Howzit Howard

Economists to state: Prepare to cut deeper

The Council on Revenues, which does quarterly forecasts of Hawaii state tax revenues, has decided in a rare extra meeting that its forecast, already bearish, was too optimistic. Governor Lingle had been preparing spending cuts based on the council's prediction of a meager 1% increase in revenues in the current fiscal year. Now she has been told it expects 0.5% shrinkage. Some economics on the council actually wanted to make the forecast even more dire than that, but Paul Brewbaker, economist for Bank of Hawaii, current chairman of the council, argued that it would be better to wait and see what results from the Wall Street rescue, which is only beginning to be implemented. It is difficult to imagine, however, a scenario in which the council will find itself doing anything other than making another downward revision. Falling oil prices have helped the economy -- Matson just announced a fourth cut in its fuel surcharge, to 25%, effective Sunday -- but no one expects oil to return to where it used to be. Indeed, even a partial return to normality in credit markets would likely spur oil price increases. While Hawaii's banking industry remains rock-solid and copper-bottomed -- Bankoh this week posted a $47 million third quarter profit while First Hawaiian Bank had net income of $55 million, improving asset quality while increasing its lending -- the Wall Street financial universe is still being sucked into a black hole of debt and lost confidence. The single most alarming new development has to do with AIG, the world's largest insurance company, which insured so many risky investments that a lot of the financial houses we've read so much about are counting on AIG, not the government, to bail them out by paying off on its risky paper insurance policies. The problem is that AIG hasn't got that kind of money. Insurance companies always assume they will have to make good on a low percentage of their policies, so when they get hit by a hurricane -- real or metaphorical -- they find themselves instantly in trouble. AIG got an emergency loan from the Federal Reserve Board, more than $240 million. But The New York Times reporting in Thursday's editions that sources say the company has burned through most of that cash already, raising suspicion that it was in a deeper hole than it said. (AIG's bread-and-butter car and home insurance policies, untouched by all this, remain solid, and would find ready buyers among rival insurers if AIG needed to sell them. In fact, it's a real shame that a perfectly good insurance company is getting slimed over one division.) The thing is, Hawaii state officials, who are required by the state constitution not to run in the red, need to realize that the situation could get worse. The spending cuts they have so far contemplated could be the minimum they will have to confront. Every state worker should look for micro-savings that could add up to save a few jobs. And dismissal is deserved by any official, however high-ranking, who tries to hold his breath until the rest of turn blue, by deliberately targeting the most popular programs for cuts in the hope of a groundswell of support for a particular program.

The mayoral debate

For the first time, mayoral debates were broadcast statewide covering all the counties that had races this year, and I'm happy to be with the station that did it. It was also enjoyable to involve your emailed questions. The only tough part for me was that we had to pick a very few questions out of, as it turned out, more than 150 sent in. And believe me some of the ones we didn't get to were really good. I saved some and hope to mention them on the next Ask Howard webcasts. One of the things I liked about the debate was that its structure revealed a lot about the personalities of the candidates. For example, you got to see how gentile and mutually respectful are Angel Pilago and Bill Kenoi, the Big Island mayoral candidates, while Mufi Hannemann and Ann Kobayashi are both clearly struggling with the painful realization that they ain't pals no more. Then, too, all of the candidates know that whoever wins will be in for a tough term due to the economic downturn and the tricky trash and traffic problems each island faces. This alone is doubtless a stress factor, made worse by the fact that part of the electorate clearly is skeptical about their abilities to deal with these problems and even their motivations for doing so. The election is in less than a week.

The yen starts to help Hawaii

In July it took 110 yen to buy a dollar. Now it takes about 95 yen to do so. I've been saying for days this should help snag us some extra Japanese visitors. Well, it's already happening. With 27 days still to count in October, Japanese arrivals by air are down only 7.5% from last year at the same time, after being down 18% in September and almost that bad in the three months prior to that. In raw numbers, more than 100,000 Japanese have flown here since October began and we're only about 4,000 away from matching the September tally with more days still to tote up. Even now we're getting more than 3,000 visitors a day from Japan. This could keep up for awhile. The organizers of the Honolulu Marathon recently said their Japanese registrations are way up from last year. The Japanese make up the lion's share of participants in that race, which is held in early December when the rest of our tourist business is having a long winter's nap or something. The biggest year-to-year declines right now are from the West Coast to Maui and the Big Island. More radio contests in Los Angeles and San Francisco! Lloyd Unebasami, the chief administrative officer of the tourism authority and now also the acting CEO, came on "Sunrise" this morning and made an interesting point. I asked him if there was any way of knowing if he needed still more money for marketing this winter, expecting him to say it was impossible to know this early whether the downturn in arrivals would worsen further. Instead he said it was impossible to know where our hotel tax revenues would be at that juncture. We're on working in unchartered territory here.

Repeat visitors are saving us

Come again? Based on final September visitor tallies, 50% of Canadian and U.S. East visitors, 60% of Japanese, and 78% of U.S. West visitors are repeat visitors. Many happy returns! It's partly the allure of the islands, yes, but it's also the increasing number of timeshares and other vacation ownership properties. You paid for it, you might as well visit it. I also note with interest that while Japanese visitor traffic continues to fall compared to last year, Japanese honeymoon traffic is up 3%. Ain't love grand?

Crisis to become more understandable

We're about to shift into a new phase of our economic downturn, in which things will get worse but at least you'll have no trouble grasping why. From here on in, it's mostly the usual stuff, dominos toppling as one company after another experiences slower sales and cuts back. In the past two weeks there have been major layoffs on the mainland by General Electric, General Motors, Yahoo, Merck, Xerox and Coca-Cola. Locally, where the downturn has been milder, the layoffs have been smaller. But in Poipu, Kauai, there are 20 jobs going away at Kukui'uli Development, and Blue Hawaiian Helicopters is furloughing 20 on Maui and the Big Island. For every person who, losing his job, spends less, there are others who see this happening and curtail their own spending though they're still employed. Excise tax revenues then falls, forcing the state government to curtail its own expenditures. Consumer spending is two thirds of all economic activity. Is there anything you can do? There is one really key thing. Look for opportunities to spend money locally. Because our economy is so small, depriving mainland companies of your money will barely be felt by them, but redirecting spending to local firms will have a positive impact here.

Brooksley Born and the Free Market of Doom

You can expect to read a lot about Brooksley Born in coming days. She is, we are beginning to hear, the Cassandra who sounded warnings a decade ago that if heeded would have prevented the Wall Street meltdown. She was shouted down and hounded out of her job by more senior economic officials led by then-Fed chairman Alan Greenspan, who Thursday told a House committee that he was mistaken in his belief at the time that the giant financial houses would regulate themselves out of concern for their reputations. I was working in Washington, D.C., at the time of Born's warning, but I have no recollection of this woman. She sounded her warning before Congress, so one presumes it was reported somewhere at the time. But such big names said she was wrong that I guess none of us took it seriously. Born said Wall Street had gotten really into sophisticated financial instruments for hedging risk, and she predicted dire consequences if these futures contracts got out of hand. She said it would hurt the whole economy. She proposed reporting requirements -- so whatever was going on would no longer be "opaque" -- and required financial cushions against loss. In brief, she proposed that the giant financial houses that were doing these things be held to a standard similar to that for regular banks. Others also warned that derivatives and other futures could screw up Wall Street. Warren Buffett was one of them. But Brooksley Born was, from 1996 to 1999, the chairman of the Commodities Futures Trading Commission. This was one regulator who was not asleep at the switch. This was the oracle whose prediction was doomed not to be heeded because Alan Greenspan, who ironically had the nickname "The Oracle," couldn't find the future with both hands. The New York Times recently published an article about this, and as soon as I read it I knew this was a really important story. Sure enough, within days the report had been matched by articles in the Washington Post, The Nation, and many other news organizations. In each one, Born is shown to be the one regulator who saw clearly what could go wrong with the increasing sale of credit swaps and other fancy deals in a giant shell game of risk spreading, away from the light of regulated trading floors. In fact, Born is piled so high with laurels for seeing the future, speaking the truth, and refusing to knuckle under to the old boy network that I had just formed the opinion that there would soon be a round of op-ed pieces attacking her and fixing blame and credit at new azimuths. Greenspan may have nipped that in the bud with with his mea culpa, which I have to say seems quite heartfelt. He didn't just say he was mistaken. He conceded he had had a fundamental misunderstanding of how the world works. Having interviewed him many times in his pre-Fed days when he seemed like just another economist and not especially trenchant in his analysis, I always thought him overrated. But it was big of him to tell some congressmen straight that he had screwed this one up. Here's what happened, according to the various reports published over the past week or so. Born told Congress that credit swaps were risky and should be brought into regulated trade. Wall Street hated the idea because nobody likes regulation except when it's the other guy being regulated. Fair enough. But Alan Greenspan was the guy Congress listened to, and he actively lobbied against Born's proposal while also, according to the reports, meeting with Born to pressure her to back down. Greenspan, it turns out, is a fan of that overpraised author Ayn Rand and considers most regulation bad. Because I think Ayn Rand was an awful novelist, I only read a couple of her novels, so my understanding of her work may be limited, but it was my impression that she admired entrepreneurs and tough-minded business executives, not weasels hedging risk in derivative financial instruments. But let that pass. The point is that some of these stories implicitly accused Greenspan of opposing Born due to a knee-jerk dislike of regulatory interference in free markets, not because he had considered all sorts of arcane stuff that members of Congress could never hope to understand. This is important if true because it is also clear from the stories that some senators and representatives heeded Greenspan's advice as a substitute for trying to actually understand financial markets themselves, precisely because they thought Greenspan was wonking all the stuff the lawmakers had no time to study. Treasury Secretaries Robert Rubin and Lawrence Summers and SEC Chairman Arthur Levitt all disagreed with Born. So, while it's fun to bash Congress, it's understandable that Congress accepted the line that Born was a loose cannon who should be stopped. Greenspan, Rubin and Levitt all objected to Born even making public the details of her proposal. They actually got Congress to remove Born's authority to act. Where are they now? Brooksley Born, now in her late sixties, returned to private law practice, later retired, and hasn't commented on the resurrected debate. Robert Rubin is a director of Citigroup. Lawrence Summers resigned as president of Harvard after making a series of damn-fool remarks but returned as a professor later. Alan Greenspan is in the business of apologizing for not being an oracle after all.

The longest pledge drive

Hawaii Public Radio has raised more than $740,000, ended its twice-annual pledge drive, and returned to regular programming. The pledge drive was distinguished by two things -- its length, which was more than usual, and something else that bodes well for HPR's future. The entire operating budget for this independent nonprofit -- it is not affiliated with any government, university or PBS Hawaii -- is less than $3 million, and two thirds of the money comes from direct listener donations. Friday night, when the drive was supposed to end, HPR was $22,000 short of its goal. General Manager Michael Titterton shut it down and told everyone to return at 7 a.m. Saturday. "All hands on deck," was the way I heard it, when I came in at 4:30 a.m. Saturday to do my regular volunteer classical music show "Howard's Day Off." And all hands showed up. At 7 a.m. in the Atherton Theatre you could see almost everyone who does any kind of show on HPR, and all the regular volunteers. The listeners showed up, too. We got lots of calls, including supplemental gifts from people who had already pledged, and more new members, and within two hours the goal was met. It would be easy to speculate that economic cooling led to charity fatigue and limited giving, but actually what I heard was that giving fell off sharply a week ago Monday -- a federal holiday -- and was strong the rest of the time. And the other significant thing about this drive? Only about one listener in ten actually makes the call to pledge support, so even an incremental increase in new members tends to mean a significant increase in financial support. This time there were more than 500 new members from Oahu and more than 200 from Maui and the Big Island. This is the best news of all.

Superferry as the anti-airline

I report about Superferry all the time but had never sailed it, so I decided to. Superferry had graciously offered to make this happen but I decided to quietly book my own travel and take Bernadette to Maui for the weekend without any commitments except those we made to each other. What struck me most was how certain things you hate about flying are different on the ferry. It's like an anti-airline, a commentary on what's wrong with airlines today. To fly, you have to congregate in a crowded room with uncomfortable seating and wait until the airline is ready for you to board. Then you line up to take your cramped, uncomfortable seats on the plane. On Superferry, you line up your car with other people and boarding is allowed long before departure. So instead of waiting to all board at once, there is a trickle, more like people arriving for a party. Seating is unassigned, and the seats are large and comfortable with lots of space in between. When flying, you can get food only when the personnel offer it, and the food is both expensive and bad. Even in first class, where it tastes better and comes with the price of the ticket, you wait to be offered it. On Superferry, food is for sale before as well as during the sailing, it's good, and it's cheaper. You can also bring your own, as with the airlines, but if you do there is more room to break it out and even to share it with others. When flying, you tend to bring too little stuff with you because there are so many financial and logistical impediments to bringing an extra bag. On Superferry, if you bring your car, if there is something you're not sure you'll need but might need, you just throw it in the trunk. For example, if I were flying, I might not have brought enough warm clothing for the drive up to Haleakala to see the sunrise. The scenery is spectacular. You can also access spectacular scenery by flying Island Air or Pacific Wings, and I sometimes think a lot of people miss some very beautiful flying because of a knee-jerk preference for the comfort of bigger planes. I caught myself thinking like this: I willingly endured sickening sulphur fumes and giddy updrafts to take a plane ride over the lava several years ago, and feel the view was worth the splitting headache it gave me, yet in booking Superferry I wondered about how many Dramamines to take. Concerning that: on my sailing, seas were so flat, it wasn't a fair test. I'll have to sail in the winter to see how bad it gets. On this trip, three weeks ago, there wasn't any difficulty whatever except once when I got up to walk and found myself lurching a little, but it didn't feel bad, I just needed to get my sea legs, which took about two minutes. Wonderful trip, too. I took the Thunderbird to the mountaintop and finally saw the rising sun -- previously, for me, the mountain was always socked in -- and later the same day we drove around West Maui including the scary road on the upper coast that doesn't appear on many maps. The only thing that I didn't like was that the car had a lot of salt spots on it when we got home, but McKinley Car Wash took care of it.

How to visit Hawaii without visiting Hawaii

A few years ago I gave a speech to the retail tenants of the Kyo-ya hotels in Waikiki, a very nice bunch of people. But a few of them acted like it was the job of the Sheraton Waikiki to be careful not to encourage guests to leave the premises. It's easy enough to understand: rents are notoriously high for resort retail, and tenants expect the landlord to help them capture enough sales to pay those high rents. The thinking, in some cases, is that the more time the guest spends "on campus," the more sales. I'm not sure it's that simple -- many guests probably limit their spending on the premises to one or two deliberate shopping strolls, regardless of how much time they spend at Hanauma Bay or on the spa table. But there is some very definite thinking in the resort hotel game that a well-designed resort offers so many things to do that you don't have to leave the grounds. I had some acquaintances on the mainland who told me without shame that they had stayed a week at Hilton Hawaiian Village without once leaving the campus. They still called it their "Hawaiian vacation," too. All this came back to me this week as I saw the architect's drawing of the planned Walt Disney resort hotel at Ko Olina, with hundreds of hotel rooms, hundreds of timeshares, and employees dressed as Disney characters. The drawing shows, if not a magic kingdom, at least a good-sized fun park, protected from the rest of the state by being sited in a cavern of high-rises. It's got everything but a moat. It will doubtless be a fun place. And I know some people don't especially care to have tourists everywhere. But I feel sorry for visitors who never even drive up the Windward or Leeward Coasts but think they've "seen" Hawaii.

Look! Up in the sky! Another airline battle!

Republic Airways, in an alliance with Mokulele Airlines, has decided to make four short-range jets available to the local carrier so it can fly from Honolulu to both Kona and Lihue beginning Nov. 17, in direct competition with Hawaiian Airlines and Mesa Air's go! interisland service. Until now Mokulele has been flying seven Cessna Grand Caravans under the brand names go!Express and Aloha Air Cargo Express. It's an exciting new venture for Mokulele, which was a sleepy Big Island charter service until acquired by Bill Boyer, the inventor of those laptop entertainment systems you can rent on Hawaiian Airlines transpacific flights. For most of our flying history, Hawaii has been able to support two main interisland carriers but not three. Each third party carrier died trying to change that after a protracted fare war in which all the carriers were wounded. The scenario played out differently last time, when Mesa Air's little Go division managed to execute its plan to put the legacy carrier Aloha Airlines out of business with a little help from soaring fuel prices and prosecutors who don't know predatory pricing when it's spelling out in an email. Now, less than a year after vanquishing Aloha, go! finds itself in the position of legacy carrier, sort of, with an upstart that has the same advantage it originally had, a deep-pocketed mainland airline backing the play. Mesa Air makes most of its living flying regional service as a subcontractor for United Airlines, US Airways and Delta, though Delta canceled some business over performance concerns. Republic does the same thing, and for more carriers, including American, United, Delta, Continental and US Airways. That's all of the big six except Northwest, which soon will be part of Delta anyway. Though go! was smaller than Aloha, its parent company was bigger, so it was able to lose money for years while the fare war bled Aloha's cash. Now it faces competition from an airline that can stand up to that. But there's more. Mokulele will fly four Embraer jets that seat 70 passengers. These planes are bigger and faster than what go! flies, while being smaller and more fuel-efficient than what Hawaiian flies.