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FT.com / Columnists / Lunch with the FT - Lunch with the FT: Tracey Emin

Lunch with the FT: Tracey Emin

By Jackie Wullschlager

Published: May 22 2009 18:03 | Last updated: May 22 2009 18:03

Illustration of Tracey EminScott’s of Mayfair is full of braying voices, too-wide smiles, glinting sunglasses and, looking down from every wall and alcove, the brash, bright Young British Art aesthetic. I pass a Rebecca Warren sculpture as I enter and am shown to a table beneath a Gary Hume gloss painting. “Tracey is running late,” a waiter confides but, almost immediately, a bird-like figure in cool linen blouse fastened with a safety pin, demure knee-length skirt, fishnet stockings and cowboy boots darts in and lands beside me.

Instantly friendly, flustered, mopping her neck, Tracey Emin leaps up again within seconds to fling her arms round the maître d’. She has piercing eyes, delicate, mobile features and teeth less wonky than photographs suggest. Gold rings, earrings and several necklaces all flash as she talks, breathless and animated in an intense Estuary English, for the next three hours.

“This is absolutely my favourite restaurant,” she opens. “I come here every Saturday when I’m in London. My powerful lady friends – Virginia Ironside, Lynn Barber – lunch here. You see everyone – Charles Saatchi and Nigella eat here. I love lunch more than dinner. I always get too pissed in the evening.” Without a glance at the menu, she orders caviar and oysters. “There, you can write that she orders from the menu without looking! And that the whole restaurant stands up when I come in.” This last is not quite true but certainly she turns heads and is welcomed by every passing waiter. “You’d better behave,” she tells one, “because this is the FT.” Trying to match her pace, I order the first things that catch my eye from the extensive, fish-strong menu: asparagus tart followed by Dover sole.

The waiter interprets “any white wine” as the cheapest on offer: a crisp Sauvignon Blanc arrives speedily and Emin raises her glass to toast Carol Ann Duffy, whose appointment as poet laureate has just been announced. “She was up for it 10 years ago and didn’t get it because Tony Blair didn’t like her private life. Now a self-sufficient, openly gay woman has become poet laureate – it’s f***ing brilliant. Things are changing.” Duffy is 53 and one of Emin’s pet themes is that “women go on getting better. It’s like a light bulb, women burn and burn and burn, with men it’s just one big flash. At about 40, a male artist has this massive ejaculation and then the work – though not the prices – goes down. It goes back to the sex thing: women keep coming and coming, men just do it once. It’s a metaphor for life.”

Emin turns 46 in July and her new show, Those Who Suffer Love, is about sex in middle age. It centres on a short animation film of a woman masturbating. Emin shows me an image on the invitation card and we agree that the headless figure, drawn in her characteristic spidery lines, looks like a frog. “Masturbation is supposed to be self-appreciative but it’s also about self-loathing,” she explains. “For women coming up to 50, the mind isn’t as agile as it used to be. What was once possible isn’t. You know, one minute you’re being gang-banged by Hell’s Angels, the next minute you’re being f***ed by a dog. The film is about what happens to your mind in middle age. So it’s honest.” She finishes with a pleading smile that makes me realise – recalling her two iconic pieces, the embroidered tent “Everyone I Have Ever Slept With 1963-1995” and “My Bed”, an installation of unmade sheets surrounded by a detritus of condoms and blood-stained knickers – that it is the fragile, childlike, almost ingratiating quality of her art, rather than its outrage or shock, that is most memorable.

A tower of tiny blinis appears. She peels off each one slowly and deliberately, dotting it with caviar with a subdued delight that recalls a child absorbed in a pack of sweets. Checking that my asparagus tart is acceptable – it is delicious – she continues: “Middle age and sex – it’s taboo. This film is supposed to relate to all women. When you see it, you’ll think, ‘F***ing hell, I wish it was me!’”

In an age where self-exposure – reality television, confessional memoirs – is standard, Emin’s autobiographical bravado stands out. “I was suicidal up to 10 years ago,” she says. Her drawings, paintings, films, neon and textile works document broken love affairs, loneliness, desire, and depression following two abortions. She cites Edvard Munch, Egon Schiele, German expressionism and Louise Bourgeois as influences, though I reckon she depends most on post-minimalist conventions and installation media. Although nothing in her art is formally radical, her impression of emotional authenticity evokes both passionate responses – mostly from women “and a hell of a lot of gay men”, she grins – and stinging criticism.

Saatchi’s search for the next big thing

This autumn art collector and gallerist Charles Saatchi will become the latest canny entrepreneur to engage in hours of televised self-promotion (see also Sir Alan Sugar’s The Apprentice and Lord Lloyd-Webber’s How do You Solve a Problem like Maria? and Any Dream will Do!) when his contemporary art show/talent contest launches on BBC2, writes Jonathan Openshaw.

Saatchi’s Best of British hopes to unearth the next Tracey Emin or Damien Hirst from a batch of unknown hopefuls and – considering Saatchi’s role in the rise of the Young British Artist movement during the 1990s – the idea may not be as far-fetched as it sounds.

The famously media-wary Saatchi seems a surprising choice to front this type of project, but he has made a public statement professing his excitement about the series, “because nobody knows where the next art star will emerge from”.

Not that Saatchi is about to become the art world’s answer to Simon Cowell. There will be no taking centre-stage with pithy pronouncements on the competitors’ efforts. Rather, his thoughts and feedback will be relayed to the students (and cameras) via two course tutors, who will also act as advisers (think along the lines of Sugar’s indomitable Margaret and acerbic Nick). There will also be guest judges from across the industry, including artist Emin, collector Frank Cohen, gallerist Kate Bush and writer/artist Matt Collings.

The competition was announced in January and resulted in thousands of applications from artists working across all media including installation, painting, digital media, sculpture and performance. The judges will select 50 of these “undiscovered” artists (not having gallery representation is a condition of entry) to be presented to Saatchi at a private staged exhibition, from which he will choose the six whom he views as most promising. These students will then be installed in a bespoke “art school” in east London for the summer, with the tutors on hand to offer technical advice and to “facilitate creativity”.

There will also be numerous studio visits from the great and the good of the contemporary art world, including curators, gallerists, collectors, artists and critics, who will provide masterclasses for the students as well as leading discussions covering key issues in contemporary art.

The series will culminate in a group show held in September, from which Saatchi will select one winner to exhibit at the “Newspeak: British Art Now” exhibition to be held in October at the Hermitage in St Petersburg.

She represented Britain at the last Venice Biennale in 2007, where her exhibition of intimate drawings was widely panned. “I cried about Venice because people were so cruel,” she admits. Did she get her revenge? “You know what Vogue said – the party of the century was Tracey Emin’s party in Venice, the whole canal was blocked for my boats, Fatboy Slim was the DJ ... Jerry Hall was there in her boat – it made Britain look so glamorous.” Yet the criticism still rankles. “You know what? I’ll do Venice again. When I was there I imagined myself as a really old woman walking up the steps of the pavilion. When I’m 80 I’ll have a great f***ing machine there” – she pounds her arms together suggestively – “or a swimming pool. I’ll fill the British pavilion with water and I’ll swim in it every day and it’ll be a performance thing: a bit wanky but so lovely.”

Is her whole life not a performance piece? “I only show what I want to show. Do you remember how fuzzy the drawings in Venice were? It’s like Daphne du Maurier, everyone said she was so open. In fact, she only gave you what she wanted you to see – there were so many layers.” An astrologer recently gave a talk on similarities between her and du Maurier’s birth charts, since when she has been reading her way through the novelist’s oeuvre. “She’s like a female Edgar Allan Poe, very dark.” I note the parallels between her text-based works and du Maurier’s – both are storytellers, both tread a line between psychological disturbance and sentimentality.

Emin slips down oysters alternating with spicy cocktail sausages – “the fat of sausages with oysters is a nice sensation” – and leans forward eagerly, tapping my arm. “Do you ever write stories? My favourite favourite time is in the winter, when the morning dark is a different colour from the night dark, not the darkness which is coming but the darkness which is leaving. Then, I live in bed and write stories in my head.” Ed Victor is her literary agent and she is planning a collection of stories, Hotel International, “that are a bit f***ed up. That’s where I’m going to vent my spleen. They say never summon the devil because he’ll come. Well, I’m going to sit down with the devil and battle it out. I’m not afraid!”

Hotel International refers to her parents’ hotel in Margate, Kent, where she was brought up with her twin brother Paul, at first “like a princess”, then in poverty when the business went bust. Her Turkish father – who had lived with them half the week, spending the other half with his wife and family – “left my mum with absolutely nothing”. Emin suffered abuse and neglect, her father was “phenomenally cruel – he has no sense of ethics or moral judgement” and “we had an electric fire with one bar; two meters, one for gas, one for electricity. We couldn’t run them at the same time because there wasn’t enough change. I washed in a bowl because there was no hot water. We squatted for six and a half years. I was down there hanging on for dear life” – she makes a ladder with her hands, and stabs a fingernail at the bottom – “I was suicidal. When Saatchi asks why I never send him any work, I say, ‘You put Margaret Thatcher in power. Thatcher should be tried for crimes against humanity.’”

Yet, to her own surprise, she “voted for Boris” in London’s last election. Her “favourite prime minister of all time is Ted Heath, health and education were his priorities. He wrote poetry, sailed, wore pink shirts and wasn’t ashamed”. She groans about Gordon Brown’s income tax rise and recently attended a Conservative arts dinner, where her neighbour was [Tory MP] Ed Vaizey. “When he realised he was sitting next to me, he was petrified, he started shaking.” This seems far-fetched: Emin, elected a Royal Academician last year, increasingly belongs to the establishment. In 2010 her first London retrospective opens at the Hayward, followed by a show at Margate’s new Turner gallery in 2011. “The prodigal daughter returns. Then I’ll have gone full circle, I’ll be back where I started and be able to reassess my life.”

Last Christmas, she got ill – a tapeworm, some chest and kidney infections – and her doctor advised five years off from the stress of making exhibitions. “A year ago, I got so upset about not having children, I stopped drinking to make me look more mummyish. I wanted to be more conformist, to give the idea of ordinariness. I always said I’d have kids when I had £1m in the bank and passed my driving test.” Why didn’t she? “I wasn’t with anyone. But if you don’t have children, you’re cut off from a major part of society. Sometimes I wake up and think, ‘What’s it all for?’ I could just disappear into obscurity. But when I was ill, I realised part of my desire to have children was that I want to escape my responsibilities to myself.” She is currently in a relationship with photographer Scott Douglas, who lives in Scotland, and they spend alternate fortnights together. “I understand now that my children will not hang as pegs in a tent but on the walls of Tate.” She has five godchildren and among many charitable ventures is the “Tracey Emin Library” in Uganda, where “lots of little children are reading books”.

Emin says she “wouldn’t be where I am now if I’d had those children. But no woman wants to have an abortion.” Accidents happen, I venture. “Condoms split – but actually, no they don’t if you don’t move.” She sits up rigid, arms pinned to her sides, mock-puritanical, then swings round to discuss desserts. Can she have the prosecco jelly without the wild strawberries because “I just want jelly”? The staff, who will clearly do anything for her, are willing to make it but warn it will take hours to set. She opts for raspberry ice-cream and mint tea, advises that my chocolate fondant “will kill you” and orders more wine. Finishing it, she looks accusingly at my still full glass. “You’re not going to drink that, are you?” she asks, pouring the contents into her own and downing it as I request the bill.

“I don’t pay here,” she boasts. “Well, I’ve paid already – with my art.” Nevertheless, she apologises as we leave that my tip is too meagre (she has no cash on her to supplement it), compliments one doorman on his tie and collects a lost umbrella with another, then suggests we share a taxi home. As we crawl east to Shoreditch, she floods me with background information, details I might have missed (“It’s good for you to see me in my world”) before courteously opening the door to let me out. “Also,” she reminds me as I step on to the pavement, “people expect me to be rude, but I’m really polite.”

‘Those Who Suffer Love’, White Cube, London SW1, May 29-July 4

Jackie Wullschlager is the FT’s visual arts critic

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Inflation panacea

FT.com / Columnists / Wolfgang Munchau - We cannot inflate our way out of this crisis

We cannot inflate our way out of this crisis

By Wolfgang Münchau

Published: May 24 2009 20:05 | Last updated: May 24 2009 20:05

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

Ernest Hemingway, “Notes on the Next War: A Serious Topical Letter” , 1935

What I hear more and more, both from bankers and from economists, is that the only way to end our financial crisis is through inflation. Their argument is that high inflation would reduce the real level of debt, allowing indebted households and banks to deleverage faster and with less pain.

To achieve the desired increase in inflation, the US Federal Reserve should either announce an inflation target or simply keep interest rates at zero when the recovery begins. That way, real interest rates would become strongly negative. The advocates of such a strategy are not marginal and cranky academics. They include some of the most influential US economists.

Four immediate questions arise from these considerations. Can it be done? Can it be undone? Can it be done at a reasonable economic cost? Last, should it be done?

Of course, it can be done, but only for as long as the commitment to higher inflation is credible. Inflation is not some lightbulb that a central bank can switch on and off. It works through expectations. If the Fed were to impose a long-term inflation target of, say, 6 per cent, then I am sure it would achieve that target eventually. People and markets might not find the new target credible at first but if the central bank were consistent, expectations would eventually adjust. In the end, workers would demand wage increases of at least 6 per cent each year and companies would strive to raise their prices by that amount.

If, however, a central bank were to pre-announce that it was targeting 6 per cent inflation in 2010 and 2011, and 2 per cent thereafter, the plan would probably not succeed. We know that monetary policy affects inflation with long and variable lags. Such a degree of fine-tuning does not work in practice. My own guess is that one would have to make a much longer-term commitment to a higher rate of inflation for such a policy shift to be credible. I suspect that the greater the distance between the new rate and the current rate, the longer the commitment would have to be.

Could it be reversed, once it had been achieved? Again, the answer is yes; again, the commitment would have to be credible. But herein lies precisely the problem. If the central bank were honest from the start and pre-announced that it would eventually reverse its policy, it might never reach its goal of higher inflation in the first place. If the central bank were dishonest, it might achieve the goal. But it would lose credibility the moment it decided to reverse. So any new credibility would have to be earned through new policy action. This might imply nominal interest rates significantly above 6 per cent for an uncomfortably long period.

What would happen then? I can think of two scenarios. The best outcome would be a simple double-dip recession. A two-year period of moderately high inflation might reduce the real value of debt by some 10 per cent. But there is also a downside. The benefit would be reduced, or possibly eliminated, by higher interest rates payable on loans, higher default rates and a further increase in bad debts. I would be very surprised if the balance of those factors were positive.

In any case, this is not the most likely scenario. A policy to raise inflation could, if successful, trigger serious problems in the bond markets. Inflation is a transfer of wealth from creditors to debtors – essentially from China to the US. A rise in US inflation could easily lead to a pull-out of global investors from US bond markets. This would almost certainly trigger a crash in the dollar’s real effective exchange rate, which in turn would add further inflationary pressure.

Under such a scenario, it might not be easy to keep inflation close to a hypothetical 6 per cent target. The result could be a vicious circle in which an overshooting inflation rate puts further pressure on the bond markets and the exchange rate. The outcome would be even worse than in the previous example. The central bank would eventually have to raise nominal rates aggressively to bring back stability. It would end up with the very opposite of what the advocates of a high inflation policy hope for. Real interest rates would not be significantly negative, but extremely positive.

Should this be done? A credible inflation target of 2 or 3 per cent, maintained over a credibly long period of time, is useful. But I doubt that a 6 per cent inflation target could be simultaneously credible and sustainable. Tempting as it may be, it is a beggar-thy-neighbour policy unless replicated elsewhere and would come to be regarded as such by many countries in the world. It would produce a whole new group of losers, both inside and outside the US, with all its undesirable political, social, economic and financial implications. It would also fuel the already rampant discussions about the inevitable death of fiat money.

Stimulating inflation is another dirty, quick-fix strategy, like so many of the bank rescue packages currently in operation. As Hemingway said, it would feel good for a time. But it would solve no problems and create new ones.

munchau@eurointelligence.com

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The case for gold

Gold bugs at last have their perfect trinity - Telegraph

Gold bugs at last have their perfect trinity
China has doubled its bullion reserves and left us in no doubt that it will spend more of its $40bn monthly surplus on hard assets rather than the toxic paper of Western democracies.


By Ambrose Evans-Pritchard
Last Updated: 9:36PM BST 23 May 2009

Comments 34 | Comment on this article

The world's top hedge fund manager John Paulson has built a gold position of at least $5.5bn, the biggest such move since George Soros and Sir James Goldsmith bet on Newmont Mining in 1993.

Britain has become the first of the Anglo-Saxon "AAA" club to face a downgrade. As feared, the cancer of bank leverage is spreading to sovereign cores.

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Gold prices tend to slide in late May and languish through the summer, because of the seasonal ups and downs of jewellery demand. The trader reflex would be to short gold at this stage after its $90 vault to $959 an ounce over the past month. They may think again this year.

Paulson & Co has bought $2.9bn in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes − three times the Brown-gutted reserves of the United Kingdom.

Mr Paulson has also built up a $2.3bn holding of Anglo Ashanti, Goldfields, Kinross Gold, and Market Vectors Gold Miners. The fact that he is launching a "Paulson Real Estate Recovery Fund", reversing the bet against sub-prime securities that made him rich, tells us all we need to know about his thinking. This is a liquidity-reflation play.

He may be wrong, of course. In his early fifties, he belongs to the baby-boom cohort most psychologically vulnerable to the 1970s "paradigm-error". And perhaps he has never lived in Japan.

It is striking how many of those most alert to the deflation danger are either veterans of Japan's Lost Decade or close students of it: Albert Edwards at Société Générale, Russell Jones at RBC Capital, Nobel laureate Paul Krugman, the Fed's Ben Bernanke, and Athanasios Orphanides, who helped draft the Fed's study on the Japan trap. "People always thought Japan's bond yields had to rise, but they kept falling and Japan is still not really out of deflation," said Mr Edwards. Indeed, 20 years after the Nikkei peaked at over 39,000 it stands today at 9,280. Interest rates are 0.01pc. The yield on two-year state bonds is 0.34pc. Still there is not a whiff of inflation.

A number of readers have written to me in tones of polite reproach asking why I fret about deflation when governments everywhere are spending and printing as if there was no tomorrow. I admit to being tortured by self-doubt, like others grappling with this extraordinary situation.

What we know is that inflation is already negative in Ireland (-3.5pc), China (-1.5pc), Thailand (-0.9pc), Korea (-0.5pc), US (-0.7), Japan (-0.3), Switzerland (-0.3, Spain (-0.2pc). The eurozone may be negative by July. Alistair Darling said Britain's retail RPI inflation used to set wage deals will be minus 3pc by September.

Does this constitute deflation in a meaningful sense? Not yet, perhaps. But it is moving too close for comfort in a world stretched by extreme leverage. The economies of the US, Japan, the eurozone, and Britain have been contracting in "nominal" as well as "real" terms – which smacks of the 1930s.

The "yen GDP" of Japan has shrunk by 10pc in one year; the "euro GDP" of Germany has shrunk 6.2pc, and Italy's by 4.7pc ; the "dollar GDP" of the US has shrunk 3.3pc. Debts are not shrinking, however.

GMO's Jeremy Grantham says in his latest note, Last Hurrah And Seven Lean Years, that the market value of equities, houses and commercial property in the US reached $50 trillion in the boom. This "perceived wealth" sustained $25 trillion of debt.

The crash has cut this wealth to $30 trillion, but the debts are still there. America's debt-gearing has exploded, as it has in the UK and Europe. This looks awfully like Irving Fisher's "debt deflation" trap of 1933. It will be a long slog for households to bring their debt-to-wealth ratios down to manageable levels.

You can argue – as do UBS, Merrill Lynch, ING, and Capital Economics, to name a few – that massive global stimulus is merely struggling to off-set a massive deflationary shock.

So how will gold fare in a "Japanese" stalemate world where neither inflation nor deflation gets the upper hand? The eight-year rally that has lifted gold from $254 to $959 may lose momentum for a while.

"The air is getting thin up here," said John Reade, precious metals guru at UBS. "Rich investors are no longer rushing out to buying gold bars as they did after the Lehman collapse. Still, we think it is highly significant that both China and Russia – two of the biggest holders of foreign reserves – are both buying gold," he said.

Personally, I remain a gold bug out of fear that the most corrosive phase of this crisis lies ahead. There are two more boils to lance: Europe and China. As the IMF keeps telling us, Europe's banks are still covering up their vast toxic debts. Nor has the G20 begun to address the root cause of the global crisis, which lies in excess exports from East (aided by currency manipulation) to an over-spending West. China is putting off the day of reckoning with its crisis response, which is to build yet more plant to flood the world with yet more over-capacity.

For "political bears" the risk is that the EU polity fragments under strain, and that governments restrict basic markets to defend themselves – whether by imposing exchange controls to stop bond flight, or shutting derivatives markets used as hedges, or putting up trade barriers. We will find out if and when unemployment hits 10pc in America, 12pc in Germany, and 20pc in Spain, or if migrant workers rampage in Shenzhen.

Some call this the "Armageddon case" for gold. That is going too far. However, gold has outperformed Wall Street's S&P 500 index by 500pc so far this century, as if able sniff out trouble in advance. Such runs tend to finish with a "parabolic" blow-off before they die. Mr Paulson may yet make another fortune, whatever his reason.

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Nervous

What You Don’t Know Makes You Nervous - Happy Days Blog - NYTimes.com

What You Don’t Know Makes You Nervous
By Daniel Gilbert
INSERT DESCRIPTIONShoboshobo

CAMBRIDGE, Mass. — Seventy-six years ago, Franklin Delano Roosevelt took to the inaugural dais and reminded a nation that its recent troubles “concern, thank God, only material things.” In the midst of the Depression, he urged Americans to remember that “happiness lies not in the mere possession of money” and to recognize “the falsity of material wealth as the standard of success.”

“The only thing we have to fear,” he claimed, “is fear itself.”

As it turned out, Americans had a great deal more to fear than that, and their innocent belief that money buys happiness was entirely correct. Psychologists and economists now know that although the very rich are no happier than the merely rich, for the other 99 percent of us, happiness is greatly enhanced by a few quaint assets, like shelter, sustenance and security. Those who think the material is immaterial have probably never stood in a breadline.

Money matters and today most of us have less of it, so no one will be surprised by new survey results from the Gallup-Healthways Well-Being Index showing that Americans are smiling less and worrying more than they were a year ago, that happiness is down and sadness is up, that we are getting less sleep and smoking more cigarettes, that depression is on the rise.

An uncertain future leaves us stranded in an unhappy present with nothing to do but wait.

But light wallets are not the cause of our heavy hearts. After all, most of us still have more inflation-adjusted dollars than our grandparents had, and they didn’t live in an unremitting funk. Middle-class Americans still enjoy more luxury than upper-class Americans enjoyed a century earlier, and the fin de siècle was not an especially gloomy time. Clearly, people can be perfectly happy with less than we had last year and less than we have now.

So if a dearth of dollars isn’t making us miserable, then what is? No one knows. I don’t mean that no one knows the answer to this question. I mean that the answer to this question is that no one knows — and not knowing is making us sick.

Consider an experiment by researchers at Maastricht University in the Netherlands who gave subjects a series of 20 electric shocks. Some subjects knew they would receive an intense shock on every trial. Others knew they would receive 17 mild shocks and 3 intense shocks, but they didn’t know on which of the 20 trials the intense shocks would come. The results showed that subjects who thought there was a small chance of receiving an intense shock were more afraid — they sweated more profusely, their hearts beat faster — than subjects who knew for sure that they’d receive an intense shock.

That’s because people feel worse when something bad might occur than when something bad will occur. Most of us aren’t losing sleep and sucking down Marlboros because the Dow is going to fall another thousand points, but because we don’t know whether it will fall or not — and human beings find uncertainty more painful than the things they’re uncertain about.

But why?

A colostomy reroutes the colon so that waste products leave the body through a hole in the abdomen, and it isn’t anyone’s idea of a picnic. A University of Michigan-led research team studied patients whose colostomies were permanent and patients who had a chance of someday having their colostomies reversed. Six months after their operations, patients who knew they would be permanently disabled were happier than those who thought they might someday be returned to normal.

Similarly, researchers at the University of British Columbia studied people who had undergone genetic testing to determine their risk for developing the neurodegenerative disorder known as Huntington’s disease. Those who learned that they had a very high likelihood of developing the condition were happier a year after testing than those who did not learn what their risk was.

Why would we prefer to know the worst than to suspect it? Because when we get bad news we weep for a while, and then get busy making the best of it. We change our behavior, we change our attitudes. We raise our consciousness and lower our standards. We find our bootstraps and tug. But we can’t come to terms with circumstances whose terms we don’t yet know. An uncertain future leaves us stranded in an unhappy present with nothing to do but wait.

Our national gloom is real enough, but it isn’t a matter of insufficient funds. It’s a matter of insufficient certainty. Americans have been perfectly happy with far less wealth than most of us have now, and we could quickly become those Americans again — if only we knew we had to.
Dan Gilbert

Daniel Gilbert is professor of psychology at Harvard University and author of “Stumbling on Happiness.” More of his writing and videos of his appearances can be found at his Web site.

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Very Good

FT.com / Columnists / Martin Wolf - This crisis is a moment, but is it a defining one?

This crisis is a moment, but is it a defining one?

By Martin Wolf

Published: May 19 2009 19:48 | Last updated: May 19 2009 19:48

Pinn illustration

Is the current crisis a watershed, with market-led globalisation, financial capitalism and western domination on the one side and protectionism, regulation and Asian predominance on the other? Or will historians judge it, instead, as an event caused by fools, signifying little? My own guess is that it will end up in between. It is neither a Great Depression, because the policy response has been so determined, nor capitalism’s 1989.
EDITOR’S CHOICE
Martin Wolf: Why Obama’s conservatism may not prove good enough - May-12
Economists’ forum - Oct-01
Martin Wolf: Tackling Britain’s fiscal debacle - May-07

Let us examine what we know and do not know of its impact on the economy, finance, capitalism, the state, globalisation and geopolitics.

On the economy, we already know five important things. First, when the US catches pneumonia, everybody falls seriously ill. Second, this is the most severe economic crisis since the 1930s. Third, the crisis is global, with a particularly severe impact on countries that specialised in exports of manufactured goods or that relied on net imports of capital.

Fourth, policymakers have thrown the most aggressive fiscal and monetary stimuli and financial rescues ever seen at this crisis. Finally, this effort has brought some success: confidence is returning and the inventory cycle should bring relief. As Jean-Claude Trichet, president of the European Central Bank, remarked, the global economy is “around the inflection point”, by which he meant that the economy is now declining at a declining rate.

Global economy

We can also guess that the US will lead the recovery. The US is again the advanced world’s most Keynesian country. We can guess, too, that China, with its massive stimulus package, will be the most successful economy in the world.

Unfortunately, there are at least three big things we cannot know. How far will exceptional levels of indebtedness and falling net worth generate a sustained increase in the desired household savings of erstwhile high-spending consumers? How long can current fiscal deficits continue before markets demand higher compensation for risk? Can central banks engineer a non-inflationary exit from unconventional policies?

On finance, confidence is returning, with spreads between safe and risky assets declining to less abnormal levels and a (modest) recovery in markets. The US administration has given its banking system a certificate of reasonable health. But the balance sheets of the financial sector have exploded in recent decades and the solvency of debtors is impaired.

We can guess that finance will make a recovery in the years ahead. We can guess, too, that its glory days are behind it for decades, at least in the west. What we do not know is how far the “deleveraging” and consequent balance-sheet deflation in the economy will go. We also do not know how successfully the financial sector will see off attempts to impose a more effective regulatory regime. Politicians should have learnt from the need to rescue financial systems stuffed with institutions deemed too big and interconnected to fail. I fear that concentrated interests will overwhelm the general one.

What about the future of capitalism, on which the Financial Times has run its fascinating series? It will survive. The commitment of both China and India to a market economy has not altered, despite this crisis, although both will be more nervous about unfettered finance. People on the free- market side would insist the failure should be laid more at the door of regulators than of markets. There is great truth in this: banks are, after all, the most regulated of financial institutions. But this argument will fail politically. The willingness to trust the free play of market forces in finance has been damaged.

We can guess, therefore, that the age of a hegemonic model of the market economy is past. Countries will, as they have always done, adapt the market economy to their own traditions. But they will do so more confidently. As Mao Zedong might have said, “Let a thousand capitalist flowers bloom”. A world with many capitalisms will be tricky, but fun.

Less clear are the implications for globalisation. We know that the massive injection of government funds has partially “deglobalised” finance, at great cost to emerging countries. We know, too, that government intervention in industry has a strong nationalist tinge. We know, as well, that few political leaders are prepared to go out on a limb for free trade.

Most emerging countries will conclude that accumulating massive foreign currency reserves and limiting current account deficits is a sound strategy. This is likely to generate another round of destabilising global “imbalances”. This seems an inevitable result of a defective international monetary order. We do not know how well globalisation will survive all such stresses. I am hopeful, but not that confident.

The state, meanwhile, is back, but it is also looking ever more bankrupt. Ratios of public sector debt to gross domestic product seem likely to double in many advanced countries: the fiscal impact of a big financial crisis can, we have been reminded, be as costly as a large war. This, then, is a disaster that governments of slow-growing advanced economies cannot afford to see repeated in a generation. The legacy of the crisis will also limit fiscal largesse. The effort to consolidate public finances will dominate politics for years, perhaps decades. The state is back, therefore, but it will be the state as intrusive busybody, not big spender.

Last but not least, what does the crisis mean for the global political order? Here we know three important things. The first is that the belief that the west, however widely disliked by the rest, at least knew how to manage a sophisticated financial system has perished. The crisis has damaged the prestige of the US, in particular, pretty badly, although the tone of the new president has certainly helped. The second is that emerging countries and, above all, China are now central players, as was shown in the decision to have two seminal meetings of the Group of 20 leading nations at head of government level. They are now vital elements in global policymaking. The third is that efforts are being made to refurbish global governance, notably in the increased resources being given to the International Monetary Fund and discussion of changing country weights within it.

We can still only guess at how radical the changes in the global political order will turn out to be. The US is likely to emerge as the indispensable leader, shorn of the delusions of the “unipolar moment”. The relationship between the US and China will become more central, with India waiting in the wings. The relative economic weight and power of the Asian giants seems sure to rise. Europe, meanwhile, is not having a good crisis. Its economy and financial system have proved far more vulnerable than many expected. Yet how far a set of refurbished and rebalanced institutions for international co-operation will reflect the new realities is, as yet, unknown.

What then is the bottom line? My guess is that this crisis accelerated some trends and has proved others – particularly those in credit and debt – unsustainable. It has damaged the reputation of economics. It will leave a bitter legacy for the world. But it may still mark no historic watershed. To paraphrase what people said on the death of kings: “Capitalism is dead; long live capitalism.”

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Big Brother

What Does Your Credit-Card Company Know About You? - NYTimes.com

What Does Your Credit-Card Company Know About You?
Thomas Hannich for The New York Times

A 2002 study of how customers of Canadian Tire were using the company's credit cards found that 2,220 of 100,000 cardholders who used their credit cards in drinking places missed four payments within the next 12 months. By contrast, only 530 of the cardholders who used their credit cards at the dentist missed four payments within the next 12 months.

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By CHARLES DUHIGG
Published: May 12, 2009

Rudy Santana’s day began recently, as almost all his working days begin, with a name on a screen. The name that April morning belonged to a Massachusetts man in his mid-30s. He owed money on a credit card and a second mortgage, the screen told Santana, and was separated from his wife. He was behind in paying back $28,900.97 in debt. Which was why he was on Santana’s screen.
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When Santana reached him by phone, the man quickly began talking about his ex-wife. “Listen,” the man said. “I called her about this debt, and a guy picked up — a guy I’ve never heard before — and when I asked for her, he hung up on me. Can you believe that? We used that money to renovate the kitchen! And now she won’t even talk to me! Who the hell was that guy who answered the phone?”

“So you’ve spoken to your wife?” Santana asked, his voice soft and gentle. “Were you able to have a good talk with her? Even when you’re angry, it’s important to talk. Did you talk about the debt?”

“Yeah, we talked about it,” the man replied. He paused and released a small sob. “You know, she told me we would be together until we died. I know I have to pay this. But I’m not going to pay her half. I won’t damn pay it.”

“I know,” Santana said. “This is difficult, and I’ll be honest — I think you’re doing a great job. You’re really strong. But the thing is, to the bank, they don’t make a distinction between you and your wife. To them, it’s just debt. They just want to get paid.

“I think I can do something for you, though,” Santana continued, glancing at his screen. It was filled with information about the man, including the fact that he had recently sold his home at a loss. Some of this information had been sent by the man’s bank to Santana’s employer, Sunrise Credit Services, which collects delinquent debts for companies like Citigroup, Bank of America and HSBC. Santana’s company had added notes, too, including helpful tips — he is easier to reach in the mornings, for example — and new ways to contact him.

“Look,” Santana said. “I know you’re angry at your wife. One step to ending that anger is putting this debt behind you. It will really help you find peace. You owe about $29,000. How much do you think you can pay?”

“Well, how much are you gonna help me?” the man shot back. “These banks got all this taxpayer money from the government, and they’re the ones who ruined the market for my house! I helped bail them out. I think the banks should be paying me, instead of trying to suck all the life out of us they can!”

It was the first of numerous blowups that Santana would confront that day. Bill collectors don’t tend to encounter many pleasantries, even in the best of times. And these are nowhere near the best of times, for borrowers or for the banking and credit-card industries that lend to them. After two decades of almost constant expansion and profitability, card companies today are in deep trouble. Monstrous losses — estimated to top $395 billion over the next five years — are growing as cardholders, brought low by the recession, walk away from their debts. And Congress and President Obama are pushing for legislation that would make it much harder for companies to hike up interest rates and charge many of the sneaky fees that have been an easy source of revenue for years.

So credit-card firms are changing their business plans. Gone are the days of handing out cards willy-nilly and hoping that the cardholders who dutifully pay up will offset the losses from those who default. Today companies are focusing on those customers most likely to honor their debts. And they are looking for ways to convince existing cardholders that if they only have enough money to pay one bill, it’s wiser to pay off their credit card than, say, the phone.

Put another way, credit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.

Luckily for the industry, small groups of executives at most of the large firms have spent the last decade studying cardholders from almost every angle, and collection agencies have developed more sophisticated dunning techniques. They have sought to draw psychological and behavioral lessons from the enormous amounts of data the credit-card companies collect every day. They’ve run thousands of tests and crunched the numbers on millions of accounts. One result of all that labor is the conversation between Santana — a former bouncer whose higher education consists solely of corporate-sponsored classes like “the Psychology of Collections” — and the man from Massachusetts. When Santana contacted the man last month, he was armed with detailed information about his life and trained in which psychological approaches were most likely to succeed.

Eventually, the man from Massachusetts called Santana back with a proposal. He had spoken to his ex-wife, he said. They wanted to wipe out their debt by paying just $10,000 — only 35 percent of what they owed.

Santana had actually already sought permission from the bank to settle for as little as $10,000. It’s an open secret that if a debtor is willing to wait long enough, he can probably get away with paying almost nothing, as long as he doesn’t mind hurting his credit score. So Santana knew he should jump at the offer. But as an amateur psychologist, Santana was eager to make his own diagnosis — and presumably boost his own commission.

“I don’t think that’s going to work,” Santana told the man. Santana’s classes had focused on Abraham Maslow’s hierarchy of needs, a still-popular midcentury theory of human motivation. Santana had initially put this guy on the “love/belonging” level of Maslow’s hierarchy and built his pitch around his relationship with his ex-wife. But Santana was beginning to suspect that the debtor was actually in the “esteem” phase, where respect is a primary driver. So he switched tactics.

“You spent this money,” Santana said. “You made a promise. Now you have to decide what kind of a world you want to live in. Do you want to live around people who break their promises? How are you going to tell your friends or your kids that you can’t honor your word?”

The man mulled it over, and a few days later called back and said he’d pay $12,000.

“Boom, baby!” Santana shouted as he put down the phone. “It’s all about getting inside their heads and understanding what they need to hear,” he told me later. “It really feels great to know I’m helping people in pain.”

***

To understand how the credit-card industry got interested in psychology, you have to go way back, to a time when many Americans didn’t have a credit card, when almost every company charged the same interest rate regardless of a cardholder’s riskiness and when people often paid off their entire balance each month. All the way back, that is, to the 1980s.

Just a little more than two decades ago, the credit-card business was a quiet, slightly boring industry dominated by banks looking for easy revenue. Card issuers made money by collecting annual dues and interest payments from cardholders as well as fees from merchants each time a customer used a card. Then the math whizzes arrived. They emphasized that the biggest profits didn’t come from people who always paid off their bills but rather from less-responsible clients who never paid their entire balance, and thus could be milked through silently skyrocketing interest rates, late fees and other penalties. Since 1995, the percentage of the industry’s income from cardholder fees has more than doubled to 40 percent. In 2005, as the push to sign up cardholders peaked, the industry sent out more than 10.2 billion credit-card solicitations, which would cover more than the entire world’s population. Two years later, card companies collected $40.7 billion in profits before taxes, according to R. K. Hammer, a credit-card advisory firm. Today Americans carry an average of 5.3 all-purpose cards in their wallets, and the average household has $10,679 in credit-card debt, according to the industry publication The Nilson Report.

But giving credit cards to riskier customers posed a problem: How do you know which cardholders will pay something each month, providing fat profits, and which will simply run up a huge tab and then disappear?

The Ph.D.’s arrived at two solutions. The first was to create thousands of new kinds of cards with their own credit limits, terms and interest rates. Such a strategy theoretically protected companies by limiting how much a cardholder could buy and by charging sufficiently high interest rates to ensure that if a few cardholders walked away, the companies still made plenty of money.

The other solution was learning to predict how different types of customers would behave. Card companies began running tens of thousands of experiments each year, testing the emotions elicited by various card colors and the appeal of different envelope sizes, for instance, or whether new immigrants were more responsible than cardholders born in this country. By understanding customers’ psyches, the companies hoped, they could tell who was a bad risk and either deny their application or, for those who were already cardholders, start shrinking their available credit and increasing minimum payments to squeeze out as much cash as possible before they defaulted.

The exploration into cardholders’ minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year. Canadian Tire’s stores sold electronics, sporting equipment, kitchen supplies and automotive goods and issued a credit card that could be used almost anywhere. Martin could often see precisely what cardholders were purchasing, and he discovered that the brands we buy are the windows into our souls — or at least into our willingness to make good on our debts. His data indicated, for instance, that people who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.

Martin’s measurements were so precise that he could tell you the “riskiest” drinking establishment in Canada — Sharx Pool Bar in Montreal, where 47 percent of the patrons who used their Canadian Tire card missed four payments over 12 months. He could also tell you the “safest” products — premium birdseed and a device called a “snow roof rake” that homeowners use to remove high-up snowdrifts so they don’t fall on pedestrians.

Testing indicated that Martin’s predictions, when paired with other commonly used data like cardholders’ credit histories and incomes, were often much more precise than what the industry traditionally used to forecast cardholder riskiness. By the time he publicized his findings, a small industry of math fanatics — many of them former credit-card executives — had started consulting for the major banks that issued cards, and they began using Martin’s findings and other research to build psychological profiles. Why did birdseed and snow-rake buyers pay off their debts? The answer, research indicated, was that those consumers felt a sense of responsibility toward the world, manifested in their spending on birds they didn’t own and pedestrians they might not know. Why were felt-pad buyers so upstanding? Because they wanted to protect their belongings, be they hardwood floors or credit scores. Why did chrome-skull owners skip out on their debts? “The person who buys a skull for their car, they are like people who go to a bar named Sharx,” Martin told me. “Would you give them a loan?”

Some credit-card companies began using these and other discoveries to find new customers and to scrutinize existing cardholders. A few firms began sending offers to people who had registered for baby showers or weddings, for example, since data showed that getting married or having a child — in addition to making people buy lots of new stuff — often also makes them more responsible. Other companies started cutting cardholders’ credit lines when charges appeared for pawnshops or marriage therapy because data indicated those were signs of desperation or depression that might lead to job loss.

But on the whole, companies, including Canadian Tire, stuck to more traditional methods of managing risk, like raising interest rates when someone was late paying a bill, because they worried that customers would revolt if they found out they were being studied so closely.

“If you show us what you buy, we can tell you who you are, maybe even better than you know yourself,” said Martin, who now works for Wal-Mart Canada. “But everyone was scared that people will resent companies for knowing too much.”

Then last year, the economy blew up. Three things became obvious very quickly. First, all those extra charges that theoretically protected credit-card companies from losing money? Well, the worst-case models were way off, and some companies started hemorrhaging cash. Second, many of the predictions that card companies built around their understandings of people’s psyches were surprisingly accurate, even during an economic tsunami. And finally, when people start losing their jobs and feeling poor, it suddenly becomes very, very important to figure out how to persuade them to pay their credit-card bills.

Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check. Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash. Have they started using their cards for therapy sessions? Do they call the card company in the middle of the day, when they should be at work? What do they say when a customer-service representative asks how they’re feeling? Are their sighs long or short? Do they respond better to a comforting or bullying tone?

“It’s really hard to get clean insights of a cardholder’s state of mind,” said Andy Jennings, the head of research and development at FICO, one of the biggest and oldest analytic firms. “The more subtle the insight, the more cleverness finding it requires. If someone pays for a big cable television package each month with their card, are they rich? Or does it signal they don’t have the sense to avoid products they can’t afford? If they check their balance three times a day, are they worried or uptight? We may look at 300 different characteristics just to predict their delinquency risk.”

If a credit-card company detects unsettling patterns, it might start cutting credit lines, raising interest rates or accelerating repayment schedules. (Companies are expected to withdraw $2.7 trillion of credit by the end of 2010, according to a March report from the Meredith Whitney Advisory Group, a banking-analyst firm.) But the most useful information the card companies are deriving from their data are the insights that help them deepen their relationships with customers, particularly when a cardholder is going through a rough time. One of the strongest conclusions of the psychological studies is that cardholders are most likely to pay the bills of those companies with which they have an emotional connection.

“Today the goal is for customers to get a warm-and-fuzzy feeling from their credit-card company,” said Carl Pascarella, a former chief executive of Visa USA. “If we have a deep relationship with you over a range of products and experiences, if we trust each other, you’ll listen when we give you advice.”

***

It was the first day of training for Bank of America’s newest credit-card customer-assistance employees, and some of the 12 new hires sitting around the classroom were a little confused.

At another company, these employees — who earn about $35,000 a year — might be called “collection agents” or “at-risk account reps.” But at Bank of America, “our whole program is built around assisting the customer,” explained Ric Struthers, president of the credit-card division. “We call it assistance, because we’re here to find a solution.”

To see how one company transforms thousands of low-paid employees into telephone psychiatrists, I attended a day of Bank of America’s four-week training program at the company’s Delaware offices. (I was allowed to attend on the condition that I neither identify nor interview the trainees during the course.) At the front of the classroom, a poster explained the company’s “Customer Delight Model.” The trainees were supposed to “provide a delightful opening,” “employ delightful words,” “acknowledge and empathize” and “personalize with a POWER close.” They spent the morning discussing hypothetical cases, like a cardholder with twins whose husband announced he had fallen in love with another woman. He handed over divorce papers, had a moving truck outside and in short order took over the house and left the cardholder with two kids, only $400 a week and a ton of credit-card debt.

“I would tell her to castrate the man,” one trainee said to the others in her assigned group. “You know, Mel Gibson is getting a divorce, and what he’s doing to that poor woman, he should get his gut hacked up with a rusty knife. I would tell her to cut the husband where it matters, and then ask the new girlfriend what she thinks of what’s down there now!”

These were not, apparently, the “delightful words” that Bank of America had in mind. A much younger male trainee opined that there might be more delicate ways of handling the conversation.

“What do you know?” the woman retorted. “You’ve never been married! You spent your whole life on vacation! Why don’t you learn something instead of moving your mouth all the time?”

Score one for the power close.

As the class discussed how to talk to someone who has recently lost her husband or her job, a young man raised his hand.

“Uh, when we hear a story like this, how are we going to ask them for money?”

“We’ll get to that later,” the instructor, Sheri Roberts, replied.

Then the trainees listened to a recording of an actual call with a cardholder who was about $10,000 in debt, divorced and couldn’t pay her bills. The Bank of America representative was chipper and positive and after 10 minutes offered to cut the woman’s minimum monthly payments in half and drop her interest rate to 5 percent.

“Oh, my God,” the cardholder sobbed on the tape. “Oh, that would help so much. I’m not a bad person.”

“No, of course you aren’t,” the representative replied. “We’re going to figure this out together.”

Such conversations, credit-card companies say, happen all the time. Indeed, just days earlier I spoke to Donna Tiff, a 49-year-old Missouri woman. We were introduced through the Center for Responsible Lending, an advocacy organization that Tiff contacted after companies began hounding her about the $40,000 she owed on multiple cards.

“The phone would ring nonstop,” she told me. “I would get on, crying, and tell them I don’t believe in suicide, but I’m close. That I’m going to file for bankruptcy, and then you’ll get nothing.”

And then Tracey came along. She worked for a company that today is a subsidiary of Bank of America. Tracey had talked to Tiff several times and noticed that there was a mistake on her account — an automatic payment was going to be deducted twice from her checking account. If that happened, Tiff’s other checks would bounce.

“I told her, thank you so much for catching that,” Tiff recalled. “And then we talked for over an hour about my problems and raising kids. She was amazing. She was so similar to me. She gave me her direct number and said that I should call her directly anytime I had any questions or just needed to talk about what was going on.”

Over the next three years, Tiff paid off the entire $28,000 she owed Bank of America and spoke regularly with Tracey, she said. And the $12,000 she owed on other cards? Well, those companies didn’t have a Tracey. They never got fully repaid.

It’s a heartwarming story. Unless you’ve seen how people like Tracey are schooled in the art of bonding. What are the odds that the random customer assistant who dealt with Tiff would have so much in common with her and manage to strike such a close bond? I tried to call Tracey myself, using the information Tiff provided. But I was told she didn’t work there anymore.

One Bank of America executive acknowledged that Tiff — and the caller on the recording in the training course — probably could have cut her debt in half just by asking. Much of what they’re paying, after all, is fees and interest that Bank of America itself tacked on.

“Some cardholders are not as savvy as others,” said Tony Allen, a company spokesman, who added that the company tries to educate cardholders about their options. “I’m sure some people feel like we have conflicted interests and that we’ll only educate as much as it helps us get paid. But we take our responsibility seriously.”

I asked Tiff if she ever asked Tracey to write off the late fees and the interest charges.

“Oh, no,” she told me. “She was so kind to me. How could I ask her for something like that?”

***

If you ask credit-card executives about the current financial crisis, they’ll admit things aren’t good right now. But what really has them worried is what’s going on in Washington.

Just last month, President Obama invited 14 credit-card executives to the Roosevelt Room and told them he planned to ask Congress to outlaw “anytime, any-reason rate boosts and late-fee traps” and to increase scrutiny of the industry. A week later, the House passed the “Credit Cardholders’ Bill of Rights” by a margin of 287 votes. The legislation would force companies to give advance notice of interest-rate hikes, ban most retroactive rate increases and stop companies from issuing cards to people under 18 years old. And if that fails to become law, in 2010 new Federal Reserve Board rules will bar issuers from changing interest rates on existing balances in most cases. In other words, once you get a credit card, it will be much harder for the company to suddenly start charging you more.

The industry has responded by warning that interest rates will rise for everyone. Already, some issuers, including American Express, Bank of America and Citigroup, have started rejecting more card applications. You’re almost sure to get fewer offers in the mail, and the days of interest-free cards for six months (followed by soaring interest rates) are probably gone.

Despite their woes, it’s hard to feel sorry for the card companies. A survey conducted last year by Consumer Action, an advocacy group, revealed that the average penalty interest rate for cardholders who had missed a payment was 26.87 percent. And for years companies have also denied consumers the right to go to court by requiring arbitration, have aggressively marketed to college students and have adopted policies like “universal default,” which allows them to hike your interest rate if you miss a payment on a card issued by a completely different company. Some of their innovations, like cash-back rewards for unpaid balances, were designed to get cardholders to stop paying the full amount they owe.

Meanwhile, as they prepare for an uncertain future, the card companies are scurrying to find the next breakthroughs in credit-card psychology. Take, for instance, Capital One’s Card Lab, a festive Internet site that lets customers design their own cards. I ordered one with my son’s photo on it.

The site is interactive. If I indicate I don’t want to pay an annual fee, for instance, the Web site tells me I must pay a higher interest rate. If I want a low rate, the site tells me I can’t get any rewards points. In essence, the Web site offers a series of choices that determine the relative values I place on different options. Capital One can watch as I navigate the site, learning more and more about me. The industry doesn’t have to drop rats in a maze anymore. We’ve started going there on our own.

“Card Lab is at some level an enormous real-time, ongoing experiment,” says Jack Forestell, senior vice president of marketing and analytics at Capital One. By observing people’s choices and then tracking how they use their cards, the company has learned who is more willing to pay annual fees and who wants airline miles badly enough to pay higher interest rates. “We’ve learned interesting things, like people are more loyal to cards that have their kids’ photos on them,” Forestell says.

What the card companies realize — and what legislation most likely won’t change — is that no matter how much we say we dislike credit cards, they’ve become an essential part of our lives. It’s really hard to rent a car without a card. Or shop online. Or buy plane tickets. Often, executives say, we are just looking for an excuse to use our cards, and so companies are becoming experts in figuring out which excuses we each most want to hear. They’ve let me transform my card into an expression of love for my son. They’ll let you tell yourself that charging a meal gets you closer to a free flight to Tahiti.

Before I left the Bank of America training session in Delaware, the instructor gave the class a little pep talk.

“You’re going to have some days when you help customers, and you’re going to walk out and feel really, really good,” she told them. “It’s O.K. to help people know that we are all working to make the world a better place. It’s O.K. to help them believe.”

Then she turned to the young man who had previously inquired about bringing up the indelicate topic of money with someone who had just lost her job, her house or her husband.

“We are the ones who let them know that there’s always a brighter tomorrow,” she told him. “That’s how we get paid back.”

Charles Duhigg is a business reporter for The Times.

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Yuan, the dollar of the future?

RGE Monitor

# China will allow companies to use yuan to settle their trade between selected provinces and Hong Kong and Macao on a trial basis, reducing currency risk for HK exporters (Caijing). Pilot projects will use the yuan as a settlement project in projects in Asia. Chinese exporters may also increase fx advances (China Daily)
# China's currency swaps concluded in late 2008 and early 2009 with six emerging economies including Indonesia, Belarus, Argentina, South Korea and Malaysia could increase use of the RMB beyond its borders. (Citi) Most of these swaps support trade between these countries.
# Allowing more use of the rmb outside China's borders might increase demand for the currency even if it shifts the burden of exchange rate fluctuation to Chinese trading partners. These are steps towards the full convertibility and capital liberalization that would be needed for the RMB to have a global role.
# Roubini: At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China's currency swaps and RMB bonds in HK are steps along this path
# A more flexible yuan, especially one that could have a share in the region's transactions and as a store of value could reduce demand for the US dollar, increase the yields on US treasuries and cost of financing the US deficit.
# China has been expressing concerns for a long time about the long-term value of its USD reserve holdings (Gao) but so far it has continued to purchase US treasuries and to swap some of its past holdings from more risky US assets to treasuries. ie although China's reserve growth has slowed, its holdings of US treasuries have accelerated
# In a trial, Shanghai plans to use the yuan for settlement in some large projects in ASEAN, Hong Kong and Macao, as well as Russia. The losses on foreign exchange transactions have eaten into Chinese exporters' profit in foreign trade.
# ChinaStakes: SAFE plans to allow Chinese banks to open domestic foreign exchange accounts for overseas institutions. This will also provide foreign exchange accounts for SOEs undertaking international investment and M&A. Previously, only foreign banks have been allowed to open foreign exchange accounts for overseas institutions.
# Deposits in Chinese-currency accounts at Hong Kong banks soared more than 40% in early 2008, to 47.8 billion yuan, or about $6.8 billion. Yuan bank accounts were introduced in Hong Kong in 2004 and Chinese financial institutions began issuing yuan bonds in Hong Kong in 2007 (Reuters) but the investment in RMB slowed sharply after regulations restricted the number of RMB bonds and
# Shen: The yuan is likely to become a regional currency because of China’s expanding trade links before it gains acceptance as an international reserve currency. To ensure access to China’s steadily growing markets, ASEAN may have to settle their transactions in yuan. PBoC should widen the daily trading band of the yuan against the US dollar, now capped at 0.5% per day. After becoming a settlement currency, the next logical step would be for the yuan to become a regional reserve currency.

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