Friday, August 30, 2013

This Week in Bank Failures

The Cyprus-inspired deposit flight that swept across the major countries of Europe this year also took its toll on American banks. About $50 billion in deposits walked out the door in the second quarter. That’s not a huge sum of money compared to the scale of the banking system or the national economy — it’s about one day of national income — but that it happened at all is telling. For one thing, the expected large-scale movement of money from European banks to American banks never happened. Of course, it did happen to some extent, but it was washed away by local deposit flight. People have to weigh the interest income they earn on bank deposits against the political risk of their deposits being partly nationalized. The daily interest earnings on $50 billion of deposits is about $300,000, so it’s not as if people have a strong incentive to keep as much money as they can in the bank. Banks need deposits, though. Deposit flight eats into banks’ capital positions, so that even a 1 percent decline in deposits forces a bank to make business plan adjustments to compensate. Banks automatically raise some loan interest rates when deposits decline, because that means they have less money to lend and can’t make so many new loans. There has been speculation this week that banks might have to raise interest rates on deposit accounts to reverse the trend of deposit flight, but that would cut into banks’ already thin profit margins. Interest rates on deposit accounts would have to be raised drastically, to something more than 1.25 percent, to get consumers’ attention, and for that to happen, banks would have to raise their loan interest rates. Central banks, though, have been trying to keep interest rates low. Central bank policy has had strikingly little effect on the lending side of the balance sheet, but it did prompt banks to lower deposit interest rates to near zero — until now, at least. If banks began to ignore central bank policy on the deposit side too, that would be unprecedented and might mark the end of the monetary policy era.

Republicans are weighing the merits of a government shutdown in October. I know they are serious about a shutdown as a political strategy because of the questions I answered today in a partisan public opinion survey. The questions the pollster asked me were designed to gauge the level of political support or resistance Republicans can expect from businesses if they close the government for varying lengths of time — one day, one month, six months. How quickly after a government shutdown would a hiring freeze go into effect? How long before the layoffs start? The answers should be obvious enough, even without a survey. Businesses don’t like shutdowns of any kind, whether the cause is a war, a hurricane, or a wildcat strike. Money stops flowing — never good for business. It is especially problematic for banks when this happens. If there is a government shutdown, expect to see a rush of emergency Fed lending to keep the banks from being the early victims. If the shutdown were to last for months, though, there would not be much the Fed could do. Previous government shutdowns, especially in California, have led to large-scale experiments with quasi-money, but that could be disastrous, causing widespread business failures, if it were attempted as a workaround during an extended shutdown in Washington. Instead of winging it on funny-money and faith, businesses will approach an October shutdown with a great deal of caution. As an example, thousands of businesses will furlough workers in advance as a precaution, just as they did at the beginning of the year.

It is a holiday weekend in the United States, reason enough not to shut down any banks tonight. Enjoy your weekend!

Wednesday, August 28, 2013

Another Nuke Shutdown

I guess you could say it’s official: operating a nuclear power plant is just too expensive.

Economists have been saying this for years, but this time the statement comes from Entergy, the owners of the Vermont Yankee nuclear power station. In announcing that the plant was closing, Entergy pointed to the high cost of operations and the comparatively low cost of electricity generated by burning natural gas. Entergy did not specifically mention solar — probably that word is taboo in the nuclear business — but had it made that comparison, it would have found that solar too provides a less expensive option.

The move comes as something of a surprise, as Vermont Yankee was expected to keep operating for another generation or longer. But it is not too surprising to those who have been following uranium trends.

The rising cost of uranium, as global supplies dwindle, must have been the main consideration, given that the plant will shut down only after its current fuel runs out. We can expect to see this situation again as other nuclear operators face sticker shock when they look at their options for refueling.

Monday, August 26, 2013

Disposing of CRT Technology

Cathode ray tubes, or CRTs, were considered current technology just four years ago, before they were overtaken by solid state flat-screen video displays. Around 100 million cathode ray tubes are still in service in the United States as televisions, computer displays, and security monitors. They will be with us for years; it may take until 2032 for the number of cathode ray tubes in use to fall below 10 million. Between now and then, they will fail, one by one.

When they do, they may not be easy to get rid of. In Pennsylvania, where I live, it recently became illegal to put televisions and other video displays — this even includes cell phones — in the trash. Cell phones may be easy to give away, working or not, but no one wants a CRT in any condition. At almost the same time that it became illegal to throw away a CRT, local governments stopped accepting cathode ray tubes at electronics recycling collections. If an old television still works, you cannot donate it to a thrift shop; they stopped selling CRT televisions last year, and they stopped accepting them as donations a few months before that.

The only answer I can find is that is that you can take a cathode ray tube to a household hazardous waste collection. These Saturday morning events, usually at local government buildings, collect a wide range of hazardous materials from homes, and cathode ray tubes is one of their largest categories. It is not necessarily a happy answer. You can expect to wait in line for an hour or two, and if you do not own a car, you will have to borrow or rent one for the occasion. These events only happen a few times a year, so you might have to keep your old television on the back porch for months. But at least there is a way to dispose of your old television without spending a lot of money or breaking the law. If there is this little official sympathy for the problem of disposing of a cathode ray tube now, I hate to imagine what the CRT disposal fee might be ten years hence.

It is a problem I may never have to deal with. I only ever owned one cathode ray tube television, and when it failed, I smashed it with a hammer (much harder than it looks, by the way) and put the pieces in the trash. I also owned CRT computer displays; those were smaller, and I presumably dropped them in the trash can whole when they failed. But that was years ago when there were no rules. But if I do not have cathode ray tubes to worry about, I do have fluorescent lights to dispose of. Those cannot go in the trash either. I am obliged to keep them safe at home until the next time I go to a hazardous waste collection. I may want to save them until all seven have failed to save myself the trip, but that will mean storing tiny amounts of toxic heavy metals in my house for more than a decade. It is the kind of nuisance that makes me ask, “Why did I ever buy something that is so hard to dispose of?”

Of course, people have mostly stopped buying cathode ray tubes, and fluorescent light bulbs will fade away in the coming years for the same reason. I wrote about technology turnover two weeks ago, and this is perhaps a more poignant example. That television you bought 8 years ago? It is now so old you can’t even throw it away.

Sunday, August 25, 2013

Germany’s Expanding Solar Capacity

Germany’s solar capacity continues to expand in spite of rapidly disappearing government subsidies. The country now has an installed peak solar capacity of about 500 watts per capita. That might be a small fraction of total power demand, but it is substantial enough that it would avert a crisis in the unlikely event that other power sources were temporarily unavailable. In June, Germany set a new record for on-grid solar power generation — the 5.1 TWh was the most by any country in any month to date.

The most remarkable thing about the expansion of solar capacity is how little disruption it has caused. The vast majority of solar installations are small enough to work within the capacity of the existing power lines on the street. They attach to existing buildings or are built into new ones without adding much weight or height. Once solar panels are installed, you can easily forget they are there. It is nothing at all when you compare it to the disruptions and conflicts that accompany most sources of energy.

Friday, August 23, 2013

This Week in Bank Failures

London this week was talking about the death of an intern. The 21-year-old intern at Bank of America died a week ago of what appears on the surface to be a stress-related illness after reportedly working 72 hours straight. It is expected in banking centers like London and New York that 50-year-old bankers would regularly fall victim to the high-pressure lifestyle of banking, but the death of a young intern one week before the end of the summer internship period has shocked even those who accept that banking can be a deadly business. The episode has led to some superficial soul-searching. Is a banking internship a form of slavery? Are 20-hour working days even legal? If a bank’s management is so slipshod as to turn a blind eye when a worker pushes beyond the point of fatigue-induced hallucinations, might this same dull thinking lead to equally deficient decisions on financial matters?

There is not much left of the bankrupt Capitol Bancorp Ltd. after tonight’s closing of Sunrise Bank of Arizona by state banking regulators. The failed bank had six locations in five Arizona cities and $200 million in deposits. Oklahoma-based First Fidelity Bank NA is taking over the deposits and purchasing the assets. Most of Capitol Bancorp’s other banking subsidiaries had failed already or had been sold in distress after faltering under its high-cost, high-risk business model. Capitol Bancorp has responded to its troubles with a barrage of lawsuits against federal and state regulators, trying unsuccessfully to delay or prevent bank closings. Meanwhile, it has been forced to rewrite its bankruptcy plan several times, most recently on July 17.

There was a second medium-sized bank failure tonight. State regulators in Tennessee closed Community South Bank, which had 15 branches and $378 million in deposits. Alabama-based CB&S Bank is taking over the deposits and purchasing one third of the assets. The two largest bank failures of the year so far have been Mountain National Bank, which failed in June, and Community South Bank, both banks with broad footprints in Tennessee.

Thursday, August 22, 2013

Cord-Cutting Picks Up

The cord-cutting trend is picking up steam as consumers get used to the idea of going without television. The total number of television subscribers in the United States, and Canada too, is declining, which means relative viewership is declining faster than the rate of population growth. Consumers are coming to realize it is possible to just cancel TV cable, though most still aren’t doing so until there is a precipitating event — they move, or the television breaks. 

The TV industry may be missing the point of the cord-cutting trend, describing it as viewers switching from cable subscriptions to smaller, less expensive video subscription services on the Internet. Yet the statistics suggest that in most cases, people are just walking away from their favorite TV shows — they are not looking for other ways to watch those shows, aside from possibly purchasing whole seasons of specific shows on DVD or Blu-ray.

Some cable viewers spend two months filling their DVRs to capacity. The plan is to spend the next two years catching up with shows they didn’t have time to watch. Of course, no one could ever really get through that many shows after the deadlines have been taken away. Meanwhile, without the sense of urgency that comes with the cable TV schedule, the luster of television fades away. It is a gradual process, but to the TV industry, these customers just vanish one day. 

For a few viewers, this fall’s price increases may be enough to push them into the ranks of the cord-cutters. For others, it will be the loss of a job or other financial surprise that leads them to cut costs. By the end of this year, I believe these numbers will be larger than the number of people who cut the cord because they moved.

Monday, August 19, 2013

Consumer Exhaustion

The latest quarterly reports from Walmart, Macy’s, and Cisco, together with the continuing decline in beer and soda, have Wall Street analysts talking about consumer exhaustion. On Wall Street, consumer exhaustion is just a number, but I believe consumers really are exhausted in some sense. Consumer exhaustion could imply a few different things: bank accounts drained by bank fees, workers not earning as much as they would like, consumers tired of shopping and buying things.

I know in my case, it is mainly a case of time pressure. My income is higher this year, but aside from a series of new energy-efficient appliances, my spending has barely budged. The appliances may help to explain why I am spending so little. It took me from May till August, in my spare moments, to bring home and install a washing machine and dishwasher. Now a dryer and a wood-burning furnace are waiting for my attention. Until those installations too are complete, I may not have the energy or the inclination to do much shopping. It was hard enough for me to pull together the energy to write this blog post, and that didn’t require me to drive anywhere. So it is not just my strategic purchases that are filling up my schedule, and from what I can see, everyone has something challenging or difficult that they are trying to get through or work around.

Time pressure is part of the story of consumer exhaustion. Empty bank accounts and a weak job market must also be taking their toll. But I have to believe there is a note of actual fatigue in the consumer fatigue that is showing up this week. Consumers are postponing purchases just because that makes their lives easier today. It is a shift in attitude — from “A new gadget will make my life easier” to “Just staying home will make my life easier.”

Lower prices and more interesting merchandise don’t have much pull in this state of mind. Over the weekend, I missed out on a going-out-of-business sale, with everything that remained in my favorite garden shop marked down 80 percent, then 90 percent. It seemed simpler to stay home. To win back bargain-weary consumers, retailers might look for ways to make shopping seem easy again. It would be the opposite of the loyalty programs and impulse merchandising that are at the heart of retail these days. Retailers may also need to be patient, as opposed to the one-year-and-we-give-up we just saw from JCPenney.

If consumers feel reluctant to go shopping, it is because these expeditions have ended badly more often than not in recent years. The tricks that retailers go through to get into people’s wallets create a hostile environment, a minefield of sorts, so it is hardly surprising if people stay away when they can. Three years ago, shoppers were going into Walmart on payday and spending all the money they had. The payday effect is still visible at Walmart, but shoppers are less likely to be loading up their carts, more likely to be getting a few things and getting out. As stressed retailers try to win a few bucks from stressed consumers, it seems the stress is getting to everyone.

Friday, August 16, 2013

This Week in Bank Failures

It is August, and today was another quiet summer Friday on Wall Street. There were no bank failures tonight.

I haven’t been writing much about banks’ legal troubles this year, but that is only because the daily stories of civil charges, indictments, proceedings, settlements, and sentences are too much, too frequent, to expect anyone who is not an insider to try to follow. You get a clearer picture if you take a step back and view the legal action in terms of trends. Legal action against banks and shadow banking companies is, if anything, still gaining momentum. Regulators and prosecutors seem to be collecting more documents that point more definitively to improper behavior. Banks’ collective accounting charges for their future legal obligations are increasing, as the billions they pay to settle the few cases that have reached that stage are smaller than the sums they expect to have to pay over the next couple of years.

Thursday, August 15, 2013

Barnes & Noble, in Worse Trouble Than I Realized

I imagine a world without Barnes & Noble only with great difficulty.

For a decade it was one of the most loyal customers of my printed books. It continues to sell them to its web site customers, even if the monthly quantities have fallen into the single digits.

Printed books are in decline as the most avid readers switch to ebooks. That poses an obvious challenge for the United States’ largest retailer of printed books. Yet it is in ebooks that Barnes & Noble is falling apart. I found this out the hard way, trying to add my new ebook to the Nook platform. I have a valid ebook file — the ebook people say so, and Apple and Amazon required only minor adjustments to display it correctly. Apple struggles with font embedding, and Amazon, with Unicode characters, but both problems had easily discoverable workarounds.

Unfortunately, there are no workarounds for the Nook platform. Nook won’t display my ebook at all, and there is nothing to tell me what part of the document file it had choked on. To attempt a workaround, I extracted the HTML from the ebook and submitted that. The HTML file was, again, a validly formed document, but after Nook Press processed it, it was garbled beyond recognition. It looked as if Nook had used Microsoft Word to convert the HTML to RTF (a 1990s word processing document format) before converting the RTF back to HTML. If true, that’s a fairly desperate workflow, something an online business would only attempt if it couldn’t afford to hire a qualified web programmer. Checking the online forums, I found that this kind of publishing failure was the norm at Nook. Most publishers gave up more easily than I had, and even on the official Nook forums, it was clear that publishers that ran into technical problems weren’t getting any help.

But wait. Nook Press has live online chat help. I put my question in there, carefully phrasing it in about 25 words. To no avail — the live chat representative closed my chat without typing even a word in response. I was starting to picture an abandoned office, most of the workers laid off, the last remaining live chat representative gamely trying to keep up with the questions coming in on the web site, with no choice but to click past any question that pointed to any kind of problem. This couldn’t be happening at Barnes & Noble, could it?

I confess I hadn’t kept up with the news from Barnes & Noble, and this is when I went to read the financial stories from May, June, and July. They were stories with an air of gloom. If Nook goes bust, will your e-books survive? Barnes & Noble moves closer to breakup as CEO Lynch resigns. Barnes & Noble restates financial statements. In short, Barnes & Noble is in the same kind of crisis as Dell and Best Buy. I expect sales of printed books to decline by 15 percent between now and December 2014. If Barnes & Noble takes that kind of revenue hit while simultaneously winding down its ebook business, there is nothing to indicate it will know how to adapt. On the contrary, the company is directionless after its recent CEO resignation.

So what would change if in 2015, Barnes & Noble went down the same path as the now-defunct Borders? For the sake of book publishers, the price of books would have to go up, but that is a messy proposition that could lead to trouble across the book business. It is hard for me to imagine the sequence that would follow, but the key to understanding it is that public libraries would suddenly become more important places than they have been in more than a quarter of a century.

Monday, August 12, 2013

InDesign as an Example of Technology Turnover

I’ve been using Adobe InDesign almost since it first came out. I can say that because it was with version 2.0 that the page layout program really worked, and I started using it a year later for all of my book layout. At the time InDesign was a big step forward for me. Now it is a cautionary tale of how rapidly technology turns over.

I can’t use InDesign anymore because I am committed to delivering ebooks along with printed books, and InDesign has starkly limited support for the XML that ebook work is built on. InDesign can export an ebook, but only ironically. The point of working in a professional page layout program like InDesign is that it gives you meticulous, microscopic control over the final printed page. All that detailed control goes out the window in the “whatever” ebook that you export from InDesign — the final product won’t look the way you want, and you can’t control the process. It is like using a waffle iron to paint an oil painting.

But if InDesign is awkward in exporting XML for use in ebooks, it is a fish out of water when it tries to import XML. It can extract the text, but you will have to completely rebuild the typography. That’s not a big deal if you are preparing a novel that might have italicized words on every fifth page, but for anything more technical than that, even for poetry, InDesign’s XML limitations probably rule it out whenever a document is being prepared for both print and electronic media.

But these days, what document isn’t? I am behind the market as I prepare my first simultaneous print book and ebook release. The publishers I compete with have been at it for three years or more. But if I am behind, it is partly because of my reliance on InDesign. My print-optimized books translated so poorly to the ebook format that I couldn’t release my early ebook attempts in 2011.

Now I am trying to catch up, but Adobe, it seems, is content to be left behind. A 19-page white paper on InDesign workflow has just two passing references to XML. Customer support notes describe how to manually correct the inevitable coding errors in InDesign’s generated XML. The irony is that XML was not exactly new when InDesign was first being developed in 1999. Adobe didn’t build XML support into InDesign then because people there didn’t see the connection between XML and page layout. Now, apparently, it is too late.

In two or three years, features of CSS 3 may render the whole page layout software category obsolete except for niche markets such as print-only magazines, annual reports, and travel brochures. For books, InDesign is already sunset technology. And this is only 11 years after its first working release. That’s a measure of how quickly technology can go from breakthrough to irrelevance.

Friday, August 9, 2013

This Week in Bank Failures

It is the middle of August, and traditionally hardly anything happens on Wall Street with so many people absent. Earnings reports arrive regardless, and Fannie Mae reported a $10 billion profit, largely the result of rising real estate values. Plans to wind down Fannie Mae and Freddie Mac will surely remain on hold until the next real estate decline arrives with the accompanying losses in the mortgage trade.

State regulators closed Bank of Wausau, a small bank in Wausau, Wisconsin, with $41 million in deposits. Nicolet National Bank, of Green Bay, is taking over the deposits and purchasing two thirds of the assets.

Wednesday, August 7, 2013

Risks of Persistently Low Interest Rates

Low interest rates for any period of time are a drag. They discourage saving — you can’t make any money in interest by having a larger amount of money in the bank. Indirectly, they discourage labor — there is no benefit in making extra money just to stash it in the bank at 0 or 1 percent interest, and there is little incentive to pay off mortgage loans early when interest rates are near 4 percent. Of course, with less work, less happens, and the economy stagnates.

Central banks in both the United States and United Kingdom have signaled their intention to keep rates abnormally low for the foreseeable future, which I think means for another seven years. The way businesses plan, they will feel that they can rely on low interest rates forever. The business perception of long-term low interest rates creates a separate set of risks.

Most directly, some businesses will just never get around to paying off their debts. When interest rates rise they may find themselves in bankruptcy, unable to meet the rising interest payments.

But there are hidden risks wherever business plans are built on the assumption that the current conditions will persist, and assumptions about interest rates are surely being written into plans all over the world. If the current depressed interest rates persist into 2020 as planned, there will be corporate budgets being written and approved by executives who can’t remember 11 percent interest rates, never mind 36 percent — and to an extent this is happening now. It is the unconscious, unexamined assumptions that are most dangerous, because decision-makers have no idea of the risks they are taking.

Monday, August 5, 2013

A Step Toward Healthier Eating in New York City

New York City’s partial ban on beverages may have given the impression that the city wasn’t really interested about countering obesity, but a new program, based on fruits and vegetables rather than aspartame, may go over better. The city’s “Health Bucks” program creates a quasi-currency that physicians can give to overweight patients, who can then use it to buy fruits and vegetables at the farmer’s markets in the city. The program and its significance are explained in a Natural News article at Hungry for Change:

New York City has been in the forefront in prior moves to limit the reach of overweight. I immediately think of its restaurant bans on smoking and then trans fats. The law pushing people to drink aspartame was a mistake, given the scientific studies linking aspartame to rapid weight gain — and it was quickly overturned in court. But perhaps that was an isolated step backward in a city that is trying to find a way to be healthier.

Friday, August 2, 2013

This Week in Bank Failures

Having a felon in a political leadership role is a problem even when he hasn’t been caught, but after several of his convictions have been upheld by the supreme court, it becomes especially awkward. This is the situation that Italy is wrestling with today. With Berlusconi heading off to jail, perhaps to be convicted again before he is released, the character of Italy’s government will have to change, and with any luck, it will come to be less defined by criminal ties between politicians and banks.

Detroit may be in bankruptcy for just two or three years under a roadmap proposed by the bankruptcy court. One of the early issues the court will deal with is the question of whether the city can bow out of unfavorable swaps contracts.

Fraudulent sales of payment protection insurance in the United Kingdom brought banks more than £18 billion in illegal profits that they now are preparing to refund to customers. That’s according to the latest tallies, which include £4 billion in charges at Barclays and more than £7 billion at Lloyd’s, the latter including a £4 million fine for initially refusing to pay some claims it was obligated to pay. Similar schemes in the United States have led to refunds ordered by the FDIC this year.

Federal student loan interest rates will be raised to more than 7 percent under a plan approved in Congress this week. Congress was working on a way to roll back the doubling of the student loan interest rate that went into effect July 1, but the final compromise cuts rates only for a very limited time. The temporary rate cuts will allow some college seniors to finish their studies, but the higher future rates will prevent many would-be college students from getting started in their studies.

The United States was due for a bank failure, and it took place in hard-hit Fort Myers, Florida, where state banking regulators closed First Community Bank of Southwest Florida and Community Bank of Cape Coral. The single bank, operating under two names, had seven locations and $254 million in deposits. St. Petersburg-based C1 Bank is taking over the deposits and purchasing the assets.

The failed bank had had problems with regulators going back to 2005, when it was cited for having too much of its assets in real estate construction loans. It was a financial imbalance that the bank never recovered from.

Thursday, August 1, 2013

Congress Discovers the College Loan Teaser Rate

Bizarrely, when Congress finally got around to addressing the problem of student loan interest rates that arbitrarily doubled a month ago, it voted to make the rates higher still. College students will pay an interest rate above 7 percent under the compromise plan approved yesterday. Congressional leaders will tell you about a rate below 4 percent, but that’s the teaser rate, which will expire long before you can pay the loan back. Congress’s message to prospective college students is as clear as mud: “We like higher education, sort of, but we need to make a profit too. We’ll think about it again in a couple of years. In the meantime, don’t read the fine print.”

The stopgap measure is absolutely good news for college seniors, who will get a chance to finish college. Students getting ready to enter college might well reconsider, though. It’s clear enough now that higher education doesn’t enjoy the kind of support in Congress that it has among the general public. It’s a lesson in political risk: with this level of commitment from Congress, students who enter college now relying the federal loan program might find the program canceled before they graduate. That would mean paying back a series of college loans, at interest rates that can’t be predicted in advance, without the benefit of a college degree. The mere fact that Congressional leaders think of college students as a profit center should make you ask what you’re getting suckered into.