Greece Economic Woes – Part 1

By ThinkReliability Staff

Greece is currently suffering from an economic crisis.  Leaders in Greece, the European Union, and the rest of the world are all anxiously watching as events unfold to attempt to minimize the impact of these issues.  An analysis of this issue can help these leaders minimize their own impacts, as well as provide appropriate aid to Greece.  However, performing an root cause analysis on an issue whose roots reach back years is not an easy task.

Normally a root cause analysis performed as a Cause Map begins with a problem outline.  However, sometimes an issue is so complicated that it’s difficult to begin there.  In these kinds of cases, beginning with the creation of a timeline may aid in the investigation.

What to include in the timeline is a frequently asked question.  When beginning a timeline, put in all the information you have.  It may make sense to go back later and create a less detailed timeline.  However, many events that don’t initially seem to add much to the timeline may later turn out to be important in the analysis.  In the case of Greece, I began the timeline with Greece’s entry into the European Union (EU).  While it wasn’t clear initially whether this contributed to the current issues being faced by Greece, it later became clear that the restrictions placed on EU-member countries did in fact contribute to the current issues.

Events in the timeline may turn out to be impacted goals.  For example, at various points in the timeline Greece’s credit rating has been downgraded.  The last downgrade occurred just before default by Moody’s.  Having a solid credit rating is an important goal – so a downgraded credit rating, especially one as low as Greece’s, is an impact to the financial goal of that country.

Once the timeline has begun (it’s not really complete until the issue is considered resolved, which in this case will take years), the next step would be to tackle the outline.  Writing the timeline will hopefully have provided some clarity to the issue.  For example, since Greece entered recession in 2009, we can choose 2009-2011 as a logical time to enter in the outline.  If more detail is desired, referring to the timeline is also appropriate.

The most commonly asked question about the outline is what to write in the “differences” row.  Differences are meant to capture things that may have been out of the ordinary, or potentially answer the question “why this country (or equipment or time) as opposed to some other country?”  Because Greece is a part of the European Union, which has consistent financial goals for its members, we can use some data points that show how Greece differs from other countries in the EU, or essentially answer the question “why is Greece having these issues instead of the other EU countries?”  In Greece, debt is estimated to be 150% of the Gross Domestic Product (GDP).  This is much higher than for most other nations.  The public sector in Greece accounts for about 40% of the GDP, also higher than typical.  Greece has the second lowest Index of Economic Freedom in the EU, which impacts its ability to quickly adjust to economic changes.   Greece economic statistics were (significantly)   misreported, contributing to the rapid decline in stability.  And, Greek tax evasion is estimated at 13B Euros a year.  This is likely not a full list of the differences between Greece and other EU countries, but it’s a start  and the outline can continue to evolve as more information is provided on the issue.

Once the top portion of the outline is complete, the impacts to the goals can be addressed.  Again, many of these impacts can be pulled from the timeline.  There were some citizen deaths associated with rioting as a result of proposed economic policies, which is an impact to the safety goal.  Spending cuts and tax increases impact the customer service goal (in this case, the “customers” are the citizens of Greece).  The production goal is impacted because of high (above 16%) unemployment, and the financial goals are impacted by a debt rating just above default and a 110B euro default.  Last but not least, there is the potential for impact on the European Union if the crisis spreads beyond Greece.

As you’ve noticed, no real analysis has yet taken place.  We’ll look at some of the causes contributing to the      current issues in Greece in an upcoming blog.  Click on “Download PDF” above to view the timeline and outline

Foreclosures Down?

By ThinkReliability Staff

At first glance, it might appear to be a welcome story.  After years of decline in the housing market, there has been a significant dip in foreclosure filing rates.  However the real reason behind the dip isn’t economic recovery…it’s a backlog of work at banks across the nation.  A visual Cause Map helps illuminate what is really going on.

Foreclosure filings have dropped 25% in the last six months of 2010.  This normally would mean that fewer properties require foreclosure.  Banks usually notify homeowners within days of the first missed payment.  After multiple missed payments, the Notice of Default is finally sent to the homeowner, about 2 months after the initial missed payment. If the homeowner doesn’t pay up, that’s followed soon after by a foreclosure filing.  In most states, eviction can happen in as little as 120 days.

However in today’s economy, banks are slower to take on new foreclosures.  One of the major causes – a huge backlog of vacant properties – has made banks reluctant to notify newly delinquent homeowners.  The initial notification process has slowed down, but so has the entire foreclosure process.  Banks hope that by delaying the process, homeowners may be able to resume payment – the preferred outcome.  In some states, foreclosures are averaging well over 900 days.  Banks are in the business of managing money, not property.

There’s another reason behind the processing delays.  Last fall banks were brought to court for robo-signing, a practice where law firms were automatically signing off on all foreclosure paperwork.  The practice meant that many applicants were illegally kicked out of their homes.  Many of the largest banks and lenders suspended processing to determine how robo-signing was occurring and stop it.  It turns out that law firms, in an effort to get through the mountains of paperwork, were rubberstamping the foreclosure filings without due diligence to ensure everything was in order.

Delayed foreclosures are beneficial to families facing eviction, however often it is simply delaying the inevitable.  Many economists believe that the economy will continue to struggle until the housing market recovers.  In the meantime, the foreclosure crisis will drag on until banks can close out these dysfunctional loans.

City Facing Default

By ThinkReliaiblity Staff

A small Rhode Island town is on the brink of financial disaster.  A low tax basis and mounting liabilities are leaving Central Falls with few options short of filing for bankruptcy protection.   The town has requested financial assistance from state and federal governments and is begging pensioners to accept lower benefits.  But how did they get to this point, and what can be done to keep neighboring towns – and the state itself – from bankruptcy?  A Cause Map visually shows how this occurred.

Like other towns facing financial difficulty, Central Falls accepted more debt than they are now able to pay.  This two-fold reason is at the center of the Cause Map.  All of the effects Central Falls now faces – such as closed town services and the loss of local jobs – stem from the fact that the city had to cut spending.  The city had to cut spending because it is facing bankruptcy.  The Cause Map method allows us to trace the reasons back even further and build a complete picture.

The first piece is that the town has a large debt – $80M to be exact – in pension liabilities for its 214 city police officers and fire fighters; this is in addition to $25M in budget deficits over the next five years.  The generous pensions can be traced back to two state laws regarding public worker negotiations.  Rhode Island is one of the few states that allows workers unlimited collective bargaining, meaning that workers can negotiate for a higher salary for any reason.  Without any limits, talks often broke down.  When talks broke down arbitrators stepped in, and their decisions were binding.  In past years, arbitrators often settled on benefits that were comparable to surrounding towns instead of what the city could actually afford.  Unlimited collective bargaining and binding arbitration together contributed to the poor negotiations and overly-generous benefits.

The second piece is that the town doesn’t have a large income.  It has a small tax basis since the median family income is only around $33,000.  Other sources of income have been pulled back as well – like state and federal funding.  The state is facing similar issues, and is in no place to bail out the multiple municipalities at risk.  The federal government had extended aid, but rescinding it when Central Fall’s credit rating was downgraded by Moody’s.

Municipal bankruptcy is a rare occurrence, with fewer than 50 occurring in the last 3 decades nationwide.  State bankruptcy is practically unheard of.  Arkansas was the last to default on its bonds, following the Great Depression.  This is in part to bankruptcy laws put in place after to avoid such an occurrence.  When one town goes bankrupt, neighboring communities are often negatively affected.  The resulting domino effect could be disastrous.  Rhode Island is a small state with little room to maneuver if local towns – like Central Falls – start going bankrupt.

Potential Power of Solar Flares

By Kim Smiley

The largest solar flare in recorded history occurred on September 1, 1859.  As the energy released from the sun hit the earth’s atmosphere, the skies erupted in a rainbow of colored auroras that were visible as far south as Jamaica and Hawaii.  The most alarming consequences of this “Carrington Event” (named for solar astronomer Richard Carrington who witnessed it) were its effect on the telegraph system. Operators were shocked and telegraph paper caught fire.

No solar flares approaching the magnitude of the Carrington Event have occurred since, but the question must be asked – What if a similarly sized solar flare happened today?

There is some debate on how severe the consequences would be, but the bottom line is that modern technology would be significantly impacted by a large solar flare.  When large numbers of charged particles bombard the earth’s atmosphere (as occurs during a large solar flare), the earth’s magnetic field is deformed.  A changing magnetic field will induce current in wires that are inside it resulting in large currents in electrical components within the earth’s atmosphere during a solar fare.

Satellites would likely malfunction, taking with them wireless communication, GPS capabilities and other technologies.  This would severely impact the modern world, but the largest impact would likely be to the power grid.  There is debate on how long power would be out and how severe the damage is, but it is clear that solar flares have the ability to significantly damage the power grid.  Solar flares much smaller than the Carrington Event have caused blackouts, but power was returned relatively quickly.  One of the more impressive of these examples occurred in 1989 when the entire province of Quebec lost power for about 12 hours. (Click here to read more.)

NASA works to predict and monitor sun activity so that preventive actions can be taken to help minimize damage if a large solar flare occurs.  For example, portions of the power grid could be shut down to help protect against overheating.  Scientists continue to study the issue, working to improve predictions for sun flare activity and learn how to better protect technology from them.  Click the “Download PDF” button above to view a high level Cause Map, a visual root cause analysis, built for this issue.

More information can be found in a report by the National Academy of Sciences, Severe Space Weather Events–Understanding Societal and Economic Impacts and the NASA website.

Record Flooding in Minot, ND

By ThinkReliability Staff

Record flooding has struck along the Souris River, leading to record-breaking flooding in Minot and threatening multiple other towns.  The river has widely ranging annual flow rates, varying from 4,200 acre feet to 2.1M acre feet.  Flooding is not uncommon in this part of the country, but what is striking about this case is how events upstream contributed so dramatically to what happened in Minot.

Rivers have always flooded.  Snowmelt and spring rains naturally contribute to higher flow rates.  Rivers also naturally move, as soil erodes in places and builds up in others.  As communities have developed near rivers, a need arose to control the rivers’ boundaries.  After all, you didn’t want to have your farm land constantly submerged by water.  Civilizations have been using earthen structures – like levees or dikes – for thousands of years to control the flow of water.

It was only within the last century, that extensive man-made levees have been built within the U.S.  The levees along the Mississippi River are some of the most elaborate in the world, extending 3,500 miles.  Along with levees, dams help to regulate the flow of water.  Dams can create artificial lakes used either to prevent flooding downstream or to provide a source of water for the community.

How is all of this relevant to the flooding in Minot?  A visual Cause Map can shed light on what led to the intense flooding there.  For starters, the levees meant to keep the Souris River contained were both overtopped and breeched.  This occurred because there was a high volume of water flowing downstream over an extended period of time.  Why is that?

The Souris River actually begins in Saskatchewan, where a further series of levees and dams controls the river.  Southern Canada had a significant amount of snowmelt and spring precipitation, saturating the soil and filling up local lakes and man-made reservoirs.  The area also had a heavy amount of rainfall the preceding the weekend, 4 to 7 inches.   With reservoirs already filled, officials had no choice but to increase dam flow rates to prevent flooding or worse – a burst dam.

While these complex levee and dam systems usually provide stability for riverside communities, they also can work against some of the systems that evolved in nature to keep water flow in check.  For instance, natural levees develop as rivers periodically overflow and deposit silt.  Also everglades and marshlands act like a sponge absorbing excess water.  Human development has affected these natural processes, and unfortunately there are likely to be many further effects from the flooding as the water continues down the Missouri River Basin.