Not your grandpa’s bank run

The thing that’s hanging over this economy, threatening to turn it into Great Depression Deux, is the term “bank run.” Simon Johnson explains that the FDIC makes an old-school bank run unlikely. But: “Sadly, it turns out we haven’t outgrown runs. Rather, we have learned since mid-2007 that other kinds of runs — let’s call them wholesale or professional investor runs — are not only possible but also increasingly likely in the United States.” (Tho keep in mind that Johnson is of a particularly pessimistic mind about the current crisis, and this feeds into that perspective.)

Explaining the banking crisis

At the beginning of last week’s This American Life, Ira Glass suggests that many of us are resigned to not really understanding what’s going on with the financial sector. Then the NPR boys go straight into explaining it, starting in the simplest terms and working up to the global collapse scale. Required. One of the more interesting people in the show is Simon Johnson (a former International Monetary Fund bigshot who’s worked with many other countries fixing exactly this situation), who Terry Gross had an interview that is also very interesting. That should prepare you for the Baseline Scenario post from Johnson’s blog, and all the other jargon-heavy reports you’ll to be encountering.

Update: Spoilers (don’t read on if you’re going to listen to the programs): The amount of debt Americans hold, as a percentage of GDP, typically oscillates between 20 and 50%; at two points in the last century it’s hit 100%: in 1929 and in 2007. So all these people yelling about how banks should lend out the money the US government is giving them are exactly wrong — arguably it was our level of debt that, as much as anything, caused the current crisis.

Johnson believes that the solution is fairly obvious: nationalize the banks. You nationalize, clean up the mess, and re-privatize them. Apparently that’s what the IMF, with the USA’s blessing, has been helping/forcing governments with similar problems do for decades, and it works reasonably well. Also, the US government does it all the time, just on a smaller scale than would be presently required. But were it not for the “obvious” political problems, the IMF would advise us to do exactly that. There’s also the suggestion that — maybe — that’s exactly what the Obama administration quietly is preparing to do.

Critical Miami says: time to buy

About three years ago,* I advised everyone in Miami to sell their house, pocket the money, and wait a couple of years:

[F]ind a moment (and find it soon), to sell your house, put your stuff in storage and rent an apartment for a year (maybe two or three), then buy your house (or one similar) back, for a maybe $200,000 profit.

So, here we are, three years later. Neverminding for now that the housing market took the whole economy with it, let’s see what the smart money’s up to these days. I work up early this morning to cook up a graph for you people, with data from the trusty

Housing asking price median, 2005 - 2008, $425,000 - $260,000

I chopped the bottom half of the graph to make it more dramatic — the housing is in the tank. This graph actually understates the situation, because it’s showing asking prices, not sales prices. I should also say that during this period, housing inventory in the area went from 12,000 to 50,000.

Now, listen carefully: it’s time to go shopping. Remember the factors that led to the bubble? Idiotic interest-only mortgages, gross overbuilding, and what seemed like terrifying hurricane seasons as far as the eye could see. The picture today? (1) mortgage idiotics universally recognized and being dealt with to the tune of trillions of dollars from the federal government, (2) overbuilding spectacularly finished, and (3) relatively calm winds for the last two seasons. To boot, (4) an incoming president that everyone seems to think Can Fix Things.

Respectively, these factors mean: (1) lots of money for people to borrow to buy homes being injected straight into the economy’s mainline, not the least of which is near-zero interest rates, (2) there are more unocupied homes now then they will be for probably another decade, (3) people will begin moving to Miami in droves again, and (4) the economy is ultimately about mood and expectations, and both are in the process of getting a major boost.

So, what’s the smart money doing? Maybe not buying a house or condo today, but it’s starting to look around. It’s checking out the listings, and getting a feel for the market, and planning on buying something pretty damn soon. I’d say sometime in the next six months. I know the right edge of the graph still looks like a plunge, but the thing is that while the economic recovery will be slow and steady, the housing market will recover probably first with a sudden upward jerk in prices. And if you wait for that first jerk up, you’re going to be one of the droves of people entering the market, and you won’t get the really good deals. The time for those is now.

* Actually, check out this post from June 2005.

What’s up with text messages?

cell phone I’ve been griping about this for years: it costs cell-phone carriers effectively nothing to send text messages, yet they’re charging 10 or 20 cents a piece. Consider the size of an mp3 file vs. a text file: my This American Life downloads (which are of course efficient, low-quality files) are 27,700 kilobyte files, which comes to 470 kilobytes — or 470,000 bytes — per minute. How many bytes is a 160 character text message? I actually had to work this out, but you’d be correct to guess that in text messaging, one character still = one byte, so it’s 160 bytes.

I.e., one minute of audio costs phone companies several thousand times as much to transmit as a text message. Calling plans are of course totally arcane, but an average between pay as you go and the less expensive monthly plans seems to be about ten cents per minute of calling. So, they’re charging twice as much for the text message while it’s costing them 1/1,000th as much to send (this is actually a conservative estimate which assumes that the phone call uses a quarter of the bandwidth as the This American Life mp3). In other words, Highway 2B Robberiez.

So the obvious solution is to not send text messages? Well, not really. If we knew they cost 20 cents before, they’re obviously worth it to us to send. This is what happens in Europe: Nobody has a prepaid plan: you pay for the minutes you actually use. (In an added twist, only the person initiating the call is charged.) Text messages are charged some trivial amount, which makes a round of texts much cheaper then a short conversation.

So, I’m not sure we want a world where minutes on the phone are expensive and text messages are cheap. I guess what I’m saying is, look at your cell phone bill. If it makes sense for you to switch to a cheaper plan, do it. If you’re off-contract, consider a pre-paid plan. And if you’re sending and receiving an average of 5 text messages a day, consider whether that $30 per month is really worth it to you.

Image: IamSAM

What the hell are we going to do about the idiot auto industry?

General Moters ev1

The American auto industry deserves to die so richly it makes me sputter. It’s pretty well exemplified by Bob Lutz, G.M.’s vice chairman, who’s been infamously quoted as saying, “…global warming is a total crock of shit. … Hybrids like the Prius make no economic sense.” It’s been just like with the housing bubble and the Iraq war, where a chorus of reasonable voices called out for the obvious correct action for years. Except that with the auto industry, we’ve been telling them for decades. Please build us better cars. Please not with the upsized SUVs. Oh, and, who killed the electric car again?

Thomas Friedman was watching TV in September:

They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

So, yeah, this is sure as hell an industry that does not deserve to be encouraged. Steve says let ‘em die. But Friedman is more cautious. He quotes the Wall Street Journal’s Paul Ingrassia, who wrote:

In return for any direct government aid, the board and the management [of GM, and any other U.S. automaker accepting a bailout] should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits.

But you see where this starts to lead. Back to Friedman:

I would add other conditions: Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

Of course others have plenty of more drastic ideas, and those strict minimum-mileage requirements we’ve been talking about for years are just the tip of the iceberg. But you see it’s not as easy as “fix it and then make them run it better.” You can solve problems with banking with more regulation, because “innovation” in the banking industry is generally considered the source of trouble. In the auto industry, innovation is the way out, and you cannot use legislation to force innovation. Just doesn’t work. Might work for a few months or a year, but eventually you’ll be forcing the wrong kind of innovation, and digging yourself a deeper bailout hole for next time. Friedman even acknowledges this — sort of — by jokingly suggesting putting Steve Jobs in charge of GM for a year.

No my friends. The American auto industry has had ample opportunity to fix itself. Instead it has chosen to cruise on easy Lincoln Navigator profits (“take a Ford Expedition, add some sound insulation, raise the price by $10,000, and hold your breath”) and a powerful Michigan legislative delegation. It fought safety standards, it fought milage standards, and it churned out the same crap, clad in differently styled plastic, for decades. The legion of workers it employs are the only plausible argument for saving it, but ultimately you’d be doing them no favors. Bailing out an industry and then regulating it to “improve” really is straight Socialism. And even if Republicans are right that this is the time to throw everything they’ve ever stood for out the window, the problem remains that Socialism does not work. Good money after bad. Delaying the inevitable.

Sorry, but I’m with Steve on this one. These companies have been bailed out before. They’ve been warned. They had plenty of opportunity to fix their shit when they were flying high on those 100% SUV profits. And they staunchly refused. They need to survive on their own or die this time.