making its way, if ever so hesitantly, into the mainstream media. A study, covered in Guardian on Monday, proposes that cargo ships will be able to cross the central Arctic eventually. Never mind that the study suggests 2050 as the date. Once the idea gets out there, it is easy enough to change 2050 to 2025, then change 2025 to 2017. There is actually a fair chance that the Central Arctic Route will be open for a week or two this summer, though I will be surprised if cargo ships line up to make the trip. The sunnier Northern Sea Route in September already makes you feel like you are getting away with something, if you are in the cargo business. It will take a few years of getting used to that before freight carriers tire of the Soviet-style paperwork and look for a new way to cut corners. By then, I have a feeling there will be an open ocean waiting for them.

Government Operations Depend on Mail

As Congress turns its attention to its next two budget deadlines, there is talk about doing away with the U.S. Postal Service as an austerity measure. Cultural advocates and community organizers have jumped to offer a list of reasons why that would be a terrible idea. People in Washington should be more eager to add to that list. We so take mail delivery for granted, officials are having a hard time grasping the many ways that government would not function without it. I’ve mentioned the difficulty of collecting taxes without mail, but that is just the beginning. Everything from courts to elections would be less effective if the mails became less reliable. In truth, dismantling the postal service would not be an end in itself, but just an initial step toward anarchy.

Austerity Layoffs on a Monday Morning

Some journalists are saying the U.S. economy won’t take an instant hit from the austerity budget that officially took effect Friday night, but it is important to note that very few economists are saying that. There is plenty of history that says that people change their plans at times like this. We can specifically expect the budgets at thousands of businesses that supply the federal government to change today, if that did not already happen over the weekend. When budgets change, staffing changes, and some of the layoffs will happen today too. The actual government layoffs will take weeks to occur, but businesses are free to move more quickly, and that is the effect we can look for this week. Of course, some austerity-budget layoffs have happened already, but others are just taking place now.

This Week in Bank Failures

There are no easy answers for Spain these days. The government set up Sareb as a bad bank to purchase problematic real estate and loans from the country’s overloaded banks. It is a complicated maneuver. Set up with no money of its own, Sareb issues government-guaranteed bonds to banks, which can then use those bonds as collateral for ECB loans. Sareb has acquired €50 billion in assets this way already, including as much as €14 billion this week. Separately, Bankia reported a loss of €21 billion in 2012, which I understand is the largest loss ever by a European bank. Meanwhile, the country’s Supreme Court overturned a 2011 decree that erased the criminal record of a Santander executive. The court ruled that the constitution permits the government to pardon, but not vacate, a criminal conviction. The executive in question will apparently have to give up his work in banking, though the current government is in the process of drafting a law that might give banking regulators enough discretion to allow him to remain on the job.

An election in Italy was so inconclusive that it had people talking about a new crisis in the euro zone. The new government’s hands are tied, observers say, and new elections will surely follow soon. In the meantime, though, the government may be unable to respond to events and avoid a crisis. With low population growth, Italy is facing a pension imbalance ten or twenty years ahead of other European countries, and the government’s inability to fix that problem is the defining issue in Italian politics right now. If Italy can solve its problems, though, its solutions might provide a model for other countries to imitate.

Tonight, the bigger story is in the United States. Austerity spending cuts that were legislated in a roundabout way two years ago went into effect tonight after a two-month delay, and observers and politicians alike claim to be surprised that it came to this. The actual cuts do not take effect instantly, as federal government layoffs and furloughs take weeks to do, but suppliers and contractors have been laying off workers for several weeks already. Next week, perhaps half a million pink slips could go out. A recession is expected, and reduced income in various quarters will make it harder for borrowers to repay their bank loans. There is good news in that connection, though: consumers already cut back spending in February out of a sense of caution. Consumers’ reduced spending reduces the risk of not meeting obligations, but it also reduces the economy as a whole, compounding the effect of the government’s spending cuts. In theory, Congress could act to reverse the spending cuts, but it will likely focus first on the more difficult challenge of a budget for the coming fiscal year.

U.S. credit unions are adapting well to a surge of customer interest. They collectively recorded their largest net earnings ever in 2012 as they added 2 million new members.