Saturday, July 26, 2008

In the News This Weekend

Three news items worth noting:

  • The FDIC closed two smallish banks, again on a Friday evening. Both banks were owned by the same holding company, so you could think of it as one bank. I think they’re calling it two to help get us used to the idea of bank failures. We may see a parade of small-to-medium-sized banks shut down over the next few months. If the feds have to shut down 4 of the 5 largest banks next year, hopefully by then we won’t be too shocked to see it happen.
  • Chrysler has decided to stop leasing its cars. They figured out that in the process of screwing their customers with auto leases, they were also screwing themselves, having to take back near-worthless pickup trucks and SUVs when the leases expire, and sometimes sooner. That’s the way the free market system works sometimes. Other auto makers say leasing remains an essential part of their business plans.
  • California is banning trans fat ingredients from restaurant food, joining the trend that started in cities like New York, Philadelphia, and Baltimore. We’re still a long way from the idea of holding food makers responsible for the safety of their products, but the trans fat ban helps to establish the idea that items sold as food can’t just be dressed-up poison.

Friday, July 18, 2008

Obese vs. Obama

Barack Obama is getting his strongest support from states that have low rates of obesity. States with high levels of obesity are supporting the opposing candidate, John McCain. The presidential election is shaping up as a battle of obese states vs. Obama states.

And this isn’t just one of those “gee, isn’t that funny” connections. When you look state by state, obesity and Obama support are so distinctly separated that it couldn’t be an accident. There has to be a cultural explanation for it, something to do with the way voters understand their lives and the world around them.

The minute I saw yesterday’s AP map of obesity rates from the 2007 survey conducted by the Behavioral Risk Factor Surveillance System (BRFSS) of the Centers for Disease Control and Prevention (CDC), I could see that there was a connection between being fat and voting Republican. The dark red states on that map, indicating adult obesity rates above 29 percent, are also red states on the current electoral map, indicating support for John McCain in the presidential election. And the 10 lightest states on the obesity map, indicating obesity rates below 23 percent, mostly support Obama. Seven of those 10 states are dark blue on the electoral map, indicating the strongest support for Obama, and only one is a McCain state.

You can make the connection just by glancing at the thumbnails below. The map on the left is the AP obesity map. The darker reds are states with higher obesity levels. The map on the right is today’s electoral map from Reds are states that support McCain in the most recent polls. Blues are states that support Obama.

AP obesity mapelectoral vote map

You can almost pick out the political leanings of a state in the obesity map. Look at the two bands of states that have been Republican strongholds in recent years, from the Dakotas to Texas and from Texas to the Carolinas. These 14 states are also strongholds of obesity, with obesity rates in the upper half, ranging from 26 percent (Nebraska) to 32 percent (Mississippi).

Looking more closely at the data, I found that this correlation is even stronger than it appears on the surface. To show how strong the correlation is, using the same two data sources, I ranked the states by obesity rates, from lowest to highest, then colored the states according to the seven electoral poll levels used by You can see that most of the states toward the left, with lower than average obesity, are solid blue strong Obama states, while there is a cluster of red McCain states at the right with the highest obesity levels.

obesity vs. electoral

What does all this mean? Are McCain voters fat? No, while it might seem that way, it would be an oversimplification to draw that conclusion from this data. It does seem safe to say, though, that McCain draws most of his support from areas where especially large numbers of people are obese, while Obama is the overwhelming favorite among areas where obesity is less common. And although I can’t pinpoint the link between obesity and voting for one candidate or the other, it is absolutely clear from the data that there is some kind of connection.

Saturday, July 12, 2008

More Moving Arctic Ice

Another indication that ice on the Arctic Ocean is moving around more: BBC News reports Russian science station North Pole 35 is being evacuated today after the ice it is based on drifted 2,000 kilometers in ten months and started heading toward the Atlantic. The ice floe shrank from 3 kilometers wide to 300 meters wide and is expected to break up after it reaches warmer waters.

Russian ice scientists usually set up camp on ice that is at least 3 meters thick, but there was none of that to be found last fall. The thinner Arctic ice moves around and breaks more easily than the ice of years past, and this is easy to see in the BBC map of North Pole 35’s trek across the ocean. The station started out 1,500 kilometers from the North Pole, drifted within 600 miles of the pole, then moved southwest toward the Atlantic.

With more ice movement, the ocean melts ice more efficiently, and the colder ice exits the central Arctic to melt along the coastlines and in the Atlantic.

Friday, July 11, 2008

Propping Up the Banks

You nearly always find, when a bank fails, that its balance sheet was worse than it looked. But in the report of tonight’s failure of IndyMac Bank, statements by federal regulators suggest that the bank was not in any condition to be operating.

The key statement to look at is the assertion that it was the withdrawal in the past two weeks of $1.3 billion in deposits that led to the bank’s collapse. Regulators called this a “liquidity crisis,” meaning a run on the bank.

But for a bank with assets of $32 billion, the loss of $1 billion in deposits is an occasion for overnight borrowing from other banks, or possibly for emergency borrowing from the central bank, but not for the forced shutdown of the bank. Only a bank that is living on the edge, or somewhat beyond it, would be brought down by a run on that scale.

Based on that and other statements, and the fact that they waited till after the Friday evening television news for this shutdown, it is probably safe to assume that IndyMac really should have been shut down a few months ago. The regulators, I have to assume, put off the inevitable shutdown — propping up IndyMac and quite possibly burning through another billion or so in government money in the process — because they were afraid that the closure of one major U.S. bank would lead depositors to worry about the 30 or so other major U.S. banks that are known to be in trouble, possibly contributing to a run on one or more of those banks.

But now that the cat is out of the bag, the regulators will not be so hesitant to shut down the next bank that goes under. They don’t have the capacity to prop up all the major banks that are facing serious problems, and now that one massive bank failure is in the news, there will not be much shock value in the next one. The FDIC, which insures U.S. bank deposits and which is now in the awkward position of operating IndyMac, brought dozens of analysts out of retirement to prepare for what could be a cascade of bank failures this year. Unless a miracle occurs to restore all the other banks to sound financial footing, they will not be sitting idle.

In the event that your bank fails, there is a risk, however slight, that you might not have access to any of your accounts for a short period of time. This makes it all the more important not to be living on the edge financially yourself. Make sure you can get by for at least a week or two without your primary bank. For most people, this just means holding credit cards from at least two different banks (and having a balance that is less than 25 percent of the credit limit on each card).

Deposit insurance covers typically only $100,000 per account holder, not per account, in each bank, so it is not entirely safe even in the best of times to have more than that in any one bank. If you need to have more than $100,000 in the bank, it is important, as I have written previously, to have it in multiple banks.

Heating Motel Rooms

One of the most worrisome things about recessions is that the loss of economic initiative takes away some of our ability to solve problems and adapt to changes. This can lead to more problems (and if too many pile up at once, that’s what causes a depression). Case in point: will rising energy costs and a lack of real estate lending liquidity create a shortage of hotel rooms?

The issue here is not the big blocky downtown hotels, which are not so hard to heat because they don’t have a lot of surface area. It’s the smaller buildings that are at issue, so it makes sense to think of motel rooms.

Most motels and many small hotels are cement-box buildings with the exterior walls of the rooms more or less pasted on. In most cases, these exterior walls aren’t effectively insulated; some of them are little more than glass. With rising energy costs, the leakiest of these exterior walls have to be rebuilt so that the hotel operators, and the traveling public who are their customers, will not be spending a fortune heating and cooling the rooms.

Most hotels and motels are small operations that will need to borrow money to build these insulated walls. Yet this problem arises at the same time that the real estate lending system is barely functioning.

A hotel operator who saw this problem coming, got a loan two years ago, and is now wrapping up the construction work, has avoided this whole problem. But one who just notices the insulation issue after seeing next winter’s energy bills may not immediately be able to get the same kind of loan. The loan, and the work, may have to wait until the recession is over.

When that happens, it’s a loss to the economy. The money, if the hotel owner can get it, goes mainly to hire local workers who, in the meantime, are unemployed. The project is a good investment that, in principle, ought to be done immediately. It’s an adjustment that allows a business to adapt to changing economic circumstances. And while we are waiting for the hotel rooms to be insulated in the way that current energy prices demand, we will have to deal with higher prices for lodging, colder rooms to sleep in, and shortages of hotel rooms as hotel operators shut down floors and whole buildings for the winter. Compromises such as these get in the way of a whole range of other economic activities, forcing people to make other adjustments in other areas.

It often happens that the same stresses and collapses that cause a recession also cause various delays in efforts to remedy the resulting problems. Our challenge in navigating a recession is to keep these to a minimum by finding whatever solutions can be found. I don’t have any simple solution to offer to the hotel heating problem that is on its way. But whatever solutions can be found to this problem and others like it are the key to minimizing the hardship caused by the recession, and keeping it from turning into a depression.

Wednesday, July 9, 2008

Corporations Are Still Hiring New College Graduates

It can be unnerving to get your college degree in the middle of a recession. Early indications this year were that corporations were especially eager to hire college graduates, but at salaries that averaged 20 percent lower than last year. New statistics indicate that salary offers for new college graduate have not actually fallen, on average, from last year. It’s probably a sign that employers got few takers for the lowball salary offers they started with, and that job-seekers who held out for more got the salaries that they would have merited last year.

The number of new college graduates being hired is also projected to be up from last year, in spite of an economy that has been shedding 50,000 jobs per month. Colleges say it is their older graduates who are having trouble finding jobs, not the newest graduates. Employers are cutting costs by hiring younger workers and paying them less than they would pay experienced workers.

Tuesday, July 8, 2008

Negativity on the Home Lending Market

If you’ve been reading (or watching) one of those Wall Street outlets, you might think there is a consensus that most of the home lending meltdown is behind us. Ha! If you want to get dirty with the current state of home lending, you need a lively discussion that includes unemployed bankers, scared real estate agents, and a list of hundreds of possible bank failures. And that’s what you get at The Mortgage Lender Implode-O-Meter. Four out of five headlines agree that the state of mortgage lending keeps getting worse. Sure, the site is loaded with advertising, but laid-off bankers have to make money somehow!

A headline today for those who thought the bad loans were mistakes made in the past: “Fed to Clamp Down on Exotic and Subprime Loans.” According to Fed chairman Ben Bernanke, the bad loans are still happening every day, and banks need to be restrained by new, much more restrictive lending rules before the banking system can have any hope of stability. (This should also silence the Wall Street critics who have said repeatedly that Bernanke is an “academic” who would never really do anything.)

It’s not that banks are lending as freely as they were up until a year ago. According to the National Association of Realtors, pending home sales fell 4.7 percent in May. Part of the reason is that more would-be buyers than ever are having to cancel because they are turned down for mortgages. Yet banks continue to issue variable-rate loans to marginal borrowers, which is the key practice behind the current troubles.

It makes sense to me that government backing for home mortgages should insist on only fixed-rate mortgages for borrowers who can’t document a substantial net worth and on really large down payments, not just 20 percent but perhaps 45 percent, for investors who will not be living in the buildings they are buying. If banks cannot pass along the risks of these loans to someone else, they will be much more careful about the quality of loans they make. And some have suggested rules that would be much more restrictive than this.

The reason we are still talking about how to change the rules of lending is that banks are still making so many bad loans. It is worth making the rules a little too tight in the short run if it means fewer banks go under.

Thursday, July 3, 2008

Stirring the Arctic

The Arctic Ocean’s ice cover is melting earlier and faster this year, mainly because the ice is thinner.

Thin ice melts faster, of course, and it turns out that a mix of thick and thin melts almost as fast as thin ice by itself. The wind breaks that ice up and blows it around. The ice eventually ends up somewhere warmer, where it melts. The only ice that is safe is a near-solid sheet of thick ice wedged against land.

And there is only one of those left in the Arctic. It’s a band of ice 300 kilometers wide that stretches northwest of the Arctic coast of Greenland in a straight line that goes most of the way to the Yukon coast.

This thick ice bypasses the North Pole, raising the likelihood that the central Arctic and the waters from there to Alaska, Asia, and Europe could be substantially free of ice by September.

Steve Conner at The Independent raised a sensation a week ago with his news story, “Scientists warn that there may be no ice at North Pole this summer.” The story, though, basically repeats data and analysis from the U.S. National Snow and Ice Data Center (NSIDC), and it offers very cautious opinions from scientists. Throwing caution to the wind, I can say that the Northwest Passage may not matter so much after all. Before too long, it could be possible to sail in almost a straight line from Norway to the Bering Strait.

The ice map shown in the Independent seems to show that multi-year ice still covers a third of the Arctic Ocean. But the NSIDC May 19 map shows that most of that area is covered by a mix that includes at least 40 percent single-year ice. There was only the one band of 61–80 percent multi-year ice remaining, and that remaining ice is far more fragile than it would have been a decade ago when multi-year ice covered most of the ocean. When the wind changes direction and starts blowing away from the islands where the ice is anchored, that ice too will blow away and melt. That will happen at some point, though perhaps not this year, as the result of weather patterns that we can predict only a week in advance. And that would seem to be the only major event remaining before the Arctic Ocean can be substantially ice-free.

In yesterday’s NSIDC report, we see ice moving around the Arctic more than last year. One way to see this is that while the daily ice coverage is higher than last year, the monthly ice coverage is lower — the result of ice moving from place to place during the month. The ice movement is one of the reason scientists say the ice must be substantially thinner than it was last year.

Yesterday’s report also emphasizes how early the surface melt of Arctic ice began this year, something that is easy to see when you compare the maps of the last four years. Surface melt starts with the warm air and sunshine melting the snow cover on top of the ice. The snow melt runs off and forms puddles which speed up the melting process. Surface melt started about three weeks earlier this year than last year, and the extra three weeks of melting are expected to lead to more melting than ever during July and August, the months of the most rapid ice melt every year in the Arctic.

Until recently, the conventional scientific view was that the Arctic Ocean would remain substantially ice-covered. Then the consensus was that it would become ice-free in summer between 2100 and 2200. Then it was 2050. One year ago, the prediction from one model that the Arctic could be ice-free around 2013 seemed like a mistake. Now we are asking if it is possible that almost the entire ocean could be ice-free later this year — and the best answer we can offer is that it depends on the weather.