Signs of ill health/will

December 14th, 2009 — Wordman

Can anyone offer me a decent explanation of why, at this very moment, every major bank in the United States is offering a savings account with a higher interest rates than they give for certificates of deposit (CDs)? Go take a look. It makes no sense.

In a healthy economy, the CD should always have a higher rate. For those that don’t know, a certificate of deposit is a sort of “long term” savings account. The idea is that you deposit some amount in a bank for a fixed length of time (often three months, six months, or one to five years) and, in its simplest form, you are penalized if you withdraw from the CD account during this time period. The idea is that the bank has a guaranteed source of funds. This illiquidity is good for the bank, but inconvenient for you. To make this inconvenience worth your while, the bank should give you a higher rate.

But I can’t find any banks that are actually doing so, at least for CDs with a reasonable term length. Citibank, for example is advertising an “Ultimate Savings Account” with a rate of 1.01%. Meanwhile, their CD terms are much lower: 3-month 0.25%, 6-month 0.5%, 10-month 0.5%. At 12-months, you get the same rate as the savings account: 1.01%. Only at 18 months do they do better, and then not by much (1.1%). For three years, they’ll give you 1.5%. Other banks have much the same setup.

So, what the banks are saying with their behavior is that it is better for them if you have a savings account, rather than a CD with a term less than a year. (Or, put another way, they are saying “if you want a CD with a term less than a year, then we don’t really want your business”.) Why would this be? On the surface, it would seem that money locked in to them even for a short period would be better for them than money that can be withdrawn at any time. I can only think of a few possibilities this would not be so, most of which are unsatisfying:

  • Loss leader: Perhaps it isn’t that CD rates are too low, but that savings account rates are artificially high, with the idea that banks are inflating them to gain customers, with the intent of lowering the “teaser rate” drastically after some (short) period and hoping the customer doesn’t notice. It seems like if you make the assumption of classical economics that people are rational, this seems likely to fail. On the other hand, this classical assumption is almost always wrong, so maybe the bank knows they can get away with this kind of thing.
  • Overhead: It could be that the costs of offering, setting up and maintaining CD accounts are larger than they seem. For the current behavior to be rational, it would have to mean that only if a CD lives for 18 months does it become worth the extra effort for the bank, compared to a savings account. I find this hard to believe, but, on the other hand, about the only time I’ve talked with a human at a bank in the last few years was to do something with a CD, so maybe it’s true. If you look at the way various ladder strategies work, you can imagine that a higher cost for customer interaction is plausible.
  • Flexibility: Typically, rates of savings accounts are not fixed, while those of CDs are. This means that a bank that has lots of customers with savings accounts has a bit more flexibility than one where the customers all have CDs. That is, if things go bad, they can set the rate of the savings accounts to zero to control their costs, while the cost of the CDs would remain a constant drain. It seems to me that if this is really the reason, then these banks are in worse shape (or, at least, think they are) then we thought.
  • Contempt: It could just be that banks think their customers are too dumb to notice. Maybe they are even correct. For example, I opened a CD a number of years back at over 3%. As the term on this CD expired, I let it automatically renew. At some point during these renewals, the rate dwindled below 1%, yet I did not realize this until recently. I’d like to think not enough of the country is as dim as I was to make this a viable strategy for banks, but I’m probably wrong.

Maybe all of these ideas have some truth? Whatever the case, it is fairly baffling. I’d love to hear from someone who knows better.

Blame

October 15th, 2008 — Wordman

In the film Rising Sun, Sean Connery’s character claims that “the Japanese have a saying: ‘Fix the problem, not the blame.’ Find out what’s f—- up and fix it. Nobody gets blamed. We’re always after who f—- up. Their way is better.” While this is not universally true (sometimes fixing the problem does mean assigning blame), it’s true enough: Americans, particularly American media, are much more fixated on pointing fingers than solving problems. With the current financial crisis, there is no shortage of culpability to go around, and the standard blame orgy is in full swing. Unfortunately, almost no one, least of all the media, is even mentioning one of the largest culprits: the American consumer. Far from assigning even a tiny bit of the blame there, most noticeably exclude them from analysis. In the debate last night, McCain went so far as to call them “innocent victims of greed and excess”.

Wrong.

The American public, that is currently raising such a stink about this crisis, did as much to cause it as anyone. They are not the sole cause, to be sure, but they are not innocent and it disgusts me they they (we) are getting a pass. One of the few to even mention this is Chris Plummer, who recently provided a menu of blame that included the general public, twice:

Consumers

Railing against greedy thieves in the financial industry ignores how readily Americans availed themselves of the cheap credit that same industry offered them. If there’s honor among junkies, it’s that they don’t blame their drug dealer for their addiction.

American workers

Employees across all industries suddenly fear for their jobs and resulting financial hardship as the nation appears headed into a recession of considerable depth. The ones most at risk are the millions who lived beyond their means and failed to steer earnings into savings for just such potential emergencies. They sadly face just desserts for feasting high on the hog.

That may be harsh, but it is largely true. It’s clear that the trigger for this crisis has been home loans made to people who ultimately couldn’t pay them back. Yet, in a society of finger pointing, somehow no one seems willing to even mention that, just perhaps, the people that agreed to take such loans might have, just perhaps, helped to totally screw us all.

The common rebuttal to this is “but there was criminal, predatory lending! Those people didn’t know what they were getting into! They were being lied to!” But, even if there was outright fraud in every single case, “those people” still signed the paperwork. Essentially, this rebuttal is saying that consumers who suck at math and reading comprehension are automatically innocent. This argument doesn’t hold up in any other venue. I’d like to believe that a small outlay of cash to a rich Nigerian in exile would net me millions but, if I fell for this scam, no one would call me an innocent victim. They’d say I got what I deserved for being so stupid and greedy. Blame certainly falls on the scammer, but also on the willing participation of the scammed. It takes two to tango.

When you are out and about, and a bomb set by a complete stranger goes off and kills you for no reason, you are an innocent victim. If you willingly enter a contract that fully explains what will happen, you are not innocent, no matter what anyone told you the contract said. That isn’t how contracts work. If you don’t understand a contract, you don’t sign it. Especially for something as large and important as a home.

You hear a lot of demand for “accountability” from the public, the media and politicians regarding Wall Street, government, the banking industry and so on. But this same public seems pathologically unable to be accountable themselves. We demand responsibility from others, but shown none ourselves. Why would we? We have no end of talking heads telling us we are the innocent victims.

Now, as mentioned, “Main Street” isn’t the sole culprit in this. There are a lot of other forces at work (which samaBlog lucidly explained). The point of this post is not to lay the blame solely at the public’s feet, but rather to act as one of the only places that assigns them any blame at all.

I tend to agree with the sentiment from a bad Michael Crichton movie that started this post, that blame just isn’t particularly useful. But, if you must point fingers, make sure you point them in the right direction.

The knife

March 26th, 2008 — Wordman

The death of an 18-year old girl from voluntary breast surgery explains the timing of this post, but is only tangentially related to its point. In the coming days, there will likely be a huge fuss about plastic surgery in the media, with people screaming on all sides in what passes for debate in that venue. Some, like this article, will make mention of an American Society of Plastic Surgeons report (pdf) claiming that the number of breast augmentations in 2007 increased 64% over the number in 2000. Some will claim this as a sign of the decline of Western Civilization. They may be right, but not in the way that they think.

In the past five years, health insurance providers have gained more and more control over the business of health in the United States. This has made them very profitable, as this comparison of four large, publicly held health insurers—Humana (HUM), CIGNA Corporation (CI), United Health Group Inc. (UNH) and Aetna Inc. (AET)—with the S&P 500 index from 2003 to 2007 shows (for the color blind, the S&P line is the one on the bottom):

Stock comparison
Image and data from Google Finance

In the process, they have essentially gained control of the pricing of nearly every procedure that they cover. They, not the doctor, set how much the doctor charges. I will have more to say about this later but, briefly, the result of this has been to cause a toxic environment with at least two major consequences: 1) in most cases, neither the person consuming health care nor the person providing it have any input or influence on what the care costs (this basically turns the invisible hand into a middle finger) and 2) doctors are now, essentially, indentured servants to insurance companies.

As a direct result of the latter development, doctors in private practice are now forced to make one of three choices: either close their practice down now, continue practicing until forced to close by bankruptcy, or find some way of making money that doesn’t involve dealing with insurance companies. A great many doctors have been choosing the third path by exploiting a loophole of sorts: insurance companies usually don’t cover voluntary surgery. Voluntary surgery, like breast augmentation.

It should, therefore, come as no surprise that plastic surgery is on the rise. There are now huge numbers of doctors motivated to get people to pay for it, so that the doctors themselves can, you know, house themselves and eat. This makes it cheaper, easier to get, and gives plastic surgery the perception that it is now routine (which, sadly, it is becoming). Ever heard of labial plastic surgery, where women have their genital “lips” reduced? You will, as millions of OB/GYNs discover they can’t actually survive by doing things like delivering children into the world.

As I said, I will have more to say on this later. For now, keep in mind when watching all these idiots on television that the rise in plastic surgery has real economic causes.

Perspective

August 9th, 2005 — Wordman

Fluid Cost per US Fluid Ounce
Unleaded gasoline (87 octane, central Long Island) $0.02
Pepsi® (2 liters, on sale) $0.03
Evian® water (1 liter) $0.05
Starbucks® Mint Mocha Chip Frappuccino® (Venti®) $0.18

How to destroy a modern record company

June 13th, 2005 — Wordman

One of the reasons mainstream music has become significantly less interesting in the past decade has been the major label’s embrace of the superstar marketing model. In previous decades, studios expended effort in building “career artists”, bands that would build a fan base who would buy record after record. This has given way to a “pump and dump” strategy, where debut albums are marketed aggressively and milked for a brief period, then the artist is abandoned. Superstar marketing is the pinnacle of this business model, where a single star is massively marketed in every way possible, almost to exclusion of the label’s other acts.

This sells a lot of the superstar’s albums and makes tons of money for the label. For the superstar, there isn’t much evidence that this will lead to strong career. In an analysis of long term successful albums Chris Johnson observes that, in spite of making millions, there is…:

…considerable evidence to suggest that when Britney [Spears] stops being pushed on the market by her record company, sales will fall off a cliff.…There are very few acts post-1990 that can boast platinum certifications more than a year after release.…The promoters will just as happily push Hanson as Bob Dylan, Spice Girls as Aretha Franklin: they are completely agnostic on the quality front.…In effect, the record labels cannot afford to build artist careers anymore. They can only afford to milk the current promotional mechanism.

I think this is fantastic because it suggests a way to hasten the demise of such record companies, which have become relics clinging to outdated methods instead of offering me the products that I want. The strategy to do so lies in the answer to the following question: If, hypothetically, Britney Spears were to vanish in some way (sudden retirement, injury, plane crash, etc.) what would that do to the financials of her label and the company that owns it. If such an event were unexpected, it’s fair to say that Jive Records would need to scramble to survive and would have a fair chance of collapsing. Sony would, unfortunately, fair better, being more diversified, but would take a financial hit as well.

By putting their eggs in one basket, record labels leave themselves open to attacks aimed at destroying the basket that don’t cost very much. All a dedicated group of people would need to is target the major superstars of a label all at once and bring them down with smear campaigns and/or industrial espionage (e.g. stealing and destroying master tracks before they can be published, injecting random signals into a CD production, etc.). Since the media largely no longer check facts, they would be useful accomplices. A clever group could probably do the whole thing without even breaking the law.

Africa’s ruin or salvation

June 2nd, 2005 — Wordman

The Carnegie Institution’s Geophysical Laboratory can now make gem quality diamonds at reasonable speed. This seems like a great thing because it seriously threatens to destroy one of the more repugnant companies on the planet: DeBeers. For decades, DeBeers has enjoyed a monopoly on the world’s diamond market, keeping the price of what is actually a fairly common mineral high by means of controlling its supply. They’ve used this monopoly to fix prices, influence and back brutal governments and indirectly fund violence against civilians. To it’s credit, DeBeers has been strongly lobbying against conflict diamonds recently, though I can’t help suspect this has more to do with further controlling supply than altruism.

Nearly all of the “common knowledge” about diamonds is a direct result of DeBeers marketing. They completely invented the “traditions” of the diamond engagement ring and tenth anniversary band and how much should be spent on each (“two months salary”, unless you live in Japan, where it is three). They are directly responsible for glamour attached to diamonds in film, backing films featuring diamonds and seeding celebrities like Marilyn Monroe with jewels for public occasions, a practice with many imitators today. All of the “common sayings” about diamonds are either DeBeers marketing slogans (“diamonds are forever”) or commissioned songs (“diamonds are a girl’s best friend”). Recently DeBeers has been using feminism to market the right hand diamond ring. (It wouldn’t surprise me if they were also masters of the altered deal.)

Synthetic diamonds are nothing new. Heck, you can even get the carbon released from cremating your body pressed into a gemstone. What is new is the low cost and high speed of production already achieved by Carnegie Institution. Mass produced gem-quality synthetic diamonds could completely undermine the DeBeers monopoly by creating an essentially infinite supply of diamonds that are higher quality than nearly all mined diamonds and completely independent of geography. Further, if the inventors of this process are really interested in using it to usher in the diamond age, they would license it very widely and cheaply. It’s conceivable that anyone with electricity could eventually grow gem-quality diamonds in their home. In this scenario, though, making gems would likely be a small afterthought to more impressive uses of similar technology (like building an elevator to space). Chances are, this won’t happen, at least for a while. Either DeBeers will come to control this new process or those that do control it will reach a “gentlemen’s agreement” with DeBeers limiting production of gems (tactics similar to those they used with GE and the Soviet Union).

Sooner or later, though, technology will reach the point when diamonds and other gems can be manufactured on a scale large enough to destroy conventional mining. The descendants of DeBeers will probably end up owning a big chunk of this industry, so they should (unfortunately) come out OK. The citizens of Africa, on the other hand, are likely to get really, really screwed by this development.

Over half the world’s diamonds are mined in Africa. In the country of Bostwana alone, in the year 2000, diamonds represented 36% of GDP and 82% of exports. Imagine that just vanishing over the space of a couple of years. Add to that the ancillary economy that supports and surrounds all that mining and you get a fairly bleak future, especially since unemployment there is already between 22 and 40% and roughly a quarter of the population is infected with HIV.

More diversified countries like South Africa should fare better, but trouble in African countries tends to spill into its neighbors one way or another.

Should the rapid collapse of the diamond mining industry come to pass, I predict an equally rapid increase in what Africa has proven, over the last fifty years, that it does really well: genocide. Since the rest of the world has indicated that it doesn’t give two shits about what happens in Africa, loss of mining income will lead to battles for control of natural resources coupled with campaigns against nearby helpless ethnicities. While militaries seize oil fields and logging operations, “terrorists” sporting equipment mysteriously identical to the local military will start slaughtering the scapegoats of the day. The tinpot thug who runs the place will vocally decry the “terrorists” but, equally mysteriously, will be unable to stop them. His wife(s) will embezzle several hundred million dollars and relocate to Europe. After the killing has gone on for several years, Kofi Annan will be horrfied and state that something must be done. The UN will ignore him by endlessly debating “sanctions”.

After a long period of this, maybe fifty years or so, people will start realizing that Africa is the only place left on Earth with easily accessible natural resources (timber, oil, various metals, uranium, cheap labor, etc.) The resulting resource rush and potential Renaissance should be something to behold, for the dozen or so Africans still alive to witness it.

Another Empire

January 14th, 2005 — Wordman

America’s detractors have called it “imperialist” for some time. Recently, the American government has embraced this label, invading several countries. While it is doubtful America is really trying to build a classical empire, I think it could actually do so in a way that would avoid some of the problems usually experienced in empire building and actually help the people of the world a little in the process.

Imperial US

America should announce that any government that actively pursues or obviously condones genocide has forfeit its right to rule and will be eliminated, with the nation it presently governs invaded and made part of the American Empire.

Since it appears that defeating foreign armies (particularly from the types of countries likely to practice genocide) is significantly less of a challenge for America compared to “winning the peace”, this strategy should provide a fairly large group of natives (though certainly a minority) who would back their new American overlords, namely the people previously being slaughtered by their own government.

After taking over a few of these countries, the likely furor of neighboring countries make it almost certain that Imperial America would be faced with the necessity of (or at least the pretext for) conquering Lybia. I figure that about half of Africa would be part of the Empire by the end of the decade. And not just the crummy bits either, but some serious mineral wealth. You might think ruling such a place would be a disaster waiting to happen. Of course it would be, but America couldn’t do much worse ruling this part of the world than its done for itself. At the very least, a lot fewer women would be raped and people getting their hands cut off would be the occasional accident instead of an hourly event.

It would also supply America with what it appears to need most: a labor pool that doesn’t mind being paid very little to make Nikes. For many in Africa, making pennies a day beats lining up to get your limbs severed, hands down (as it were).

Another thing going for this policy is that it embodies America’s second founding principle: hypocrisy (freedom being the first founding principle), given that the “let’s get our citizens to destroy their food supply” strategy employed against Native Americans would fit the “obviously condones genocide” requirement.