The Homeless Crisis

 There has been a lot of talk about homelessness in the past few years.  It's a problem.  There's no doubt about that.  Where the conflict comes in is when people start talking solutions.  At one end of the spectrum are the "ride them all out of town on a rail" people.  At the other end of the spectrum are the "Governments should spend tons of money on either new construction or housing subsidies for the poor" people.

The former strategy has been employed with modest success in the past.  It drove numbers down, at least temporarily, and only in some places.  What it mostly did was move the problem around without actually eliminating it.  The later strategy has also been moderately successful in the past.  It too drove the numbers down. at least in some places.  And it had the virtue of not moving the problem around.  But it too did not eliminate the problem.

These two strategies are only two examples of the many strategies that have been tried in the past.  That means that we can look to history for guidance as to the likelihood of success of any strategy we might now consider.  And that means, as anyone who has read my previous work knows, it's time for a dive into history.

For my historical dive I am going to stick with Seattle's history on the subject.  The historical experience of every city and every region is distinct.  Seattle, for instance, featured a large "Hooverville" encampment during the Great Depression.  The homeless congregated in large numbers on then undeveloped land.

Hooverville was the historical equivalent of the "Tent Cities" we now see, but on a much larger scale.  Back then the homeless built shacks out of tarpaper and scrap lumber rather than scrounging up cheap tents.  And they congregated in one place.  But the idea was the same.

Not every city had a Hooverville, but many did.  It was one of many common patterns that have emerged and reemerged over the years in response to the periodic bouts of homelessness the country has suffered through.

Seattle's experience with homelessness has some unique components.  But there is enough commonality of experience to permit Seattle to stand in for all those other places without loosing anything essential.  And away we go.

And I am going to start with a simple question?  Seattle didn't always have a homeless problem, did it?  And the answer is NO.  Seattle didn't always have a homeless problem.  That's why history, which is almost always helpful, is even more helpful than usual. We can see how things were when there wasn't a problem.  Then we can see what changed to cause the problem, and to make it go away.

And we know there is a solution:  go back to the way things were when homelessness was at most a minor concern.  So, let's start with the way things were during some of those periods.  Early in Seattle's history it had something called "Skid Road".  Over time this phrase morphed into the now widely used term "Skid Row".  A skid row is a neighborhood full of cheap, crappy housing.  As a result, poor people live there.  They do so because that's the only place they can afford to live.

Skid Road came about because of Seattle's early connection to the timber industry.  '49ers flooding into San Francisco and surrounding areas in search of gold set off a local construction boom.  The completion of the first transcontinental railroad a decade or so later caused the San Francisco metropolitan area to continue to flourish for more decades.  That extended the construction boom.  Both events also cemented San Francisco's position as the financial capital of the west coast until well into the twentieth century.

But for our purposes what's important is that the wood used to build all of those buildings in the then booming metro San Francisco area had to come from somewhere.  And a major source for that wood was the Puget Sound region.  The headquarters of the regional timber industry was Port Townsend, now a sleepy tourist destination, but then a very big deal.  But Seattle, in the form of the Yesler Sawmill, got in on the action.

The big industry in Seattle in the early years was cutting down trees, milling them into lumber, then putting them onto ships bound for San Francisco.  Seattle had, and still has, steep hills.  Back then the hills were covered with trees.  If Seattle was to grow into a metropolis the trees had to go.  Luckily, trees were valuable due to the San Francisco construction boom.  This allowed the timber industry to power a lot of Seattle's early growth.

But it is harder than one would think to get the trees down Seattle's steep hills and into the mill.  So, something called a "log flume" was constructed.  Instead of water, the thing a flume normally moves, Seattle's flume moved logs.  And it was, in essence, a giant slide.  The process of cutting down the trees, turning them into logs, putting the logs into the top of the flume, letting them slide down into the water at the bottom, then floating them to the sawmill, was called "skidding".

And after all the trees had been cut down the flume no longer had a purpose, other than being an eyesore and being in the way, that is.  So, it was then taken apart and the timber it had been constructed from was fed into the sawmill.  What was left was a road.  But before that Skid Road was a neighborhood.  It was an undesirable neighborhood.  No one wants heavy logs flying by their house.  And, of course, there was always a chance that a log would pop out of the flume and crash into someone's house.

Given all that, it is no surprise that the only people who lived in that particular neighborhood were poor people who had no better option.  So, the association between a Skid Row neighborhood and poor people dates back to the origin of the term.   And the term originated in Seattle and nowhere else.

Back in those early days there were no zoning laws.  If someone wanted to build a log flume in the middle of town there was no law against it.  In fact, it was encouraged.  After all, it would bring money into the local economy.  Similarly, if someone wanted to throw up crappy housing that only poor people could be induced to live in, there was no law against that either.  That's how things worked back in the day.

People always had a place to live.  It was substandard, dangerous, and often uncomfortable, but it was.  It put a roof over the head of almost everybody.  When it came to housing poor people, and thus keeping them off the street, all that was necessary was to have Skid Row type neighborhoods in your city.  Poor people found hanging out in the more desirable parts of the city could be herded into the less desirable parts.

And it worked.  Cities were cut up into neighborhoods.  The poor people lived in the slums, i.e. the Skid Row parts of town.  Rich and powerful people lived in the fancy parts of town.  There were usually gradations in between.  Some parts of the city were closer in nature to the slums.  But they were a step up from the worst slums.  Some parts were quite nice, just not quite as nice as the nicest parts of town.

Eventually, this got formalized in the form of zoning laws.  City Governments started putting rules in place to designate the boundaries of the various neighborhoods.  And they started mandating construction standards.  These varied from pretty much anything goes in the slums to allowing only high quality construction in the fancy parts of town.

Codes for the fancy parts of town might mandate minimum square footage, both of the house and of the lot, forbid activities like multifamily dwellings, manufacturing, retail, warehousing, and the like.  Other neighborhoods permitted all of the activities prohibited in the fancy parts of town, and were silent on things like minimum square footage and the like.

These zoning laws worked.  There was a place for everybody and everybody knew their place.  One modern twist on this idea was called Redlining.  Supposedly, lines on a map were used to delineate the boundaries of the various neighborhoods.  Red lines were used to delineate the boundaries of the neighborhoods set up for the undesirable groups, Asians or Blacks, for instance.  They weren't allowed to cross the "red line" and move into the rest of the city.

Seattle, had a Chinatown, for a long time the only place where people of Chinese extraction were allowed to live.  It was eventually joined by Japantown (Japanese), Little Saigon (Vietnamese), and others.  Each maligned group got its own ghetto.

The term "ghetto" was coined in Europe.  It referred specifically to the neighborhood Jews were confined to.  But the usage of the term was eventually broadened by Americans.  In the U.S. it was most commonly used in association with the neighborhood were Black people were forced to live.  In Seattle, the Black neighborhood was called the "Central District".

One feature of ghettos of all kinds is that housing prices are lower there.  One popular excuse for creating and maintaining ghettos is that "those people drive housing prices down".  The point of ghettos was to discriminate against the people who were forced to live there.  That made living in or near a ghetto unpopular.  And popularity is really what determines the desirability of a particular location.

There is only a modest correlation between the actual desirability of a location and its price relative to land in other locations.  There are intrinsic factors that go into how desirable a specific location is.  They are things like convenience, the view, amenities like being on the waterfront, and so on.  But a study of these intrinsic factors only gets you so far when it comes to predicting a piece of property's market value.

Subjective factors also figure into the calculation.  If we study actual land values for a typical U.S. city in the 1950s, a city like Seattle, then we can subtract the intrinsic factors to determine the how much subjective considerations affect a property's value.  It turns out that subjective factors are very important.  Land in a "rich" neighborhood was highly overvalued while land located in a ghetto was highly undervalued.  Zoning had a large influence on land values.  But that, after all, was the point.

Since then, a number of forces eventually substantially diminished the ability of zoning to distort land values.  Two big ones were suburbanization and civil rights.  Suburbanization had two effects.  First, a lot of middle class and rich people moved to the suburbs.  That siphoned off a lot of the people occupying the top financial tiers.  This made it harder to maintain inflated land values in pricier neighborhoods.

In Seattle's case the metropolitan population was growing just enough to exactly offset suburban flight.  As a result, migration to the suburbs did not cause Seattle's population to decline.  On the other hand, it didn't grow either.  Instead, it remained essentially unchanged for several decades.  That meant that enough rich and middle class people continued to live in the city to keep prices stable, or increasing slowly, in rich and middle class neighborhoods.

To this day there are lots of neighborhoods in Seattle that are filled with nice houses occupied by middle class people.  These kinds of neighborhoods provide more than half the housing currently available in Seattle.  And these neighborhoods have seen little change.  Change has been confined to the poorer neighborhoods.

The other impact of suburbanization eventually had an equally large effect.  Seattle got hemmed in.  The last time Seattle expanded its borders was in the '60s.  That meant that Seattle couldn't implement the "sprawl" strategy used by cities like Huston and Phoenix.  Given a choice, people preferred to live in detached single family homes.

But there was just no place inside Seattle's city limits to build more.  So, Seattle built high density housing, apartments and condos.  This should have caused the population to increase.  But there was a countervailing trend.  The number of people living in the typical house declined.  In Seattle's case, these two opposing trends balanced out.  It wasn't until the '90s that the high density trend got the upper hand and Seattle's population started growing again.

Initially, suburban living was very desirable.  Cheap land allowed suburban developments to be reasonably priced.  Huston, Phoenix, and other similarly situated cities, were able to grow by annexing more and more land, which they filled with suburban sprawl.  But that sprawl eventually meant that new suburbs kept getting farther and farther away.  And that has caused the commute to anywhere interesting to get longer and longer.  So these new outer suburbs have gotten less attractive over time.  As a result, they now attract poorer and poorer people.

What civil rights did, starting in the  '60s, was to make discriminatory zoning practices like redlining illegal.  Initially, these anti-discrimination laws were honored in the breach.  But over time enforcement slowly ramped up.  Eventually, this made it harder and harder to use zoning to enforce the rigid boundaries that used to characterize neighborhoods.  The eventual result was gentrification.

People started viewing neighborhoods not by who traditionally lived in them but by the intrinsic factors they provided.   Previously undesirable neighborhoods started becoming sought after.  Take, for example, Seattle's aptly named Central District.  As the name implies, it is centrally located.  That is a very desirable feature.

Gradually, many of the Blacks that had traditionally lived there were pushed out by white people with more money.  And besides being able to pay more in the first place than many Blacks could afford, they had the money to fix up the housing they found there.  Early adopters took advantage of what had been undesirable, and therefore cheap, to snap up properties that they otherwise couldn't have afforded.  These properties eventually became desirable, and therefore valuable.

Over a period lasting more than thirty years all of the less expansive parts of Seattle have gotten gentrified.  And what that meant was that all of the cheap housing got replaced by expensive housing.  Contemporary Seattle no longer has a Skid Row.  And that means that there is no place in Seattle for the poorest people to live.  Seattle used to have a bunch of SRO (Single Resident Occupancy) hotels.  These were essentially flop houses where even very poor men could afford to live.  They are now all gone.

Seattle is an extreme case.  But the general trend is universal.  Not every city has lost all of its "flop house" quality housing the way Seattle has.  But pretty much every city has far less of it now than it had fifty years ago.  And pretty much every city has lost a lot of the housing that people occupying the bottom few rungs of the economic ladder could afford.

Seattle used to be an easy place for a person making the minimum wage, or perhaps a little above it, to find housing that was both affordable and decent.  That kind of housing is now effectively nonexistent.  Again, the near universal trend is for people in those income brackets to find it very hard to find a place they can afford to live in, even if they live in a place that is thousands of miles away from Seattle.

That has put a lot of people into a severe squeeze when it comes to finding housing they can afford.  Then there are drugs and mental health.  We are more than fifty years into the War on Drugs.  It has been a failure all along the way.  But one side effect is that people who end up with serious drug problems too often find that they have little access to effective treatments.  As a result, a lot of them end up on the street.

People having mental health problems also have trouble getting effective treatment.  Their illness causes them to have poor judgement.  And that leads to the kinds of actions that lead to them also finding themselves out on the street.

Finally, there are the otherwise squared away people who for one reason or another have hit a serious financial problem.  That is often enough to put them out on the street.  The street has become the dumping ground for all the problems that society does not want to deal with.

Tents are cheap.  Sleeping bags are cheap.  Grocery carts are cheap.  Derelict cars and motor homes are cheap.  The result is a lot of people living on the street, in a tent tucked back somewhere, or living in a junker vehicle.  Things have gotten out of hand.

There are several problems here that need to be fixed.  We tried dealing with drugs by locking lots of people up.  What we ended up with was a fantastically expensive prison industry and no relief on the drug front.  We used to have mental hospitals.  But we got rid of them and decided that "community based" treatment was the way to go.  That too has been a failure.

If we give the squared away people a helping hand they will take it and soon be off the streets.  But the number of helping hands are far fewer than the number of people who could use the help.  At the other end of the spectrum are the people who have become comfortable living on the street.  They steadfastly refuse all offers of help.  I have no interest in making their lives easier.  In fact, I am okay with some of the yesteryear tactics that were designed to get them to go elsewhere.

I am firmly of the opinion that throwing money at this particular problem is a mistake.  Government, no matter what level you want to talk about, doesn't have enough of it.  Nor am I convinced that an infinite amount of money, should it become available, would be effective.  Even if a lot of money was available, this is the kind of problem where the need will always expand by the amount necessary to consume however much resource is thrown at it.

But the problem is not insolvable.  It didn't used to exist.  It can be made that way again.  History tells us that the proper approach is a legal/regulatory one.  Before discussing the main change, let me address some changes in the law that would not solve the problem, but they would help.  Current law make sit almost impossible to deal with junker vehicles and the people living in them.

The law should be changed so that it is illegal to park a vehicle on a public street that is not "street legal".  All vehicles parked on city streets would have to conform to all safety standards and the like; and they should be required to have current "tabs".  This would get the worst of the junker vehicles off of public streets.  If people want to allow people to live in junker vehicles parked on their private property, okay.  But not on public streets.

It should also be illegal for someone to pitch a tent on a sidewalk, in a public park, etc.  Again, if people want to allow other people to pitch tents on their private property, that's another thing.  Will these changes make it harder for homeless people to find a place to lay their head?  Yes.  But it will also free up a lot of resources that are currently playing whack-a-mole.  That's not enough to fix the problem.  But it is a start.

Then there's the big one, zoning.  Zoning is the most powerful tool in the government toolbox.  Lots of zoning changes have been made over the last few decades that have increased the minimum standards for major remodels or new construction.  This has made it illegal to construct slum housing.  A tight housing market has made it a good idea for owners to upgrade cheap housing to the point where it is no longer cheap.  What has been done can be undone.

But there is no political will to do this.  And for a very good reason, NIMBY.  I own my house.  It has increased tremendously in value since I bought it.  I like that.  And a significant contributing factor to its increase in value has been tight zoning.

Tight zoning floats all boats.  Even if you don't fix your house up the fact that the housing market is tight means that prices have been going up and up and up.  It has also made deciding to fix up your house (and maybe flip it) into a no brainer for anyone owning a house at the low end of the market.  (Flipping houses has now been a thing since This Old House went on  the air in 1979.)  All of this has had a positive impact on my net worth and the net worth of the pretty much every other home owner in Seattle.

The single largest class of housing in Seattle is single family residences.  All those people have a vested interest in keeping prices increasing at a good clip.  They are the silent majority in this discussion.  They don't say much, but politicians hear them anyhow.  These voters want the homeless problem fixed.  But they want it fixed in a way that doesn't interfere with the steady rise in the value of their house.

That kind of thinking blocks the best way to fix the homeless problem.  If cheap, slum-quality housing was readily available then lots of people would move off the street.  If developers can make a profit building cheap slum-quality housing, they will build it.

But nobody (meaning all the people who own single family homes in Seattle, and many of the ones who live in multi-family units) wants a bunch of slum-quality housing being built in Seattle.  And the resistance is especially fierce to building such housing nearby.  Not.  In.  My.  Back.  Yard.

Most slum-quality housing comes about as a side effect of the real estate cycle.  Prices go up and builders build.  They keep building and building as long as demand is strong.  Then something happens.  Demand dries up.  But construction involves long lead times.  They can't just stop on a dime.

When the market turns by the time all the projects that were in the pipeline complete a substantial housing surplus has built up.  This causes the value of some properties to drop by a lot.  This drop puts downward pressure on the entire housing market.  In a declining market often the only way landlords can keep their financial heads above water is to turn some of their property into slum-quality housing.

In this scenario nobody has any real say in the matter.  Market pressures overwhelm people's normal inclinations.  So, the fact that some people (those still hanging on who live near the newly created slum-quality housing) object vigorously to what is happening doesn't matter.  They don't have the leverage necessary to stop it from happening.  So, it happens.  The market now has slum-quality housing and poor people have some place to get off of the street and out of the weather.

Historically, this is what has happened in Seattle.  The Roaring Twenties turned into the Great Depression.  That produced a lot of cheap housing.  Besides the creation of Hooverville, a significant number of large houses that had been occupied by a singe family got turned into boarding houses.  The landlady maintained some public spaces in common, living room, dining room, etc.  Tenants got a room of their own.  But that was it.  They shared a bathroom down the hall and did all their entertaining in the shared public areas.

There are no rooming houses in contemporary Seattle.  Nor are there any apartments where tenants share a bathroom.  And nobody now lives an a unit where their bed swings down from behind a door in the wall (a "Murphy" bed).  Most people would find these kinds of accommodations appalling.  Not surprisingly, current zoning laws make these types of units illegal.  But they are how we used to have cheap housing.

The closest we come in the modern era is the Tiny House.  These feature a minimum of amenities and very little in the way of square footage.  Tiny Houses initially violated all kinds of Seattle's zoning laws.  I think a loophole has since been introduced that makes them legal, but I'm not completely sure about that.  And, of course, nobody wants Tiny Houses in their neighborhood.  And heaven forbid that anyone would propose the apartment equivalent of Tiny Houses.

So we continue to go in circles.  The thing that would actually work gets vetoed.  And, as I pointed out above, it gets vetoed for good reason.  It is also important to note that people who buy newspapers or who watch the local news on TV are the people doing the vetoing.

And it is bad business to alienate the people your business depends on.  So, the people who write for the newspaper, or report the news on local TV, go out of their way to avoid pointing out the obvious.  But I don't own a newspaper or TV station.  So, there it is.

Not surprisingly, I don't expect anything to change any time soon.  Lots of whining.  No effective action.  Before leaving the subject, let me make a couple of additional observations about what does not work.  The first one is rent control.  New York City is the poster child for rent control gone badly awry.

NYC has a lot of apartments, and has had them for a long time.  Not surprisingly, landlords sometimes get up to mischief.  About a century ago NYC put in some laws that were supposed to reign in this mischief.  But times changed and markets evolved.  NYC kept updating and updating their rent control laws in an attempt to stay ahead of the situation.

In spite of cycle after cycle of updates the regulations could never keep up.  Eventually, the rent control rules were so byzantine that nobody could understand them.  Support for rent control in its then current state slowly collapsed.  That led to successful efforts to roll back and simplify rent control regulations.  NYC still has rent control.  But the current system is a shadow of its former self.

The point is that in the long run it didn't work.  It got so bad at one point that NYC had more slum-quality housing than any other type.  At that point nobody was happy.  Rent control is one of those things that sounds like a good idea.  And it can work pretty well for short periods of time.  But in the end it doesn't deliver the desired result, enough low cost housing to satisfy demand.

What does deliver large quantities of low cost housing is zoning.  With proper zoning laws the market can deliver housing in quantities sufficient to make a difference.  Builders will build if they can do so profitably.  But right now they can't build cheap housing profitably.  That is unlikely to change any time soon for the reasons listed above.  But it needs to be said.  Rent control discourages construction.  Over time, it makes things worse.

Another idea that keeps getting proposed is to severely restrict the ability of landlords to evict tenants.  This idea comes from a good place.  Lots of landlords have engaged in discriminatory practices of one kind or another in lots of places and at lots of times.  Restricting the rights of landlords to evict tenants seems like a good way to fix this problem.

It too is another problem that can work well in the short run.  Seattle had an eviction moratorium during COVID.  As a short term measure it kept people housed in a time of severe economic distress for many.  But to see how things play out over the long term when a landlord's ability to evict is severely constrained we need to look no farther than Cabrini Green.

Cabrini Green was a large public housing development that was built in Chicago.  Its goal was to humanely house poor people at a price they could afford.  It was part of a federal program that reached its peak in the '60s.  And in the early years Cabrini Green was a big success.  It consisted of a series of large apartments that provided decent housing at subsidized prices.  A lot of God fearing and law abiding families moved in and were initially happy.

But it soon became almost impossible to evict anyone from Cabrini Green.  The ostensible reason was to avoid discrimination as most of the tenants were Black.  But over time an unintended consequence surfaced.  In a population as large as the one at Cabrini Green there were bound to be a number of bad apples.

They formed gangs and things soon got out of control.  That led to a situation where nobody was safe.  And it became impossible to deal with vandalism.  Later, drug use, drug dealing, and shootings became rampant.  Eventually Cabrini Green became one of several projects that gave public housing a bad name.  It was eventually torn down.  By that time it had degenerated into a lawless slum.

Appropriate eviction regulations are not something where a black-and-white solution is possible.  Landlords need to be able to kick bad apples out.  Discrimination needs to be controlled.  There is no simple solution that delivers both objectives simultaneously.  Only a nuanced approach can do that.

People like bright-line laws and regulations.  This is where some behaviors are always permitted and other behaviors are always prohibited.  But that kind of approach has been tried many times and has failed every time.

We need to allow the enforcers to exercise a degree of discretion.  Then we need to monitor the enforcers to make sure they are using that discretion wisely.  That's not something that we as a society are good at.

If we continue to avoid doing what works when it comes to homelessness, remember that there is another way to fix the problem.  We can just have another Great Depression.  Maybe continuing to bump along ineffectually is not such a bad idea after all.

Bonds, Banks, and the Fed

A bank nobody had heard of called Silicon Valley Bank (SVB) crashed recently.  Since then, all hell has been breaking loose.  If you look in the right nooks and crannies of the press the story is actually being covered reasonably well.  But the usual oversimplifications and lack of appropriate context and background dominate the coverage provided by the media that most people actually follow.  This gives me the opportunity to fill in some blanks and provide some the appropriate context and background.

Starting at the beginning, stocks are supposed to be risky, and bonds are supposed to be safe.  The logic is simple.  Many organs of the press report where the Dow's closes at the end of each day.  That number has been bouncing all over the place.  One day it's up.  The next day it's down.  The volatility of the Dow, and other indexes like the S&P 500 and the NASDAQ, reinforces the idea that it is easy to both make and lose money when investing in stocks.

Bonds, on the other hand are supposed to be safe as houses.  You know what you're getting from the get-go, and you almost never lose money on the deal.  Instead, you almost always get what you were promised when you signed up.  And, in fact bonds rarely default (fail to pay investors what was promised on time and in full).  But it is still possible to lose money on bonds even if they don't default.  To understand why it is necessary to dive into how bonds work.

Bonds are characterized by an amount (often called the "face value" or the "denomination"), a "term" or duration, and an interest rate.  So, for the purposes of explanation, let's talk about a $10,000 bond (the amount), whose duration is 10 years, and that has an interest rate of 1%.  These numbers have been picked to make the math simple, but bonds of this exact type have actually been issued in the recent past.

The way things are supposed to go is that an investor hands over $10,000 in exchange for the bond.  Some bonds pay interest quarterly.  Some pay semiannually.  Either way, our investor receives $100 (1% of $10,000) in the first year, another $100 in the second year, and so on.  At the end of the tenth year the $10,000 is returned.  In all, the investor puts in $10,000 and gets back $11,000.

And, as I said, bonds rarely default.  Even "Junk" bonds, bonds issued by institutions who have problems of one kind or another, usually pay off.  So, what could possibly go wrong?  It turns out that if the investor holds the bond to maturity, 10 years in our example, usually nothing.  The interest gets paid on time and in full.  The investor gets his initial investment back, on time and in full.

But what happens if events similar to what has happened in the past several months happen?  It turns out that the "Fed", the Federal Reserve Bank of the United States, jacked up interest rates.  I am going to skip the details of how the Fed manipulates interest rates because it's complicated.  Just trust me, it can, and it does.

The Fed has twin responsibilities.  It is supposed to manipulate things so that inflation stays low, and the economy grows steadily at a relatively even rate.  The standard tool for doing this is to manipulate interest rates.

If the Fed moves interest rates lower, it is supposed to make it easier for businesses to grow and expand.  That lowers unemployment and increases economic growth, perhaps increasing inflation.  If it moves interest rates higher, then that is supposed to decrease business activity with the likely side effect that unemployment goes up, hopefully decreasing inflation.

There is a lot wrong with this simplistic scenario.  If you troll through my past blog posts, you will see me diving into all this in more detail and pointing out how poorly this works.  Nevertheless, this is the standard tool the Fed has traditionally used.  And, for various reasons, which I am again going to skip, the Fed has been goosing the economy by keeping interest rates near zero for most of the last decade.

But supply chain problems and other issues that coincided with the end of the critical phase of the COVID epidemic led to a consensus that the economy had gotten overheated.  This resulted in rampant inflation.  Unemployment was extremely low, so it would there would be little or no harm if it went up a bit.  This was the analysis pushed by the business community.  There was, however, little dissent from this view coming from other sectors.  Not surprisingly, the Fed adopted this view and started raising rates very rapidly.

Typically, the Fed meets once per month to decide whether or not an interest rate adjustment is warranted.  Most months they decide to do nothing.  But for several months in a row the Fed decided to raise interest rates by 75 basis points.  A basis point is 1/100th of a percent, so that amounts to three quarters of a percent change.  That's a big change.  To increase the interest rate by a large amount month after month is unprecedented.

Large increases in the interest rate coming month after month was supposed to quickly cool the economy off.  A cool economy was supposed to decrease inflation to the Fed's target of 2%.  Increasing interest rates quickly and dramatically was supposed to slam the brakes on spending by both businesses and consumers.  That, in turn was supposed to drive inflation down.

But there was little change in spending behavior even after several months of drastic action.  As a result, inflation, while declining, stayed high.  So, the Fed kept jacking rates up.  Recently, some signs of a slowdown finally started appearing, so the Fed only increased rates by 25 basis points the last time around.

But the consensus among Fed watchers was that the Fed was going to continue with its "higher, ever higher" strategy.  The only item that lacked consensus was how fast the Fed would raise rates.  Would it go back to 75 basis points per month, or would it stick with a slower rate of 25 basis points per month.  So, what's all this got to do with SVB?  Interesting question.

It has to do with how you can lose money on bonds that don't default.  Let's say that one year into the life of our 10-year bond we decide to sell it.  Well, if interest rates are still at about 1% then the sale price will be $10,000, more or less.  No harm.  No foul.  But what happens if instead in the interim the Fed has jacked rates up by a lot, and done it very quickly?  Which, by the way, is exactly what they have done recently.

Then why should someone buy our bond for $10,000 more or less?  It only pays a paltry 1% and they can buy a new 10-year bond that pays 4%.  Instead of getting $100 per year in interest payments they can get $400.  In those circumstances they wouldn't touch our bond with a ten-foot pole.

But what if we were to "discount" our bond, say by asking only $8,000 for it?  That way they would eventually pick up an extra $2,000 when the bond got redeemed for the full $10,000 amount.  $8,000 might not be the right price.  But there is a price that would attract a buyer.

The business of figuring out exactly what that price would be is complicated.  Fortunately, there is a "secondary" market in bonds.  You can just look there to find out how much a particular bond needs to be discounted to in order to sell.  The secondary market provides a "current market price" for our bond.

SVB did not get into trouble by selling a bunch of bonds and taking a bath on them.  The situation was slightly more complicated.

As a result of the crash of 2008 a lot of institutions were required to periodically "mark to market" all of their assets.  This stopped them from carrying "Zombie" assets on their books.  These were assets that used to be worth a lot but were now worth far less.  Zombie assets could make everything look fine when, in fact, it was not.

I don't know whether SVB was required to mark their assets to market, but investors and large customers became aware that SVB had a bunch of problematic assets on their books.  They forced SVB to mark them to market and report a big loss.

At this point we don't have a problem.  SVB could spread the actual losses over a period of years by not selling the bonds right away.  So the problem could have been managed.  They also did what they were supposed to do in a situation like this.  They immediately set out to increase their capitol.

But when it comes to finance, it often resembles a game of musical chairs.  In this case the loser of the game would end up having to eat the losses.  So, a bunch of investors on a group chat decided it wasn't going to be them.  It was going to be someone else.  They all decided to immediately pull their money out of SVB.  That way none of them would be stuck with the check.

Banking and finance are now just files on computers.  A "bond" used to be a piece of paper that someone kept in their safe.  Now it is information in a computer file.  So are account balances.  And now it only takes a matter of seconds to move money around.  The time it takes is not affected by whether the amount is question is $1 thousand, $1 million, or $1 billion.  The money moves equally fast in every instance.

A bunch of depositors pulling a few thousand apiece out of SVB wouldn't have made any difference.  But a bunch of investors pulling out millions and billions made the difference between solvency and insolvency.  SVB went from "just fine" to "dead man walking" in less than 48 hours.  And SVB had another problem.

SVB specialized in funding for Venture Capitalists (VCs) and for other high-risk sectors of the tech industry.  Tech has been hit hard in the last few months.  It turns out that the economy was under enough pressure that they stopped seeing the growth rates that investors and VCs expected.  Stock prices of even solid, well-established tech companies have declined substantially in the last six months.

In far too many cases, the companies SCB was investing in were not big and well-established.  They were start-ups.  As a result, they were likely hit even harder than the big, well-established firms.  So, it was likely that the non-bond part of SVB's portfolio was also in a lot of trouble.

There is currently no hard evidence of this.  But the fact that the FDIC, the part of the government responsible for cleaning up the mess that the failure of SVB left in its wake, has not been able to sell SVB off, either as a whole or in pieces, is a good indication of problems here too.

An over-reliance on a single market segment, or a number of closely related market segments, has been a red flag for forever.  SVB should have not been allowed to do that.  But the public does not care about the minutia of bank regulation while bankers and Wall Street does.  So, regulators were pressured to look the other way.  And they were not allowed to put regulations in place to outlaw this sort of behavior.

In that sense, SVB was unique, or nearly so.  But as soon as SVB went under people started looking for other similarly situated banks.  Signature Bank immediately went to the top of that particular list.  It was over-invested in Cryptocurrency, another high-risk market segment.  And it didn't take long for it too to go down.

When things are going well, high-risk market segments can create high profits.  But when pressure is applied, they tend to go down farther and faster than more boring market segments do.  It should come as no surprise to learn that both SVB and Signature Bank were Wall Street darlings.

Thank goodness, an over-concentration on high-risk market segments is not as common in the banking business as it once was.  But the problems with their bond portfolio that SVB had is much more common.  That's because of how banks actually work.

When you put money into a bank the bank doesn't sock it away in a vault.  Instead, it loans it out to other people.  The interest on their loan portfolio is how banks cover operating costs and the cost of whatever interest they pay on CDs, for instance.  It is also how they generate a profit for their shareholders.  This sounds risky, but if done properly it usually isn't.

Banks are aggregators.  As part of how they do business they mix your money in with everybody else's.  If on a given day more money comes in as deposits than goes out as withdrawals, loans, etc., then everything is fine.  There is more than enough money to go around.  However, if more goes out than comes in, this is a potential problem.  But if the net is small, and over time it gets balanced out by more money coming in on other days, then it is an easily managed problem.

As a safety measure, banks are required to set a certain percentage of deposits aside as a "reserve".  Is this money stacks of bills in a vault?  Again, no.  They are, however, required to invest this reserve money in "safe" securities.  The regulators determine what securities qualify as safe.  But they always include U.S. Treasury bonds in the list of securities that qualify.  So, banks own a bunch of them as part of their reserve requirement.  Well, guess what.  These are the very bonds the Fed was jacking the rates up on.

So, it's not just SVB that was subject to this problem.  And it's not just around SVB that musical chairs got played.  The collapse of SVB caused people in the know to look at banks near and far.  They soon zeroed in a bank called First Republic Bank.  It's another of those banks that I had previously never heard of.  But the jackals started circling within a day or so of the collapse of SVB.

First Republic is still in trouble.  But apparently it wasn't in as bad a shape as SVB, because the Feds swooped in and started propping it up rather than shutting it down.  As of this writing First Republic is still in business.  If the pressure lightens up it will survive.  If the pressure intensifies, it likely won't.  The irony is that in a normal environment it would have sailed along nicely, and people like me would still have never heard of it.

And it's now not just U.S. banks.  A giant Swiss bank called Credit Suisse was soon in trouble.  They were old enough and big enough that their name was familiar to me from long before the present crisis.  But first a digression because the story of Swiss banks is an interesting one.  And it turns out to be relevant.

Up until the '30s they were the kinds of banks you would expect to find in a country the size of Switzerland.  But Swiss banks smartly leveraged Swiss neutrality laws to their advantage in the run-up to Word War II.  They took in deposits from people being persecuted like the Jews.  They also were happy to deal with the persecutors.

As more and more countries cut ties with the Nazis, Germany started doing business through Swiss banks.  Swiss banks grew enormously during this period.  In the aftermath of World War II lots of money was stranded in Swiss banks because its owners, Nazis, Jews, and others, were no longer around to collect it.

Swiss banks quickly moved on to playing the same "collect money from both sides" game during the Cold War.  Only the players changed.  As opportunities there eventually diminished with the end of the cold war, they shifted to doing business with drug lords, authoritarian dictators, and the like.

But all good things eventually come to an end.  In the last ten or twenty years the Swiss have been forced to open up their banking system to outside scrutiny.  And other countries like Panama have also gotten into the business of hiding and laundering money, so the Swiss lost their near monopoly.

This has diminished the advantage of Swiss bankers.  But by now they were hooked on the power and prestige of being major players.  They have since resorted to getting into the business of playing the Wall Street game where they get involved in risky ventures in order to juice their balance sheet.  When the game of musical chairs went international, a development that only took a few days, Credit Swisse was the fattest target.

The Swiss government brokered a deal where Union Bank of Switzerland (UBS), the other Swiss behemoth bank, took them over.  The Swiss government was so concerned that they didn't let a little thing like the law get in the way.  They simply changed the law that made such mergers illegal overnight to permit this particular merger to go through.  UBS has its own problems.  But the Swiss government decided that putting all the problems into one basket made them easier to manage.

Is the banking system now back in good order?  It's too soon to tell.  If we can go a couple of weeks without anything else popping up, then we are likely out of the woods.  But if another big bank starts making headlines for being in trouble, or if First Republic goes under, or if the Swiss merger goes south, then we are in for more trouble.

There is a lot more I could get into.  How we got into this mess.  What should be done to fix it.  What will be done to fix it.  But I am going to confine myself to one additional subject.

There is talk of raising the limit on how much of an account balance the FDIC insures.  The current limit is $250,000.  Almost all of the money on deposit at SVB was uninsured because it was in an account that had far more than $250,000 in it.  Most banks have a far lower percentage of their total deposits that are outside of the insurance umbrella in this way.

Theoretically, the FDIC could have left the owners of those accounts hanging out to dry.  The law permitted the FDIC to say, "here's your $250,000 - sorry about the rest".  The whole reason there was a run on SVB was because a bunch of big depositors did not want to take a haircut.  And who can blame them?

With that in mind, it looks like it would make sense to increase the amount.  An argument against increasing the limit to infinity as some are proposing goes under the rubric of "moral hazard".

Let's stay that all deposits are insured.  Then what's to stop someone from putting their money into a bank that they know has problems?  The incentivizing of bad behavior like this leads to a moral hazard.  Or so the argument goes.  But the "how high should the insurance limit be" ship sailed a long time ago.

At this point I would not characterize our current banking crisis as a big one.  Compared to the size of the economy (trillions) even a few billion is small beer.  But in the last few decades we have had two banking crises that do qualify as big banking crises.  There is the one that people still remember, the crash of 2008, and the one they don't.

The one that everyone now conveniently forgets about is the Savings and Loan Crisis of the late '80s and early '90s.  It turns out that there are lots of different types of "banks".  The easiest way to organize them is by looking at who regulates them.

What most people think of as a "bank" is actually a "commercial" bank.  They often have the phrase "National Bank" in their name.  These operate under a "charter" issued by the Federal Government.  They are regulated by Federal agencies and insured by the FDIC.  As a group they are the most heavily regulated and have the strictest operating requirements.

But then there are the state-chartered banks.  These used to be regulated and insured by the state equivalent of the Feds and the FDIC.  I don't know if that is still true.  SVB was a state-chartered bank, but the Feds, including the FDIC, have been all over them.

Then there are Savings and Loans (S&Ls).  Back in the day they couldn't make loans to businesses and couldn't offer checking accounts.  The biggest "bank" failure in the U.S. is Washington Mutual.  Technically, it was a "mutual saving bank", but it was regulated by the same people that regulated S&Ls.

The original idea was that S&Ls couldn't cause much trouble, so regulation was much lighter on them.  And at one time that was true.  But in one of the waves of deregulation that swept the U.S. they were deregulated to the point that they could offer checking accounts and make a much wider variety of loans.

What could possibly go wrong?  Lots.  S&Ls started doing all kinds of things.  Besides doing stupid things some were run by outright crooks.  The whole thing came crashing down during a ten-year period running from roughly 1986 to 1996.  S&Ls went under by the scores and the Federal Government ended up picking up the pieces.

Some laws were changed but S&Ls were not forced to confirm to the rules national banks had to operate under.  Standards and regulations remained much looser.  And throughout the S&L Crisis almost all cases depositors were made whole even if they had far more than the amount on deposit that was covered by insurance.  At this point it became de facto policy to cover all deposits no matter the amount.

The demise of Washington Mutual (or WaMu, as it was commonly called) was not part of the S&L Crisis.  It managed to make it through the S&L Crisis unscathed, because at that time it was well run.  Instead, it belonged to the events connected to the crash of 2008.  By that time good management had been replaced by bad.

And one contributing factor to WaMu's demise was the light regulatory environment it operated under.  In the case of WaMu, and all the other "banks" that went under in this event, depositors were made whole regardless of the size of their account balance.

And the crash of 2008 introduced a whole new group of players into the public consciousness, "investment" banks.  Again, the actual game was to find an excuse for diminished regulation.

A law called Glass-Steagall had been passed in 1933 carving out investment banks as a group subject to a separate, more permissive, regulatory regime.  They couldn't do "retail" banking, offering checking accounts, making loans to individuals and businesses.  They were restricted to only doing business with Wall Street.

The argument was that the customers of investment banks were sophisticated people who were savvy about money and risk.  As such, a heavy regulatory hand was not required.  Unfortunately, Glass-Steagall was repealed in 1999 as part of yet another wave of deregulation.  As a result, most of the names mentioned in the headlines surrounding the crash of 2008 were investment banks.  Not surprisingly, they had done stupid things in pursuit of ever higher profits.

All depositors caught up in the S&L Crisis and in the crash of 2008 were made whole regardless of how much of their balance was or was not supposed to be covered by insurance.  In fact, I can't think of a time in the last half century when a depositor has taken a haircut as a result of a "bank" failing.

So, the limit on how much of a deposit is insured by the Federal Government is a fiction.  Changing it will make literally no difference.  Except, perhaps, to fool some people into believing that something is being done when nothing is being done.

And finally, to return to my original subject, bonds.  SVB was a publicly traded company.  As such it issued stock and was nominally owned by its shareholders.  They are in for a haircut.  But SVB also issued SVB bonds.  The holders of these bonds are likely to be reimbursed 100%.  It may take a few months, but they will probably get all of their money back.

It is common to see stockholders losing a lot and bondholders not losing anything when a company goes bust.  And that is part of the reasoning behind the idea that bonds are safe while stocks are not.

Fixing the Vaccine Rollout

 In this go-go era of Twitter and 24 hour cable news channels, things that happened a few days ago are old news and things that happened a few months ago are ancient history.  So the healthcare.gov fiasco from 2013 counts as prehistory.  BTW, the word "history" has a precise definition.  It consists of the body of events that happened at a time and in a place where someone wrote down an account of them.  Everything else is prehistory.  In spite of the fact that it happened so long ago that it is effectively prehistoric, that particular fiasco bears on the current subject.

And, since I am talking about a prehistoric event, let me review the details.  President Obama spent most of his first two years in office passing healthcare reform.  The final law that was enacted is informally called Obamacare.  The official title is the Affordable Care Act, or ACA, for short.  Components of the ACA rolled out in phases.  One of those phases included a web site  that anyone could use to find an "individual" health care plan.  It didn't matter which state you lived in, healthcare.gov was supposed to steer you to a plan that was available in your area.

The web site went live on October 1, 2013 and promptly crashed.  And crashed.  And crashed.  Soon, many people who should have known what they were talking about, started saying, "it's broken and can't be fixed."  President Obama didn't panic.  Instead he brought in a group of very experienced executives from the tech industry to put it back on track.

They succeeded.  And it only took them 60 days.  I wrote a blog post on how it all went down.  You can find it here:  Sigma 5: Fixing healthcare.gov.  It's a good read.  And my thesis for this post is that there are a lot of parallels between that situation and the one currently surrounding the rollout of the COVID-19 vaccine.  Let's start with a quick review of what went down back then.

The people who were brought in had a tremendous amount of experience managing complex IT projects.  They looked the situation over and decided that the fundamental architecture was fine.  That was good news because architecture issues are difficult and time consuming to fix.  What they did find were a lot of easier to fix problems.  Unfortunately, it would be necessary to fix pretty much all of them before the site would work.

That's because there were a lot of components involved.  Many of them were broken.  Many components also did not play nice with other components.  And a big problem was that the system had to interface with 50 different state systems.  Each had its individual quirks and peculiarities.  But the new team didn't panic.  Instead, they did what good project managers always do.  They created a "punch list".

The idea comes from the construction industry.  You take a tour of the project and look for everything that needs attention.  Each item is a "punch" on the list.  As each item is put right it is "punched" out of the list.  Ideally, you eventually end up with a punch list containing no items.

So the team built a punch list.  Then they prioritized it.  Then they sent out the top priority items to the various contractors working on the project with instructions to fix them.  Then they kept track of the results.  Once these top priority items were fixed they looked at the list and picked out a new set of top priorities and sent it out.  It really was as simple as that.

There are several things that helped.  These people knew what they were doing so they built a good punch list.  The contractors, who it turned out were actually doing good work, knew that these people would not accept second rate work so they set to and started fixing problems.  And the managers were careful to keep their priority list as stable as possible,

You always need to be prepared to change things up as the situation evolves.  But I have spent a lot of time in IT.  And I have frequently found myself in situations where the priority list gets completely rewritten every few days.  It takes time and focus to fix a problem.  You don't get much productive work done by switching from project to project to project all the time without staying on one project long enough to finish it.

The management team also did a lot of communication.  It was important that all the players knew what was going on.  These players included the White House, the various contractors, and each state.  It was particularly important to work individually with each state.

The idiosyncrasies of its particular systems and way of doing business, were different for each state.  But a solution that worked both for the overall system and for each state had to be implemented for the overall project to be a success.

That required a lot of communication and a considerable amount of flexibility.  But the states soon found that they had a partner that was willing to listen to them and to work with them, so it all got ironed out.

For a couple of weeks nothing appeared to be happening.  The site still kept crashing.  Pretty much none of it seemed to be working.  But that was because a lot of things had to be fixed before any change would be apparent to outsiders.

In reality things were being fixed on a daily basis.  But until lots of components were working, and working together, all that was happening was that the point of failure was just being moved around.  But then enough things got fixed that some parts started working.  Then more things got fixed and more parts started working.  And, in a surprisingly short amount of time, it was all working.

The bottom line was that the Obama people really had done a pretty good job.  They just weren't skilled enough or experienced enough to pull a project of that complexity and difficulty off on the required timeline.  With the knowledge and steadying hand provided by the outside experts things came together quickly.  And the good work the Obama people had done in laying a sound foundation made that possible.

Health care is complicated.  Health insurance is complicated.  Tracking a single item, or in this case, a few similar items, is a piece of cake in comparison.  So the fundamental problem presented by the vaccine rollout is much simpler.  But structurally, it has similarities.  This Federal system has to glue everything together.  And it has to deal with the idiosyncrasies of 50 different states.

There is one key difference.  The Obama people believed in doing a good job.  And they felt that what they were doing was an appropriate role for the Federal Government to fulfill.  The Trump people, on the other hand, really didn't believe in government.  So, they doubted that what they were supposed to do was even an appropriate function for the Federal Government to perform.

Assuming the job needed to be done at all, then they were of the opinion that somebody else should do it.  They really don't care if it was the States or private businesses.  Just so long as it is not the Trump Administration.  But it was important to maintain appearances in order to fend off criticism.  So, they put together a system that was more designed to fend off criticism than it was to work well.

As a result, when the Biden people came aboard they found little to work with.  Their standards were completely different.  They expected the system to actually be capable of doing the job, not just pretending to do it.

And a big part of that was providing a system that State Governors, both Democratic and Republican, could make work in their various states.  While the Trump people were in charge Governors found that they did not have a reliable partner at the Federal level to work with.

To pick one well publicized example, a key question is how much vaccine will each State get and when will they get it.  According to lots of public proclamations by various Trump officials the answers were "a lot" and "right away".  But when State officials queried their Federal counterparts they quickly learned that neither was true.

First, the figures put out publicly describing how many doses each State would get were far higher than the actual amount that was later officially promised and still later delivered to each state.  Second, they only learned how much vaccine they would be receiving late in the week before the vaccine would be arriving.

So, states were expected to get by with less.  And they couldn't plan ahead because they didn't know how much vaccine they would be receiving, two, three, or four weeks out.  That made it very hard for them to plan for the efficient distribution and administration of the vaccine they did receive.  It also led to hoarding.  If you don't know how much you are getting, then it seems like a good idea to hold back a lot of what you already have, "just in case".

But it turned out that the problems didn't end there.  Getting doses out of freezers and into arms turned out to be much harder than most predicted.  And it was not just the super-cold freezers that were required.  A key group that everybody prioritized were elderly people living in congregate care facilities.  

These people have a lot of physical and mental issues.  Many of them are bed ridden.  Many of them get confused or upset easily.  You have to go to where they are and you have to provide a lot of extra TLC.  The result was that for this group the amount of time it took to do one injection was about twice as long as forecast.

Plans for tight grouping and tiering also quickly broke down.  The "use it or lose it" characteristic (doses must be used within 6 hours of being "reconstituted") meant that careful plans must be made or many doses would be wasted.  Who was supposed to do this careful planning?  Overloaded and over-stressed State Health Departments and pharmacy chains like CVS and Walgreens.  What could possibly go wrong?

The situation that the incoming Biden team inherited was chaotic and underperforming everyone's expectations.  But the underlying problems were not that complex.  Can vaccine manufactures accurately forecast their production rates?  The answer seems to be "yes".  That's the foundation underlying everything else.

As is typical, the Federal Government is actually doing very little itself.  Others "do" while the Federal Government directs and tracks.  Companies like Pfizer and Mederna manufacture the vaccine.  Companies like FedEx, and UPS ship it.

It gets more complicated than that as we move vaccine doses closer and closer to people's arms.  But it is still a situation where this company or department performs a certain function.  The vaccine needs to be tracked as it moves down the chain.  Then patient information needs to move back up the chain so that we can track what's going on.

One current problem seems to be that long, elaborate, forms need to be filled out for each injection.  That's because in the early going health insurance companies and health care providers, the people who have the information the forms demand, were cut out of the loop.  That is starting to change.

I, for instance, am getting my vaccinations through my regular health care provider.  It already has all the information the forms require in it's computer system.  I know others who have been able to work through their health care provider to schedule and receive their shots too.  That doesn't work for everyone.  But it works for most people.

We all know that the data is going to eventually end up in a compute somewhere.  Any data on a paper forms will have to be keyed in at some point.  So why not do a computer-to-computer transfer in the first place?  It's faster, cheaper, and more accurate.

Things are getting ironed out.  Some of this "ironing out" actually began before Trump left office.  But I expect things to accelerate.  Coordinating vaccine distribution is the easy part.  Compared to getting the healthcare.gov web site working. it is a trivial undertaking.

And collecting and reporting vaccination statistics accurately. and in a timely manner, is also not very complicated.  I expect all of these problems to be ironed out by the end of February.

Getting the vaccine to the states is already working pretty well.  Getting it from there to people's arms is a much more difficult problem.  We have seen progress in this area but much more needs to be done.  Only about 60% of shipped doses have been used, according to the most current CDC statistics.  On the other hand, people have had horrendous experiences trying to finding and schedule an appointment.

One big contributing factor is that demand current vastly outstrips supply.  There is no healthcare.gov one stop web site, for instance.  But the time has passed when it would make sense to create one.  But lots can be done that does not involve a federal web site.

The first thing the Federal government can do is to help states defray the cost.  There is money in the pipeline for this.  And more is coming if the Democratic "COVID" bill is enacted into law.  Even the Republican alternative contains additional funds to help the states with this.

But the federal government can also help with advice and various kinds of technical assistance.  With healthcare.gov, the Federal government went so far as to build the state piece for the states that wanted them too.  Many states took the Federal government up on the offer.  That's not possible in this situation.  But there is a lot the federal government can do to help.  One way or another, I expect this problem to be largely solved by the end of March.

That leaves the biggest problem of all, vaccine availability.  This is totally a Federal responsibility.  And it is the one that will take the longest to solve.  Vaccine makers know that they can sell everything they can make.  So they are making all they can already.

The Federal government can use the Defense Production Act to help the companies out.  While there's nothing that can be done immediately, there is lots that can be done over time.  Ramping up production can only be done so fast, no matter what you throw at the problem.  But the government can be very helpful down the line.

The amount of vaccine that will be produces is pretty much baked in for the next few months.  Production should increase substantially in second quarter (April-June).  It can continue to increase in subsequent quarters.  I expect that supply will be pretty much in alignment with demand by the Fourth of July.  If we are lucky, we will be able to reach that goal by Memorial Day.

That should mean that everybody in the U.S. can get vaccinated before the Summer is over.  And it looks like the same will be true for Europe.  But the combined population of the U.S. and Europe constitutes only about 10% of the population of the world.  And it is the richest and most heavily resourced 10%.  This pandemic will not be under control until the world is vaccinated.  

The vaccines in use in the U.S. are expensive and hard to administer.  They are not the right tools for use in most of the world.  We need vaccines that are equally effective but much cheaper and easier to use.  There are some candidates.  But effectiveness is still a question.  As is cost.  And current world vaccine manufacturing capacity is woefully inadequate.

So, it looks like it will be 2022 or 2023 before the world is shot of this scourge.  And that's a big problem for all of us.  Variants are now popping up all over the place.  Currently the variant of most concern is one that was first identified in South Africa.  All of the vaccine candidates that have been tested against it show substantially reduced effectiveness.

So all is lost, right?  Actually, no.  First, current vaccines are very effective at keeping people out of hospital and, more importantly, at keeping them from dying.  The data currently available indicates that this is true even when the new variants are involved.  Secondly, vaccines can be tweaked.

Many of the vaccines and candidates are based on new technology.  Both the Pfizer and the Moderna vaccines are "mRNA" technology.  As such, they needed to be subjected to more scrutiny that would have been appropriate for a vaccine candidate that worked the old fashioned way.

We are now field testing these new approaches by injecting these vaccines into a lot of people, including me.  If, as expected, vaccines based on mRNA and other new technologies turn out to be safe and effective, then the technologies they are based on become not "new" but "proven".  Heightened scrutiny will no longer be appropriate.

A vaccine needs to be targeted.  One of the big advantages of these new vaccine technologies is that they can be targeted more precisely and more quickly than vaccines based on old technologies.  Vaccine makers that use new technology say that they can quickly and easily retune their vaccines to improve their effectiveness against the variants that are now popping up.

The approval process should take far less time once the basic approach has been proven out.  That means that vaccine makers think they can turn out "new and improved" versions of their vaccines within a few months.  And I believe them.

There is already talk that people like me, who will soon have competed the current process, may need a "booster" in six months to a year.  "New and improved" vaccines that are highly effective against the new strains, and the capacity to produce them at scale, should be ready by then.

I don't know whether this optimistic forecast will apply to the less wealthy parts of the world.  Work is moving forward on vaccines that are effective but also are cheap to make and easy to administer.  They just aren't ready yet.  When they do become available, some of their characteristics will be critical.

I'm not talking about the necessary attributes of being cheap and easy to administer.  I am talking about other attributes.  Will they come pre-tuned for the new variants?  Will they be easy to retune?  Will periodic booster shots be required?

This last attribute may be the whole game.  Periodically administering booster shots in the U.S. and Europe is relatively easy to pull off.  Having to periodically administer boosters to the entire world looks to be neigh on impossible.

There's hope.  But we are still a long way from being out of the woods on this one.

Cars - The State of Play in 2020

 I like to periodically return to subjects to see how things have evolved since I last wrote about them.  The most obvious example is my long running series, "60 Years of Science".  But it is far from the only example.  This post brings together updates that are joined by the fact that they all have to do with cars.  Let me start with self-driving cars.

I last opined on this subject three years ago.  Here's the link:   https://sigma5.blogspot.com/2018/01/robot-cars-now-new-and-improved.html.  For a long time the conventional wisdom was that Autonomous Vehicles, or AVs for short, would arrive in 2020.  Well, have they arrived?  Nope! The "wisdom" referenced in the post consisted of, in part, an article in Science, the premier scientific journal published in the U.S.  (It is #2 in the world behind the British journal, Nature).

A December, 2017 article in Science opined that AVs would appear "somewhere over the rainbow".  Elsewhere in the same article the author described widespread use of AVs as "still decades away".  Ouch!  Then, as now, I find that prediction too pessimistic.  So, where do we stand now that we are at the end of 2020?

Well, then and now there are several companies working on the subject.  Waymo, the Google subsidiary, is generally assumed to be in the best shape.  But, like everybody else, it is still running "demonstration" and "pilot" projects.  One problem is that a car that was part of one of these demonstration/pilot projects managed to kill a lady in Arizona.  It wasn't part of a project run by Waymo but the death put a pall on the whole industry.

Several people have also died while driving Tesla cars in "Autopilot" mode.  A Tesla car operating in Autopilot mode is not a full up AV.  And the drivers were allowing Autopilot to drive their cars under conditions where they were supposed to be closely monitoring it.  Instead, they adopted a "hands off" attitude, literally.  But these are technicalities that don't influence the thinking of the general public.  The public is extremely concerned about the safety of AVs.

And that has caused everybody to go slow, everybody, that is, except Elon Musk, the CEO of Tesla.  He says that the new iteration of Autopilot will be capable of autonomous operation.  Details are skimpy so nobody knows quite what he means.  The general consensus is that the Tesla Autopilot feature lacks many of the capabilities necessary for true autonomous operation.  So, most people are in "let's see what he actually delivers" mode.

And, there is a great deal of confusion.  The SAE (Society of Automotive Engineers) has defined various "levels" from fully manual to fully autonomous.  Their "level 5" is fully autonomous.  And everybody agrees with the criteria that they have laid out.  That's not the source of the confusion.

The source of confusion is that people expect a level 5 vehicle to be able to operate completely autonomously in all conditions.  They expect to operate in the daylight and at night.  They expect it to operate in good weather conditions and bad.  They expect it to work on city streets, on freeways, on country roads, and even off road.  An AV capable of that level of autonomy truly is decades away.

But the ability to safely and consistently handle in all those conditions is not necessary in order for large numbers of AVs to be on the road and operating successfully.  There is general agreement that off road is the hardest to manage.  So, it will be the last to appear.  On the other hand, there is some disagreement as to whether city driving or freeway driving is the easiest to manage.

One's first impression is that freeway driving is the easiest.  And that's true in most conditions.  But there is a famous example of an AV test car being unable to exit a Phoenix freeway.  The other drivers on the road ganged up on the test car.  They repeatedly blocked it from finding a slot it could use to move into the exit lane.

Trouble exiting, or trouble changing lanes when you need to, is a common occurrence.  If there's a lot of traffic it is hard to find an opening without some cooperation from other drivers.  The solution to a lack of cooperation is to "barge" and force an opening.  But that can be dangerous.

With a little jockeying, and possibly some hurt feelings, it can almost always be pulled off.  But it may involve a game of "chicken" and that's not "safe and sane" driving.  It often involves judging the psychology of the other drivers.  You need to pick on someone who will back off rather than remaining assertive.

It is possible to "program" that kind of behavior (all but the psychological part) into the AV system.  But companies don't want to do that.  Besides being risky, it is bad for public relations.  Self driving cars adhere to speed limits and follow all the other rules of the road.  That makes them far more timid than the average driver.  But it is also the posture that is most reassuring the public.

I don't know if the AV companies have solved the "Exiting" problem.  The incident I heard about happened a couple of years ago so they have had time to work on it.  The solution may have been as simple as going with unmarked vehicles.

But many autonomous designs feature various pieces of distinctive hardware poking out of the roof of the car.  Such a design obviates the need for the cars to be marked in order to be easily identifiable.  A car with a "taxi" bubble on the roof looks like a taxi regardless of whether it says "TAXI" on the side or not.

So, urban areas may turn out to be easier.  I'm sure the AV companies have gathered reams of data on this subject.  I expect them to first introduce AVs into whatever environment they think will be the easiest to get the cars to work in.

There have been some "fully autonomous" licenses issued by states, etc.  This allows companies to put AVs on the road in some places without having to have a test driver onboard.  But nothing of this sort has been rolled out on a scale large enough to attract the attention of the press yet.  (And it may be that COVID has been a major reason for the delay.)

I truly think that we will see some AVs in operation in limited areas by 2022.  The obvious choice is Uber/Lyft.  These companies know exactly where passengers are departing from and exactly where they want to go.  They can also give customers the option to opt in or opt out of a trip in an AV.  That allows them to keep things tightly controlled.

Uber and Lyft are very interested in AVs as they very much want to eliminate the cost of the driver.  And they have the technology that allows them to handle whatever constraints AV operations throw at them.  They can only handle a limited geographic area.

They can handle time-of-day or weather constraints.  They can handle passenger consent issues.  And they can handle changes in any or all of these constraints.

My thinking about AVs and Uber/Lyft mirrors almost everybody else's.  But so far, neither Uber nor Lyft have started so much as a pilot project to dispatch AVs for use by the general public in a limited area and under limited conditions yet.  I'm sticking to my "by 2022" prediction, but I have no special insight into this.

And that's how I expect the AV market to evolve.  It will start out only being used in small, limited ways,  If things go well then AV use will expand into more and different environments.  Eventually, the coverage will be broad enough to encompass a large number of trips but not all trips.  That's good enough.  I do think that it will be a long time before we see off-road AVs.  But that's okay.

Tesla's experience with Autopilot tells us a lot about how fast the psychology of the public can change.  A small set of drivers pushed it far beyond its actual limits.  That got several of them killed.  In spite of this, Autopilot is very popular.  It gets a lot of use, mostly in a responsible way.

But some people still push its use beyond what is safe.do in spite of the well documented risks.  With familiarity comes comfort.  And it doesn't take very long  People quickly came to trust Autopilot, in many cases more than was wise.  Right now, almost no one has any actual experience riding in an AV.  But, once they do, one trip will be enough for most people to become comfortable with the experience.

Next, I want to introduce a closely related subject.  Cruise Control got a lot more capable during the Obama Administration.  In older cars I have owned, all Cruise Control was capable of was maintaining a constant speed as the car went up hill and down dale.  The last car I bought was capable of a lot more.  And the Tesla Autopilot I discussed above is capable of still more.  All this is part of the path to a true AV.

But, as the capability of Cruise Control systems increased by leaps and bounds, lots of people figured out that it would be a good idea for these automated systems to communicate with each other.  Maybe the car in front could see an obstacle your car couldn't see.  And it is useful to know that a close-by car is going to change lanes or speed up or slow down or whatever.

The natural progression is for each car company to independently develop its own system then expect the other car companies to come to them.  (I saw this play out dozens of times in the computer business.)  Except companies adopting standards developed by other companies was never going to happen.  (It almost never did in the computer business.)

The solution is to have a "neutral" standard that everybody would use.  That way all suitably equipped cars could talk to other suitably equipped cars regardless of the make.  The specification is called "V2V" (vehicle to vehicle) communication.

The Obama Administration quickly put together an umbrella group to help this along.  The Government wouldn't set the standard.  They would just facilitate the industry coming together to set the standard.  That way it would be an "industry" standard not a "government" standard.  Better for everybody that way.

All this was moving along nicely when we had an Administration change.  As an Obama initiative, the Trump people wanted nothing to do with it.  Also, in spite of the fact that the government wasn't setting the standard, it smelled like "government regulation" and they were averse to that sort of thing.  So they shut it down.

Caught is the same net was the V2X initiative.  The idea was to extend the V2V specification so that it didn't just cover vehicle to vehicle communication.  It would instead be "vehicle to everything".  A smart stoplight would be able to tell oncoming vehicles when the signal was going to change.  Or it could inform the vehicle that a pedestrian had requested a "walk" cycle.

Anything that might improve things could be included.  Weather alerts could be sent out.  Construction areas could be signal cars what their extent was.  Warnings about ice on the road could be communicated.  Use your imagination.  This program was also effectively shut down.

We could be a lot further along at this point if standards had been adopted.  I'm sure the initiative will eventually come into being.  But the auto industry manufactures about fifteen million vehicles per year.  None of those vehicles are V2V or V2X capable at this point.  The time when most vehicles include V2V and V2X  capabilities will take just that much longer to arrive.  And the benefit will, therefore, take just that much longer to arrive.  So sad.  So unnecessary.

Okay.  On to my next topic, electric cars.  It turns out that I have never dedicated a blog post to this subject.  I'm pretty sure I have peripherally mentioned the subject.  But, in perusing the titles of all of the posts I have made, I don't see anything that is likely to have addressed the subject in any depth.  So, here goes.

In theory, electric cars are a great idea.  DC electric motors (all you really need to know is that this is the kind used in electric vehicles) are capable of providing 100% torque at 0 RPM.  To translate that into English, torque is a measurement of how hard the motor is pushing in an attempt to get the car to go faster.  0 RPM is the situation where you are stopped and you want to start going.  In short, DC electric motors are great if you love jackrabbit starts.

And being able to accelerate quickly (i.e. a jackrabbit start) is what people (mostly guys) use to decide whether a care is "powerful" or not.  Elon Musk made sure that Tesla cars accelerate quickly.  It was a great decision from a marketing point of view.

And there are lots of very powerful electric motors out there.  Diesel train locomotives aren't really "Diesel".  They are actually "Diesel-Electric".  The thing that is turning the wheels is actually an electric motor.  Nuclear Aircraft Carriers, the largest and heaviest moving objects in the world, use electric motors to turn their propellers.  So, if it is possible to build a powerful electric car, what's the problem?

The problem is the battery.  Engineers put wimpy electric motors into cars because a powerful electric motor can quickly drain the battery.  There is a direct tradeoff between a vehicle that feels powerful and responsive and a vehicle that goes a long way between recharges.  (You can try to get the driver to back off but drivers never do.)

If batteries worked well then there would be no problem using powerful electric motors in electric vehicles.  Car makers put powerful gas motors and big gas tanks into cars all the time.  That gives "gas" cars lots of power and lots of range.  Unfortunately, this approach is not possible when it comes to electric cars using current battery technology.

And it's not like we haven't known how to make electric cars until recently.  The "Baker Electric"  was a popular car in the early 1900s.  But its top speed is about 12 miles per hour and it doesn't go far between charges.  Why?  Because it uses "lead acid" batteries.  This is the type of battery that can be found in "gas" and diesel cars.  But it is both large and heavy in terms of how much energy it can store.

Modern hybrid and all-electric cars use "lithium" batteries.  They are similar to the battery in your mobile electronic device.  They are a big improvement over a lead acid battery.  But they still suck.  Lithium batteries are also very expensive.  The "gas tank" in a car costs a few dollars.  The battery pack in a hybrid or all-electric car costs many thousands of dollars.

The battery pack is much larger than a gas tank.  It is also much heavier than even a full gas tank.  And it can't propel a vehicle nearly as far as a tank full of gas can.  The manufacturers of hybrid and all-electric vehicles are forced to make trade-offs.  And none of their options are good.

A smaller battery pack is cheaper, takes up less space, and weighs less.  The lower weight improves the electric vehicle version of fuel economy.  Performance is not determined by the size of the battery pack.  Instead, the most important factor is the size of the electric motors.  This all sounds good so what's the problem?

The problem is range.  In the same way a small gas tank restricts range, a small battery pack restricts range.  Powerful the electric motors also restrict range.  They can drain the battery pack more quickly than small motors.  Of course, small motors translates to wimpy performance.

So vehicle makers go with the smallest battery pack (and often the smallest motors) that they think they can get away with.  Tesla cars come with a relatively large battery pack.  But that makes them expensive.  And, since Musk emphasized performance, if you drive a Tesla in "high performance" mode, it doesn't go very far before it needs a recharge.

You can get a lot of mileage between recharges with a Tesla.  But you have to put the vehicle into "economy" mode.  Then the vehicle delivers anemic performance.  And a Tesla is an expensive vehicle.  If you want to keep the cost down you have to go with a small battery pack.  That guarantees anemic performance.

And that has tilted the market towards hybrids.  These have a small gas engine and a very small battery pack.  The engine is used to recharge the battery pack on the fly.  If both the engine and battery pack are delivering power to the wheels, a hybrid can deliver so-so power.  On the other hand, if the battery pack has run down and only the power from the engine is available, then the car can barely get out of its own way.

But the combination delivers a lot of range.  Buyers have shown a marked preference for the extended range hybrids deliver over reasonably priced all-electric vehicles.  This trade off is forced by the current state of the art in battery technology.

Lithium batteries are far superior to lead-acid batteries.  But what is really needed is a battery that is as superior to a lithium battery as the lithium battery is superior to the a lead-acid battery.  Unfortunately, scientists currently have no clue as to how to create such a battery.

What I find surprising is that there is a role that all-electric vehicles can fill right now.  That role is with respect to delivery vehicles and the like.  As noted above, all-electric vehicles have a limited range.  But it is more than sufficient to satisfy the needs of these vehicles.  So no technological or other improvement is needed.  Why we don't see all-electric delivery vehicles all over the place is a mystery to me.

Drivers are concerned, perhaps excessively so, with the battery running down at an inconvenient time.  But delivery vehicles are used for short trips.  They don't rack up that many miles in a single day.  If the place where they are parked at night is equipped with fast chargers (chargers that run at 220 volts rather than the 110 volts that most household plug sockets deliver) then they can be recharged overnight.

As long as they have enough range to handle the number of miles these vehicles put in each day, an electric vehicle should work fine.  Fleet operators know all the statistics concerning how many miles per day their vehicles rack up.  And they rack up a lot of miles in a year so fuel costs are very important.  To me, it sounds like a perfect fit.

And there is an Uber/Lyft equivalent operating in this space. It's Amazon.  Amazon has a large delivery fleet.  It is tasked with getting packages "the last mile" from the fulfilment center to the customer's door.  Amazon is said to be working busily on an all-electric delivery vehicle.  But so far, it's all talk and no actual vehicles on the road.

I find that quite surprising.  Tesla is working on an "18-wheeler" long haul truck.  I find it difficult to believe that is practical given the current state of the art when it comes to batteries.  But it looks completely practical to do a delivery van.  Or, for that matter, any commercial vehicle that "comes home" every night, and that racks up a modest number of miles per day.

There are currently gas stations everywhere.  It takes five-ten minutes to "gas up".  More and more charging stations are being installed.  But all-electric vehicles don't recharge in five or ten minutes.  You are lucky if it can be pulled off in five hours.  That means that a successful all-electric vehicle needs to be based somewhere and not wander too far from base.

New houses now often feature a 220 volt circuit in the garage.  This is easy to do.  The circuitry is the same as that used to support electric stoves, dryers, and water heaters.  A house may come with the natural gas versions of these appliances.  But any commercial electrician knows how to string the necessary wiring.  It is easy to include in a new house.  It is harder, but usually not that much harder, to retrofit such a circuit into an existing house.

Almost all all-electric vehicles are now sold to consumers that can afford to own multiple vehicles.  They can use their all-electric vehicle for their short trips, and most trips are short tripe.  When they occasionally need to go a long way then they can use one of their other vehicles.

That is not, and will never be, a large part of the consumer vehicle market.  All-electric vehicles need to sell in large numbers if the cost is to be driven down.  Short haul delivery vehicles should enlarge the market substantially.  And that's good.

There are some other market segments that all-electric vehicles should eventually be successful in.  But their success will be limited until the main problem with electric vehicles is solved, the creation of a much better battery.

Finally, I want to talk about supercars.  These have been around for something like twenty years.  They certainly didn't exist when I was a kid.  The situation in the '60s was typical of what came before and what continued for some time after.

When I was a kid the fancy car was the Cadillac.  Sure, a few Hollywood Moguls and the like drove (or were driven in) a Rolls Royce.  But that was more of a fantasy than a reality.  And here's the thing.  A Cadillac didn't cost that much more than a regular car.

My dad bought a Plymouth in the '60s.  The Plymouth was a step up from the Dodge.  The Chrysler was a step up from the Plymouth.  The Chrysler was supposed to be comparable to a Cadillac.  But there is only one Cadillac of Cadillacs.

The Cadillac was the "top of the line" in its time.  But Cadillacs didn't cost all that much more than the Chevrolet, the "economy" entry in the General Motors product line at the time.

My father's Plymouth cost a little under three thousand dollars.  A Chevrolet of the period cost about two thousand dollars.  But the Cadillac only ran four to five thousand dollars.  The "top of the line" car of the time cost between two and three times what an "economy" car cost.

If we update the numbers to what they now are then an "economy" car runs between twenty and thirty thousand dollars.  Picking the high number would mean that a "top of the line" car now costs between sixty and ninety thousand dollars. And you can drive a brand new Cadillac off the lot for sixty to ninety thousand dollars.  So that part tracks.

But ninety thousand dollars doesn't even you get you in the door when it comes to super-premium cars now.  Those run hundreds of thousands of dollars.  And that doesn't even get you close to the top of the market.  Ultra-premium cars now run between a million and ten million dollars.

And it's now been a long time since Rolls Royce was as expensive as it got.  You can drive the Rolls Royce of your choice off the lot for only a few hundred thousand dollars.  It's still a super-premium car but it's not even close to being an ultra-premium car.

What happened, of course is that the rich got a whole lot richer and these people needed something to spend their money on.  There are now lots of people who have fleets consisting of dozens of ultra-premium cars.

I don't know what they do with them.  Traffic speeds have stayed the same since the '60s.  You can easily rack up a very expensive speeding ticket in an economy car.  So, there's literally no place to take advantage of what justifies the price of these vehicles.

And they are not "lap of luxury" vehicles.  The "go to" luxury limousine is a stretched version of the Chevrolet Suburban (or any large SUV like the Ford Expedition).  These vehicles feature roomy interiors with lots of headroom.  The interiors can be customized to make them quite luxurious.  But, no mater how tricked out the interior is, you are still only talking hundreds of thousands of dollars.

All the ultra-premium vehicles, the ones that cost a million or more, are set up as sports or performance vehicles.  The interiors may be well appointed.  But they are cramped.  Few feature more than minimal storage space.  But they all look like they go super-fast.  And most of them actually do.

In the late '60s the goal of "hot car" guys was to have a car that could go two hundred miles per hour.  Few of the vehicles of the period, even the custom ones like the Shelby Cobra, actually could even touch two hundred briefly.  And none of the "street legal" ones could sustain two hundred for any period of time.  That has changed.

The "production" versions of many of these cars are street legal and they can easily maintain a sustained speed of two hundred miles per hour.  And when lots of cars from lots of manufacturers can all do the same thing, it's time to up the ante.  This car can do two twenty.  No, that car can do two thirty.  And so on.  The goal recently became three hundred miles per hour.

And Bugatti the first car maker to pull it off.  They were able to get a "prototype" version of one of their production cars to clock in at 300 MPH while conforming to all the conditions necessary to be officially credited with the record.

The car was slightly modified "for safety reasons".  I don't know if Bugatti will even sell a car set up the same way the "300 MPH" car was.  The actual production (i.e. non-prototype) version of the car comes equipped with a "limiter" that makes the car top out at 261 MPH..  And plan on laying out $3 million or more for the "limiter" version.  Who knows what the non-limiter version would cost.

Bugatti said 300 MPH was fast enough.  I don't understand that.  Because 500 KPH is only 311 MPH.  Surely, they could have gotten the car to go a measly 11 MPH faster.  And 500 KPH is a much more satisfying number.  This is especially true since most of the world runs on KPH rather than on MPH.  If it was me, I would have gone for 500 KPH.

And, apparently I'm not the only one that thinks that way.  An outfit I had never heard of before, even though it is located in Washington, the state I live in, decided to go for it.  The company name is SSC, short for Shelby Supercar.  (And this Shelby is apparently no relation to Carol Shelby of Shelby Cobra fame.)  They make a street legal car called the Tuatara that they thought would go 500 KPH.

They were right.  They too made a run under the appropriate conditions.  Their official speed was 508.73 KPH (316 MPH).  They claimed that the car was unmodified.  It did use "race" fuel, a type of fuel that is commonly found at drag strips and race tracks.  But that was it.

And there have since been claims of "discrepancies".  This has caused the company to promise to redo the run under the most stringent of conditions.  The entire production run is already sold out.  But, if you could order one, your very own Tuatara would only set you back a measly $1.6 million.  A bargain, wouldn't you say?