This Week in Bank Failures

The FDIC is taking steps to encourage consumers to keep their money in the bank, emphasizing that in the case of a bank failure, the FDIC is legally obligated to pay insured deposits “as soon as possible.” This point is significant to anyone worrying about inflation and the limited size of the FDIC’s line of credit with the Treasury. The FDIC’s argument to consumers emphasizes the idea of keeping their money safe, but the only thing that will really persuade consumers to keep more money in the bank will be higher interest rates, and that will not be happening for the next five years, if you can believe the statements coming out of the Fed.

Developments this week: Treasury Secretary Tim Geithner urged Congress to hurry with financial system regulatory reform, hinting at the risk that a new Wall Street breakdown could derail any economic recovery. ◾ Congress is considering a measure to change the FDIC’s assessment base from a bank’s deposits to its assets. The rationale is that it is usually a problem with a bank’s assets, rather than its deposits, that leads to a bank failure. A problem with this approach, though, is that it discourages banks from keeping extra assets. This might be resolved by exempting the safest assets, such as cash. ◾ Calls to dismantle the FDIC and eliminate deposit insurance continue to come from financial analysts who have failed to learn the lessons of history. It is worth noting that none of the people who are calling for an end to deposit insurance appear to have any substantive understanding of economics. ◾ A week ago, the NCUA closed Ensign Federal Credit Union, based in Henderson, Nevada, with 7,900 members and $98 million in assets. Member accounts were moved to EDS Credit Union. ◾ Residential real estate values will continue to fall, with construction down just 30 percent from the bubble levels of last year, mortgage delinquencies at the highest rate ever seen, and Congress’s recent extension and expansion of the home buyer tax credit. All this puts more pressure on bank balance sheets, as about half of bank assets are based on real estate.

There was one small bank failure tonight: Commerce Bank of Southwest Florida, with one office in Fort Myers. The formerly high-flying banking culture of southwest Florida has been hit with the second-largest concentration of bank failures in the country, behind only suburban Atlanta. The failed bank had $77 million in deposits. The cost for this bank closing is estimated at $24 million. Deposits and assets were purchased by Central Bank, a Minnesota bank that has been acquiring failed banks at a rate of one per month.

Thursday Is the New Friday

Thank God it’s Thursday!

Well, that’s what you might say if you’re an average worker. For years, the average work week was more than 40 hours. It has been falling, though, and in the current recession, it has fallen to a surprisingly low level of 33 hours per week. That means an average worker is one who works four days a week, rather than the traditional five.

It’s not really that people are working four days a week. There are those who work only two days a week, and they bring the average down. If someone works two days a week at each of two jobs, they really bring the average down, because they’re counted twice — the labor statistics don’t have a way of bringing a worker’s two jobs together. On the other hand, millions of workers who previously worked five days a week are now working just four as the result of employer cutbacks. Others work four days a week, but work longer hours, as employers seek to cut their employees’ commuting costs.

Still, less than half of workers are working the traditional 40-hour Monday to Friday workweek or an approximation of it. This is a cultural transition point about as significant as learning, around 1980, that less than half of children live in a household with both of their parents. Societal institutions are still built around that norm, but it is not the common situation anymore.

Christmas Shoppers Hold Out Till December

“U.S. consumers say they are not likely to shop without the big price cuts they saw last year,” says a new Reuters story about holiday shopping. The story cites an America's Research Group survey that suggests that consumers are not eager to go shopping for presents.

A repeat of last year’s discounts, with “after-Christmas” sales starting the day after Election Day, would be impossible, though. Last year, retailers had bloated inventories and had to cut prices as much as their competitors to get shoppers into the stores. The result was the most aggressive discounting in any Christmas shopping season ever.

This year, retailers aren’t in any mood to risk a repeat of that, and they couldn’t get the financing to overstock their shelves even if they wanted to. The downward spiral at CIT Group, traditionally the largest inventory lender to smaller retailers, has sharply limited how much some stores can stock this year, while losses at large retail chains such as Best Buy also see them carrying much thinner inventories.

Without huge inventories, there can’t be huge sales. Stores will be running out of many items before Christmas even without price cuts. With the thinnest Christmas-season inventories ever, a real 70-percent-off sale, of the sort that we saw so often last year, could mean that the shelves are empty before you arrive in the store.

To try to get shoppers to buy, retailers will do their best to create the illusion of deep discounts by showing exotic-looking items with prices so high that they can easily take 50 percent off, then 75 percent. This will work to an extent, but many shoppers are likely to hold out for real bargains, and they may end up buying nothing at all, or only token presents for their family members.

Some of the shoppers who say they insist on deep discounts in mid-November are only bluffing, or kidding themselves, and may end up buying anyway when mid-December rolls around. That could make this year the latest Christmas shopping season in more than a decade. Christmas shopping has been coming earlier and earlier in recent years, with the midpoint of the season hitting on Black Friday in 2007 and the weekend before Thanksgiving in 2008. This year, though, as shoppers hold out, the midpoint of the season might not come until the middle of December.

The lack of deep discounts at least means retailers that plan the season well won’t get stung the way they were last year. A retailer that plans for sales that are 10 percent less than last year may make a nice profit, despite the decline in revenue. And retailers that plan for sales that are about the same as last year will have a decent shot at breaking even.

What It Means to Hunker Down

Nouriel Roubini of Roubini Global Economics wrote on Sunday that the U.S. job market is sure to get worse at least through 2010, and could remain terrible for years after that. His advice to workers: “if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down.” He has a policy suggestion that could make things less bad, but the political chance of it being implemented is near zero, and the risk of bankrupting the country if it were to be implemented is considerable. If you have a job, the chance that you will be unemployed for the next five years is large enough to take notice of; if you are unemployed already, that chance is much larger.

For many of us, the issue is not about waiting for things to get better, but finding a way to survive until things get better. Strategies might include radical personal cost-cutting, such as canceling television and telephone contracts, cutting your own hair, baking your own bread, and heating only a few rooms in your house during the winter. If you have a quarter acre of land, subsistence farming might be an option (if not now, then when April rolls around). You might turn one of your hobbies into a business, even if you can only hope to make $20 a day at it. If you are more fortunate, you might just need a college degree, an advanced degree, updated training, or some sort of personal makeover to get your next job. Or, if nothing is going right for you, your plans might include selling everything, moving to a warm climate, and living in a tent.

It’s hard to believe this is America where we’re talking about this, but we are facing a situation where millions of workers will be unemployed for five years or longer. Congress lacks both the political will and the financial means to create jobs on a scale that would keep this from happening, unemployment benefits will absolutely not be extended for five years, and food stamps aren’t enough to keep you going. The job prospects for workers without a college degree who have been unemployed for more than one week are literally the worst they have ever been, so it’s foolish to just hope that the job offer you need will arrive next week. Can you survive for four years after the unemployment benefits run out? Yes, you can — but don’t wait till after the holidays to start figuring out how you might do that.

The bottom line is that it is your responsibility to make your household budget add up whether you have a two-income household, a one-income household, or a zero-income household in which the last unemployment payment is a distant memory. Don’t be afraid to look at those numbers and find ways to make them work — because for the first time since the New Deal, Uncle Sam is looking at us and saying, “This time, you’re on your own.”

After the Summer Bounce

New economic reports in the coming weeks will tell us that the increase in economic activity in the United States during the summer was mostly a seasonal event. Home prices, for example, increased ever so slightly, but will have to fall more wherever there is more housing being built on top of the substantial oversupply that already exists. Already, the unemployment rate, which held steady as millions of unemployed workers took summer vacations, has resumed its increase. And consumer sentiment has fallen sharply as the sunny days of summer and the excitement of the Clunkers program fade from memory.

I hope people will not be unduly discouraged by indicators that seem to say the recession is still holding on. The fact that the economy could support a seasonal bounce shows that things are not so terrible. The economy, even as it retrenches and reshapes, still has considerable strength. It is nearly holding its own.

Another reason for hope is that the recession does appear to be over or ending in much of the world. Economic growth elsewhere will eventually help the U.S. economy, creating more demand for U.S. exports. If the coming collapses in commercial real estate and credit cards and the subsequent bank failures do not further frighten the U.S. economy, the U.S. recession will surely be declared over with next summer’s bounce.