Tuesday, June 28, 2016

Volkswagen Settles With U.S.

Details of Volkswagen’s U.S. diesel emissions settlement are here. The company will pay up to $10 billion to repair or buy back defective cars, along with $5 billion in other penalties and clean-air initiatives. The details of the settlement don’t provide a path for Volkswagen to rebuild credibility for its diesel engines but could give it a reason to accelerate its electric-car efforts. 

Criminal investigations are ongoing in the United States and Germany.

Monday, June 27, 2016

You Brexit, You Fix It

The British vote to leave the EU reflected a lack of confidence in the bureaucratic-corporate approach of both the EU and the British prime minister. What is needed now is a chance to prove that some other approach can be more successful. Cameron wasted no time in announcing his resignation, but aside from that there hasn’t been much movement yet. Discussion of the British separation from the EU is still dominated by unfounded predictions of gloom and doom as if the vote had not already taken place. One of the bizarre results of the election was that pro-EU voices were republishing their most preposterous Brexit predictions the day after the vote as if there were something to be gained from boasting about their broken crystal balls. The propaganda will have to step aside eventually so that new approaches can be considered. It is an unprecedented situation so no one is quite sure what should happen next, but patience is certainly called for. There have been only four days since the vote, and in British and European politics, nothing happens in four days.

One obstacle ahead is the view by some EU officials that the British people must be made to suffer for their anti-EU vote, similar to the suffering imposed on the Greek people, in order to deter other countries from following the same path. This is politically a mistake. If the EU is all about suffering no one will want to participate. Some observers are already predicting that the EU could be dissolved within five years. Besides that, though, it is hard to imagine how the EU can force any form of suffering on the people in Britain. In the view of the voters, they are already suffering from their country’s EU membership. Artificially prolonging that suffering won’t change that point of view. There is also the problem of the EU budget. It has been disproportionately paid for by Britain, and the largest bureaucratic-corporate reshuffling in EU history must follow to make up for the budget shortfall. The EU won’t have the spare funds to spend punishing Britain.

The more responsible approach would be to observe and assist the new British experiment and to learn from its successes and failures. In my view, Britain is sure to be partly successful in breaking loose from from the bureaucratic-corporate approach and forging a new path, and that will provide an example for others including the EU to imitate.

Friday, June 24, 2016

This Week in Bank Failures

The U.K. vote to leave the European Union caught stock markets off guard. U.S. stocks ran up all morning yesterday on the day of the vote after the last two polls showed a tiny margin favoring Remain. Doubts began to creep in around noon but stocks mostly held their gains. When the votes were counted late at night, though, it was a solid victory for Leave, so that today, stocks reversed not just yesterday’s gains but the year to date in one session. Bank stocks led the market lower with their worst day in decades. Among banks, European banks and international banks with a major presence in London fell the farthest, though financial stocks worldwide were affected. Currency markets were in turmoil almost as soon as the polls closed, with wild swings during the highest overnight volume ever. The weekend has arrived now, and it looks like the worst is over as far as the markets are concerned.

The stock markets might have been caught off guard by the so-called Brexit, but the banks themselves were not. They may have made a month’s worth of gains today during a volatile day of currency trading, but in London, that’s little consolation for a city that, as of Monday morning, is no longer a major European banking center. The British exit from the EU won’t happen instantly, but it won’t take years either, and international business customers will not wait until the move is official to reconsider their European banking patterns. By the time the EU change is official, London banking will have to be smaller. I expect to see head count in banking in London shrink at least 25 percent in a relatively short time. Executives huddled in their respective banks in London earlier this month to draw up plans to reshape their businesses, and those plans went into effect early this morning after the vote count was in. Banks are obliged to focus on stability and continuity today and Monday morning, but Tuesday is another matter — and actually, banks like Lloyds, HSBC, and RBS had already been making cuts all year. For those senior employees who make it to the end of the year, bonuses could all but disappear. None of this will surprise bankers in London. The expected blow to the banking business is one of the reasons the City of London was one of the most strongly pro-EU areas in early voting returns last night.

Some jobs that leave London will move to EU countries, with Ireland and Spain in the best position to pick up banking operations that move out of Britain. Czechia and Luxembourg are two other names that have come up, and a few jobs could move to Germany. However, with the banking sector needing to shrink in any case, no one should expect that any new facilities will be built to replace the old facilities closing in the south of England, that the number of jobs added will be similar to the number of jobs cut, or that the salaries of newly hired workers in Ireland or Spain will rival those of workers laid off in London.

Two banks in particular may face identity crises with Britain leaving the EU. Deutsche Bank has its headquarters in Germany but its core operations in London. That’s a geographical formula that no longer adds up, and it is hard to imagine a gentle way of resolving that tension. For similar reasons a planned merger of stock exchanges between Germany and England is being called into question. The same problem, if in a more ironic form, faces Royal Bank of Scotland (RBS), which is headquartered in London but has its most important customer base in Scotland. Scotland may now be seeking independence so that it can rejoin the EU. In this situation Scotland won’t accept for long the current pattern of going to England to do its banking. RBS might be forced to decide between spinning off its operations in Scotland and watching them fade away.

While today did not provide the chaos that had been widely predicted before the vote, there were problems. The most serious problems had to do with banking customers wanting to buy euros and U.S. dollars. Several British banks ran out of euros before the day was over and stopped converting currency for their customers. With the British pound declining to its lowest level in 30 years, it’s understandable that people would be looking for hard currency. But if this is an early sign of deposit flight, that’s a trend that could hasten the decline of the banking sector in London.

Seeking Credibility After U.K. Leaves EU

After England carried a U.K. referendum for independence from the EU, outweighing the pro-EU sentiment from Scotland, both the British government and the EU will have to go through an extended process of rebuilding credibility.

Governance problems in the EU which lend too much influence to multinational corporations ultimately allowed the Leave vote to carry the EU referendum in Britain. There have for years been rumblings of discontent across Europe about the EU’s many concessions to big business. EU leaders who through yesterday felt comfortable in ignoring the problem may now realize they have to do something to reduce the risk of the whole EU splitting apart.

One measure of this is a controversial nuclear plant project in Britain which with EU support was ready to go ahead against local opposition. Now the whole project is up in the air again with financing in doubt and new uncertainty about the demand for the generated electricity.

In manufacturing too Britain will face a period of hesitation from foreign investors. One analyst suggested that Toyota would be less likely to locate a new factory in a post-EU England. It is a far-fetched example that perhaps shows how little impact foreign manufacturing investment has on the British economy. Britain only has to show that it can keep doing what it’s doing to maintain its credibility in the world.

Among the many questions that remain open is the issue of independence for Scotland. The strong pro-EU vote in Scotland highlights how separate Scotland has become from the rest of the U.K. The “better together” meme that narrowly defeated the referendum on Scottish independence rings hollow today now that England has voted directly against the same idea.

Friday, June 17, 2016

This Week in Bank Failures

Most surveys point to a British vote to exit the European Union. Banks are standing by to profit or at least avoid losses from trading on currency volatility before and after the vote. Uncertainty around the referendum was one of many factors cited by the Fed in deciding to leave interest rates unchanged. The IMF has warned of a recession in the U.K. following its exit from the EU, but realistically, that won’t happen. Workers can expect several thousand layoffs in global banking operations in England, but that is not enough of a change to prompt a recession. EU membership has few practical consequences in people’s daily lives, so that many people didn’t realize the U.K. was an EU member until the referendum question came up.

Cuts: Bank of America says it could close more branches and will reduce its branch staffing levels by at least 5 percent through attrition.

After five years in conservatorship, Texans Credit Union is financially stable again. The NCUA is ending its management of the credit union and turning control back over the the credit union members.

Tuesday, June 14, 2016

Two Internet Stories

There are two big Internet stories this week: Microsoft buys LinkedIn and the D.C. Circuit Court of Appeals upholds net neutrality. LinkedIn is a sad story in a way, in that an essential economic service can’t seem to operate effectively or make a profit. The Microsoft acquisition will surely mark the end of the LinkedIn as a career networking hub and the beginning of its transformation into, as Microsoft describes it, an extension of the Microsoft Office suite of document-editing programs. It is a step forward for Microsoft if LinkedIn is the replacement for SharePoint, but the average LinkedIn user will want to move quickly to reduce their LinkedIn presence to the equivalent of a public version of their job-hunting resume. If Microsoft owns LinkedIn it effectively takes most of the social qualities away from LinkedIn and turns it into more of a public forum. The net neutrality ruling doesn’t change anything but it means that ISPs still can’t turn themselves into obstacles to prevent you from getting access to Internet resources that are progressive in terms of politics, technology, and culture.

Saturday, June 11, 2016

Lessons From Fort McMurray on Fire Pathways

The Fort McMurray fire of last month, which has burned nearly 600,000 hectares and is still only 70 percent contained, qualifies as a major urban disaster, but it also has a hopeful side. We saw that a ferocious fire doesn’t mean your whole city has to burn down. About two thirds of Fort McMurray was spared. Some of that was a matter of luck, but much of it had to do with the way the fire got from the forest to the burnable part of a structure. Some structures burned down because there was a simple pathway for the fire to follow. The downtown remains largely intact, partly because the commercial buildings had nothing on the exterior that a fire could get hold of.

With that in mind, take a look at this picture of a detail of my house. The forest near my house is plenty damp this year, but wherever there is a forest there will someday be a fire. There is a problem in the picture and a very obvious clue to what the problem is.

What most people will notice first is the missing ornamental shutter. Some might also complain that the shutters are too long for the window. Even purely decorative shutters ought to match the length of the window they are decorating. The excessive length of the shutter is, in fact, an important detail.

The missing shutter, though, is the clue, not the problem. I took this photo after taking down one of the two shutters. Well, okay, it practically fell down just by looking at it.

Underneath the stucco, the exterior wall you’re looking at is masonry. It won’t burn by itself. However, the ornamental shutters are vinyl. Once the vinyl starts burning, it can produce a very hot vertical flame, more than hot enough to jump the one-inch gap and ignite the eaves and roof above. But how would the shutters catch fire?

There, as some readers may already know, is the crux of the problem. The bush below the shutters is growing right up against the outside wall of the house. That’s a bad landscaping design for a number of reasons, but especially when you look at the scenario of a drought-induced forest fire. After a few weeks with no rain, a bush, even if still green, can dry out enough that it takes only one fly-away ember from a forest fire or similar source to ignite it. Then, if the bush is right up against the house as this one is, the situation has gone from the already serious problem of having a fire in the neighborhood to the much more serious problem of having a fire licking the exterior wall of the house.

The bush is too risky all by itself, but having the decorative shutters there to carry the fire to the roof makes matters worse. If the video I’ve seen from Fort McMurray is any indication, this specific fire pathway would result in the entire house burning down in a matter of minutes. By contrast, in the same scenario but without the bush and the decorative shutters, there is a chance that the house might not catch fire at all. In Fort McMurray, similar details sometimes separated the house that burned from the house next door that didn’t.

The time to address problems like this is not when a drought has already taken hold and there is a warning of a fire risk. That’s because the power tools routinely involved in this kind of work themselves present a slight risk of creating a spark and a fire. Rather, the right time is when doing routine maintenance and groundskeeping — in other words, a normal summer Saturday.

For me the day was today. It took me maybe a hour this morning to cut away this particular fire pathway, and the work might have gone faster if I hadn’t paused to write this account of it. I’ll leave it as an exercise for another day to make the outcome look prettier. Even including that step, though, it’s a small price to pay to reduce the risk of losing an entire house in a future fire event.

Looking at my house this way has made me question whether it really makes sense to have a roof of shingles that are ultimately a form of paper. That’s a question I may look at again when it is time to replace the roof. Large-scale fire events are expected to be more frequent in the future, so we may have to get used to looking at cities and buildings in terms of their flammable materials, the way fire experts are already trained to do.

Friday, June 10, 2016

This Week in Bank Failures

London will remain an important banking center if the United Kingdom votes to leave the European Union, but it will no longer be a practical European headquarters for international banks. Banks anticipating a Leave vote have started to make contingency plans to close facilities and lay off staff. European operations centers could move from England to smaller EU countries bordering on Germany. Banks are also prepared for market turbulence immediately following the vote.

The Russian economy appears to be stabilizing, with forecasts calling for slight growth next year, enough to reverse a slight decline this year. There has been no major fallout from the various extreme measures the government took to stabilize the banking system.

Large foreign banks that have a smaller presence in the United States can file simplified resolution plans under new rules announced by the FDIC. In essence, a foreign bank can reuse its 2015 plan, redoing the plan only as the bank’s footprint changes.

Thursday, June 9, 2016

Two Responsible Ways to Subsidize Nuclear Power

In recent weeks there has been a coordinated worldwide effort to ask for operating subsidies for nuclear power. Supposedly the subsidies would put nuclear power on the same level as sustainable forms of electric power, though in fact, the currently operating nuclear plants already benefit from construction and startup subsidies far beyond any subsidy in the history of solar, wind, and geothermal power.

If there were to be subsidies for nuclear power, though, it is important that they don’t go to prop up inefficient plants that make poor use of the world’s limited stock of uranium, which may be almost gone by the time current plants are ready to be shut down. In other words, subsidies shouldn’t take away the market forces in place that separate the better operators from the worse ones.

This means subsidies have to apply across the whole industry. Here are two suggestions I can offer:

  • Having the government take up some of the responsibility for the unusual health care costs of uranium miners and nuclear workers
  • Having the government take the lead responsibility for disposal of nuclear waste

If you think about it, the nuclear industry already enjoys these subsidies, but they could be expanded incrementally as much as policymakers saw fit. This would be a better approach, if nuclear subsidies are needed, than the welfare-style handouts the industry is so vocally seeking.

Wednesday, June 8, 2016

Solar Passes Coal in U.K.

Another milestone for solar power: May was the first month in which the U.K. generated more solar electricity than coal electricity. Coal has fallen into such disfavor that there were moments when all of the country’s coal plants were shut down. That’s something that had never happened since the initial phase of electrification in the late 1800s. At the same time, the past fall and winter’s solar installations benefited from the longer days of spring. Solar is tipped as the replacement for coal on the electrical grid, but it’s clear that coal would be fading even if solar power did not exist.

Sunday, June 5, 2016

The Free Uranium Party

A few readers expressed surprise at the nuclear power plants shutting down. Fair enough — when nuclear power was introduced, the promise was of an electric supply that would be “too cheap to meter!” In practice, nuclear, like coal, is one of the more expensive sources of electricity and gets by only because it is indirectly subsidized from beginning to end. A nuclear power plant can operate at minimal expense, but only until the fuel runs out. That’s why the nuclear plants aren’t closing next week or next month. They’ll shut down when they have to, after the fuel in place isn’t generating enough electricity to bother with. Uranium prices have been going up in proportion to the doubts about the global supply. For years, U.S. nuclear power plants got uranium that was indirectly subsidized by the nuclear weapons program. Since the late 1980s, cheap uranium from decommissioned nuclear weapons has kept the industry going. But obviously the number of weapons that can be taken out of service is limited. At some point that party has to end. It now seems the price of post-warhead uranium is going up in recognition of the limited supply. Some nuclear power plants are more efficient and will be able to keep operating. For the most risky and least efficient plants, market forces won’t let them keep going. As long as uranium is in short supply, it is obviously better to supply it to the plants that are more efficient and less risky. That’s how we’ll get the most electricity from the uranium that is left. Based on that, things work out better if nuclear fuel isn’t subsidized. The bigger subsidies are, the more the resource gets put to wasteful use.

Friday, June 3, 2016

This Week in Bank Failures

Indicted: two former Deutsche Bank traders, in New York, on charges related to manipulating benchmark interest rates.

The International Monetary Fund (IMF) has suspended a program of financial support for Guinea-Bissau after the country spent a week’s worth of GDP on a bank bailout program. The IMF said the country could not afford the bank bailout.

The Fed has become the focus of cyber attacks, and now a House committee is investigating the central bank’s information security practices.

Cuts: Layoffs around 4 percent are on the way at Bank of Montreal in Canada and Bank of East Asia in Hong Kong. Bank of Italy says that country’s banks must cut costs and staff to avoid a crisis.

Thursday, June 2, 2016

For Nuclear, Not Enough Subsidies to Go Around

Exelon says it is closing two of its nuclear power plants after a bid for state subsidies apparently failed. Facing high prices and uncertain supplies of uranium at the same time that natural gas prices are at historic lows and solar costs continue to fall, the whole nuclear power industry will need subsidies to keep operating. Of course there will be subsidies, but governments cannot pay enough to support the entire industry, so most of the nuclear industry will have to close over the next 15 years.
Each of the two Exelon nuclear plants in Illinois is losing $100 million per year and the utility says it can’t pay to refuel the plants. They’ll be retired when the current fuel runs out, one in 2017 and the other in 2018. 
Even before the two Exelon plant closings in Illinois, the next nuclear power station to be retired could be the Fort Calhoun plant in Nebraska, described as the smallest nuclear power plant in the country. Accountants have concluded that that plant is too expensive to operate, and there are reasons for safety fears after damage from a flood and a fire. The plant’s cost structure is too high to compete with solar power in 2016, and no one will be surprised if the cost of solar electricity falls by another 5 percent before the year is over.
The growth in solar capacity is only enough to make up for one or two nuclear plant shutdowns per year, including plants that must shut down as their end of life approaches, so at this point it is mainly natural gas that is making up the shortfall. By 2020, solar capacity will be increasing fast enough that no one will miss the nuclear power plants as they close one by one.

BHS Liquidation Starts

There is another blow to the department store format, this time in the U.K., where the BHS chain is going into liquidation. According to the administrators, there were interested buyers but financing couldn’t be found. Probably all 163 stores will close this month.

From Paper Money to Plastic

The first credit cards were printed on paper, but it didn’t take long before credit cards made the transition to the more secure medium of plastic. Paper money has been slow to follow, but that transition too is well underway. Today the U.K. says goodbye to paper money with a £5 note made of plastic. In the U.S. paper bills look like they will be with us forever, but in fact, plastic is already part of the mix. High-denomination notes are woven with plastic security features that cover 4 percent of the width. Security considerations will lead to more changes which are likely to include more carefully selected artificial materials over time. 

Wednesday, June 1, 2016

Going Home . . . but Take Food and Water

The cleanup begins in Fort McMurray now that a fire that ripped through the northern Alberta city has moved on. About 10 percent of residents are expected to return home today, and more tomorrow, but those who do are cautioned to take with them enough food and water for two weeks. Some plan to live in their cars for a few days while they start on the delicate work of removing ash, smoke, and dust from their houses. Stores may not reopen until next week. Water pipes have been flushed out to remove the toxic effects of the fire but it will take more thorough testing to be sure that water is safe to drink. It may take weeks to completely restore electricity to the area. Ash on the ground has been sprayed to make it slightly sticky so it won’t blow around, but dust masks may still be required for anyone walking around the neighborhood. All in all, it’s not the scene you think of when you imagine finally being able to go home.