Colleges suing students?

Wow, alright, I am drowning in a pile of unfinished blog drafts over here. I have a total of 14 unfinished posts  in my queue just from the last week, so I'm just gonna go ahead and post a few of them, rapid-fire style, just to get some of this stuff out there. You might get a little less of my ranting and raving in these posts than you'd usually expect, but maybe that's a good thing. And hey, it's better than another link dump, right?

First up, I'll consider this post to be an update on the burgeoning student loan crisis about which I've written numerous times. Per Bloomberg,

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates. 

The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship. 

Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans -- distributed and collected by the federal government -- Perkins loans are administered by colleges, which use repayment money to lend to other poor students. 

The increase in the amount of defaulted loans among poor students comes as President Barack Obama says he wants to expand access to college for working-class families and increase funding for the Perkins program. Under his proposal, the pot for Perkins loans would increase to $8.5 billion from about $1 billion. The Education Department would service the loans instead of colleges.

Oh, this is gonna be fun... leave it to Yale, right? As is mentioned later in the article, student loan debt has soared in the last several years (total debt outstanding now exceeds $1 trillion, more than our nation's aggregate credit card debt), as tuition costs have gone nowhere but up in a world flush with government-guaranteed debt.

As Karl Denninger writes (okay, rants),

Let's cut the crap -- colleges market themselves to young men and women on the premise that their educational services will provide you a means to get a better job than you would otherwise obtain.  That's the entire purpose of a career-focused education and the only justification for the outrageous tuition charges they assess. 

Well, as it turns out if you fail to benefit from the alleged "education" that these people sold you, and in the process you borrowed money using Perkins loans, the college is very likely to come after you, including in court! 

Oh, and lest you think they'll just sue to the principal and accrued interest, nope. 

As I've pointed out to a number of High Schoolers contemplating going to college and taking out loans, there are statutory penalties that apply if you default.  In the case of Perkins loans these amount to an additional 30% of the principal, increasing to 40% on a second collection attempt and another 40% on top of that if they sue. 

That basically doubles the amount you owe. 

Of course colleges don't talk about this before you matriculate.  After all, "education" as offered in these edifices is only partial, and the representations, both expressed and implied are many -- but the warranties few.

Yikes. The implications of the student loan crisis could well be far-reaching, and it's a dynamic that we'll need to keep our eye on over the next few years, because a lot of these institutions are proving to be ruthless when it comes time to collect payment.

In the meantime, I'm hoping we see some guts from the students who are being sued—let's see a countersuit from the unemployed (or underemployed) college graduates against their colleges and universities, alleging fraudulent marketing and failure to deliver on the promises made. The suits may have little merit, but I think it's the lender's (and not the borrower's) responsibility to determine the creditworthiness of the borrower. If they made bad loans to bad students, they should be forced to pay the price. That's how loans are supposed to work, period.

[Bloomberg]
[Market Ticker]

Quote of the Week (Japan Edition)

I wanted to pull this week's Quote of the Week from Arnold Schwarzenegger's Q&A on Reddit last week, I really, really did. The concept of 1,000 duck-sized Predators is just too great to not mention, and I couldn't get that mental image out of my head all week. Brilliant stuff.

But I decided instead to give the honor to Japan's new Finance Minister (their 11th since 2007!) Taro Aso, whose brutal bout of honesty this week added a neat little twist onto Japan's growing fiscal problems (and demographic nightmare). In a statement that is almost certainly intended directly for the ears of Jiroemon Kimura, the oldest man in recorded history, Aso uttered a phrase (well, a few of them, really) that you might end up hearing a lot of around the world over the coming decades...

This week's QUOTE OF THE WEEK

"Taro Aso said on Monday that the elderly should be allowed to 'hurry up and die' to relieve pressure on the state to pay for their medical care.

'Heaven forbid if you are forced to live on when you want to die. I would wake up feeling increasingly bad knowing that [treatment] was all being paid for by the government,' he said during a meeting of the national council on social security reforms. 'The problem won't be solved unless you let them hurry up and die.'

Aso's comments are likely to cause offence in Japan, where almost a quarter of the 128 million population is aged over 60. The proportion is forecast to rise to 40% over the next 50 years.

To compound the insult, he referred to elderly patients who are no longer able to feed themselves as 'tube people'. The health and welfare ministry, he added, was 'well aware that it costs several tens of millions of yen' a month to treat a single patient in the final stages of life."
                                                     - Justin McCurry; Guardian

So, first of all, it needs to be said that this dude is completely off his rocker. If you read Mish Shedlock's whole piece, you'll see that Aso has previously made bizarre off-color remarks about Jews, Taiwanese, and blue-eyed U.S. diplomats, so clearly he has a habit of saying outlandish things to provoke a reaction (sort of like another economist we all know and love).

That said, this little moment of honesty might hit just a little close to home for all of us here in America. Our Medicare costs are already projected to go through the roof over the coming decades, in large part because we continue to refuse to have difficult conversations about end-of-life care (specifically, how much is it worth to keep somebody alive for an extra year at age 65, versus at age 75, versus at age 85? Is there an infinite value? A declining value? Do we even begin to know?).

We can choose to spend an infinite amount of money to keep a person (any person) alive for another day, and hospitals and doctors will surely be glad to dispense those services as long as somebody (i.e. the taxpayer) is willing to pay. But sooner or later, we simply can't afford to do so for everybody, and we have to have that difficult little conversation with each other. Japan is having it now; it's coming our way sooner than you might think.

[Mish Shedlock]

Quote of the Week (Fiscal Cliff edition)

I don't have a lot to say about the recent "resolution" to the fiscal cliff, largely because it resolved nothing and is, once again, merely a prelude to the next "fiscal crisis" that is mere weeks away. However, I thought that Tyler Cowen of the Marginal Revolution blog shared the most succinct (and sobering) summary of the entire fiscal cliff experience. From New York Times columnist Ross Douthat, it's your Quote of the Week.

This week's QUOTE OF THE WEEK

"If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000 when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public progams sustainable for the long run?"
                                                     - Ross Douthat, New York Times

Indeed. Which of course just shows us that there is, ultimately, zero political will to address the problems about which I've spilled so much ink (okay, pixels) on this blog. If we can't raise revenue, then we can't fund programs, period, end of story. It's just a matter of when we choose to recognize this fact (or when the markets decide to recognize it for us, as is usually the reality when it happens elsewhere, and is almost assured given that politicians are already setting up to capitulate on the next crisis).

All of this means that charts like this one aren't likely to change any time soon, regardless of what some people might want to tell you:

Source: Bianco Research via Barry Ritholtz

But hey, at least the markets liked the deal, that must be good news, right? Uh, maybe. Or maybe this thing was just like every other piece of legislation out of Washington lately—hastily thrown together, not well-understood even by those who voted on it because they didn't bother to read it, and loaded up with all sorts of kickbacks and favors to the corporate elite that don't belong in there to begin with.

Business as usual in Washington, right? Good grief.

[New York Times]
(h/t Marginal Revolution)

Quote of the Week

I'm going to keep things quick and simple with this week's Quote of the Week, because I think it largely speaks for itself. Let's get right to it, with blogger Karl Denninger's response to the recent revelation that over 47 million Americans (about 15% of the total population) are now receiving food stamps. That's an increase of nearly 50% just since 2009, which is costing our government an additional $25 billion annually. Yuck.

This week's QUOTE OF THE WEEK

"The last month for which data is available, September, shows over 600,000 people [began collecting food stamps] in that month alone, comprised of 290,000 households. In one month! The average handout is $278.89 per household, or $134.29 per person monthly. Note that there are only 143,549,000 people in the workforce -- that is, people earning a wage... To put this in perspective for every three people working one is collecting food stamps."
                                     - Karl Denninger, The Market Ticker

That is awful. Setting political issues of the "fiscal cliff" or the "welfare state" or whatever else aside, the simple fact is that this is a completely untenable economic situation. Far too many people are currently receiving food stamps, and this alone is a huge indication that our policy responses to the financial crisis of 2008-09 (deficit spending, Fed money-printing) have been an utter failure.

The debt-based financial games that we've played for the last several decades have gutted our nation's middle class (death by several trillion paper cuts), and yet many would suggest that more of the same is what we need to solve our problems. Believe me, they're wrong.

It is imperative that we stop lying to ourselves and pretending that these policies work. They don't. We need to clean up our fiscal house (starting with defense and Medicare), take the power away from the banks who continue to steal from the rest of society, and most importantly stop printing money. It won't be fun, and it won't be easy, but it really is the only option—things will only be worse in the future if we fail to act today. America is a country that has always strived for greatness, and 15% of the population on food stamps falls far short of "great".

[Market Ticker]

The "real" fiscal cliff

From Tyler Cowen at the Marginal Revolution blog, what he terms "the truly important news". I'll agree with his assessment.

Forget post-election dissection and the fiscal cliff, here is the stunner: 

The U.S. birthrate plunged last year to a record low, with the decline being led by immigrant women hit hard by the recession, according to a study released Thursday by the Pew Research Center. 

The overall birthrate decreased by 8 percent between 2007 and 2010, with a much bigger drop of 14 percent among foreign-born women. The overall birthrate is at its lowest since 1920, the earliest year with reliable records. The 2011 figures don’t have breakdowns for immigrants yet, but the preliminary findings indicate that they will follow the same trend. 

That’s the real fiscal cliff.  Yet The Washington Post reports that its most popular article today is “Starbucks’ new $7 coffee is its priciest ever."

Yeah, that's not good. As I mentioned on Twitter this morning, over the long run, without population growth there can be no economic growth. Worse yet, a steady decline in the ratio of non-working (retired) citizens to working age citizens means that there's virtually no way to keep Social Security solvent, or to have any hope of paying down our national debt.

Want to know why Japan's economy can't seem to get out of its own way? This is why:

Too few working people (we could also call them "taxpayers"), too many unproductive people to support, and not enough aggregate savings among the latter to support themselves without help from the former. That's a problem, and it's one that's difficult if not impossible to reverse.

When a population ages dramatically, in relative or absolute terms, that always creates issues from an economic standpoint. It's a simple problem, and yet it's one that no amount of modern economic complexity (or monetary policy) can overcome. As Tyler wrote, this is the real fiscal cliff.

[Marginal Revolution]

Pay for Congressional performance?

Sheila Bair baffles me. Every time she starts making a ton of sense, the former FDIC head says or writes something else that comes across like low-grade satire, except I don't think it is. Her most recent piece for Fortune falls into the latter camp.

Will the elections bring about improvements in our increasingly dysfunctional government? I fear not. Successfully running for office these days is more about political fundraising and negative campaigning than about the art of governing. Only one in 10 Americans thinks Congress is doing a good job, and no wonder. Our economy is stuck in low gear, and our fiscal situation is precarious. How do we motivate our national leaders to deal with these problems? As with most organizations, it comes down to economic incentives. If our elected officials can keep their paychecks by being adept at fundraising and negative campaigning, then that is what they'll do. But if at least part of their pay is based on performance, maybe we could get them to focus on doing their jobs. Pay for performance has improved management in the private sector. Why not try it with the folks in D.C.? 

For instance, one-half of compensation for corporate directors is frequently paid in stock, which they must hold for several years. The idea is to align their economic incentives with the long-term profitability of the corporation. There is no stock ownership in the federal government, obviously, but we do issue a lot of debt (boy, do we ever). So here is an idea: Let's start paying members of Congress and the President half of their compensation in 10-year Treasury debt, which they must hold until maturity. Members of Congress make roughly $180,000, so under this proposal, they would get $90,000 in cash and $90,000 in 10-year Treasuries. (We would add a housing allowance, too, given the high cost of living in Washington.) For the President, it would be $200,000 cash and $200,000 in T-bonds. If the economy does well and if they get our fiscal house in order and institute pro-growth tax and spending policies, those 10-year bonds should hold their value. But if we continue our profligate ways, inflation spikes, and interest rates skyrocket, those bonds may end up being worth as much as the stuff Czar Nicholas issued shortly before the Bolshevik revolution (some of which I bought at a flea market and now use as wallpaper in the bathroom).

She keeps going with her proposal, but I refuse to further indulge her ramblings here. Realistically, the very premise of Bair's argument is fundamentally flawed.

"Pay for performance has improved management in the private sector," she writes. No, Sheila, it hasn't. Reams and reams of research have been produced which prove your argument wrong. What pay for performance tends to do, instead, is encourage leaders and executives to make company-betting moves which promise huge potential payoffs but equally large risks. If those risks pan out, the executive in question makes millions and retires happy, but if they don't, the whole company blows up and the manager walks away scot-free, moving on to the next gullible company to rinse and repeat (see: John Thain).

These schemes have led to an epidemic of short-termism on Wall Street in particular, where traders and executives have little interest in the firm's profitability beyond the next quarter or year. Making those stocks or options or bonds vest at a later date does little to change the underlying risk/reward dynamic from the standpoint of the executive. While things may be slightly different for Congressmen than for Fortune 500 CEOs, those differences aren't nearly as great as we would like them to be. The folks in Washington have already shown themselves to be experts at trading long-term security for short-term gain, and the last thing they need is another scheme from us that encourages them to do more of the same.

You see, even if our Congressmen (and women) were to blow up the whole country under Bair's proposal, they'd still be pulling in $90k a year (oh, and a housing allowance, of course), well above the national average. That's not exactly giving them the "skin in the game" that they might need in order to ensure that they don't screw things up terribly for the rest of us.

Worse still, the plan suffers from a serious flaw in design by tying compensation to a bond price rather than some other more tangible measure of actual long-term American prosperity. If our Congressmen suddenly own millions of dollars worth of U.S. government debt, then all that does is give them a huge incentive to encourage the clowns over at the Fed to keep on keeping on with their ridiculous quantitative easing, which sends bond prices skyrocketing (and yields plummeting) even while the fiscal state of the union deteriorates by the day.

The real flaw in Bair's argument, ultimately, lies in its presumption that Congressmen and Senators control bond prices and economic outcomes with their policies—they don't. The Fed controls these things, they have for decades, and that won't be changing any time soon, regardless of any "pay for performance" scheme that you want to put into place. Not until the voters force it to be so, that is.

The truth is, the only kind of "pay for performance" scheme that will ever work in a democracy is to vote the bums out when they screw over their constituents. That requires real, actual responsibility on the part of the voters, more than some lazy "autopilot" compensation scheme that won't work and represents a further abdication of the voters' responsibility to hold their elected officials accountable.

Now as ever, we as voters get the government that we deserve. If we refuse to hold our Congressmen accountable with our votes on Election Day, then we can't expect the mess to sort itself out just because they own a few more government bonds then they used to. Bair should know better than this, and yet somehow she doesn't. Unless, of course, this is satire, in which case the joke is, once again, on me.

D.C. politicians have in large part ascended to their lofty positions by being experts at gaming whatever system has been placed before them. Unless a pay-for-performance scheme is meticulously designed to avoid any unintended consequences, you can bet that they'll find the loopholes and design ways to maximize their compensation, regardless of the externalities that may result from their actions. What a joke of an idea. Our politicians need fewer systems and schemes to try to game, not more. Go back to the drawing board, Sheila.

[Fortune]

On middle class woes (and personal responsibility)

Hey, why not make it two posts about personal responsibility in one afternoon, right? Let's go for it.

Since it's election season, you're about to be bombarded with misleading statistics from both sides talking about how good and terrible the economic recovery of the last four years has been. The Democrats will tell you (I've seen it ad nauseam already) that Obama has presided over 29 consecutive months of job growth. True, but missing the point.

As for the Republicans, they're likely to counter with something like this:

Although the economy shed thousands of middle-wage jobs during the Great Recession, the bulk of the employment gains since then have been in low-wage arenas such as retail, food-service, and home-care industries, according to a new report released by the National Employment Law Project, a liberal research group.

Low-wage jobs, defined as those that pay no more than $13.83 an hour, accounted for 21 percent of recession job losses but have accounted for 58 percent of the recovery growth.

At the same time, middle-wage occupations (jobs with an average hourly rate between $13.84 and $21.13) accounted for 60 percent of the jobs losses, yet accounted for only 22 percent of the job growth, according to the NELP study which analyzed federal census and labor data.

Indeed, one study showed that among those workers who lost jobs between 2009 and 2011 and subsequently found new jobs (many did not), a full one-third were accepting new jobs with a 20% or greater pay cut. That's a problem, and it shows a significant weakness beneath the declining headline unemployment rate that President Obama hopes to tout this fall. Clearly, not all jobs are created equal, and the recent trade-off has been a terrible one for most Americans, despite what the headline stories would love for you to believe.

This low-quality job growth only continues a steady trend of devastation of our country's middle class, a trend that I largely blame on misguided Fed policies of dollar debasement, all of which benefit the rich at the expense of the poor. But as Mish Shedlock wisely asks, who is really to blame here?

Citing a study from the Pew Research Center, Mish posted the following graphic:

He then wrote,

Note that 62% blame politicians and 54% blame financial institutions, but only 8% blame themselves. 

Five Questions 

1. Did banks force people to take out loans they could not pay back, or did people do so voluntarily? 

2. Who elects Congress? 

3. Do people make enough effort to understand interest rates, debt, the economic policies of politicians, exponential math and its implications, the untenable nature of public union pension plans and promises? 

4. Do a significant number of people (if not the majority) get their economic views (assuming they have any economic views) from The View, Oprah, The Talk, or CNBC? 

5. Why did PEW leave off the Fed and Fractional Reserve Lending from the list of answers? 

Two Bonus Questions 

1. Would the majority of respondents know anything at all about the Fed and Fractional Reserve lending had the PEW listed those options? 

2. Who is really to blame for what is happening?

Preach on, Mish.

If you want to blame the banks or the politicians for all of your problems, fine. Go ahead. It's as good a cop-out as any. But at the end of the day, it is OUR unwillingness to pull our money out of the banks (or to stop borrowing money from them), it is OUR unwillingness to hold politicians accountable for their incompetence, it is OUR continued refusal to stand up for ourselves and take even the slightest modicum of responsibility for our own nation's destiny that is to blame for all of the negative outcomes of the last 10 to 15 years (or more).

The housing bubble and its ugly aftermath could not have existed without the greed and financial illiteracy (call it "innumeracy" if you must) of the majority of the nation's citizenry. Ditto the burgeoning debt crisis that threatens to rob a generation or more of its retirement. As I've mentioned here before, if you make yourself a target, then you're practically guaranteed to be taken advantage of sooner or later. This was all our own doing, but we've seemingly lost our ability as a nation to take responsibility for our own decisions (or refusal to make decisions, whatever).

I'm all about personal responsibility, and I always have been. Therefore, I don't blame Congress, because I haven't done anything significant in my life to change the composition or approach of our Congressmen. Congress does what it does because we haven't required them to do anything differently.

So I do blame myself, because I obviously haven't done enough to change the world in which I live. And in a sense, taking ownership of that is incredibly liberating. Are you willing to do the same?

[National Journal]

Ponzi financing in California

I don't have a lot to add to Mish Shedlock's take on this situation—this post of mine basically covered the issues at hand—but suffice it to say that by now, just about every government in California is bankrupt and desperate. Given my previous post, though, I thought I had to pass this item along. From Mish (italics are quotes from this article, bolding is mine):

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest. 

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes... 

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools. 

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative. 

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years. 

And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up... 

As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers. 

Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians. 

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane." 

Think growth will bail out Poway? Think again. 

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010. 

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child. 

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child. 

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656... 

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it. 

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance.  What then? Will property taxes rise 10-fold to pay back this loan?

Mish's last point is right on. The problem with taking on massive amounts of debt—thus shifting the burden of current expenditures onto future generations, with interest—is that future generations will still have to find a way to finance the expenses that come up in their time, in addition to paying off the previous generations' bills.

For an analogy, imagine trying to pay down a mortgage on your own house while also still paying down your parents' mortgage on a house that you no longer live in but that has been accumulating interest for decades without a single principal payment—yeah, doesn't sound too feasible, does it?

Sooner or later, the debt writedowns (defaults) will come, because they must. If you can't find the money now, you can't just wave your hands and assume that your kids will have it in 20 years' time. They won't. They'll be too busy paying down their own student loans, not to mention fixing the crumbling infrastructure that you left for them.

But hey, that's not your problem, right? Hey, somebody give J.G. Wentworth a call... we've got some bridges that need some fixing.

[Mish Shedlock]

How Facebook could (help) bankrupt California

I wrote briefly last week about the troubles over in Facebookland (I shed no tears for Mr. Zuckerberg) and the company's incredibly shrinking stock price. Unfortunately for some of us—especially the California schoolteachers among us—there's some collateral damage here (isn't there always?). Per Bloomberg:

Facebook Inc. (FB)’s declining price may cost California “hundreds of millions of dollars” in revenue expected from taxes on capital gains, the state’s fiscal analyst said.

The owner of the world’s largest online social network, touched $19.82 today, the lowest price since the Menlo Park, California-based company first offered shares to the public at $38 on May 17.

The most populous U.S. state’s $91.3 billion budget, signed by Governor Jerry Brown in June, counted on $1.9 billion in income-tax revenue from company insiders such as Chief Executive Officer Mark Zuckerberg exercising options or sell shares, assuming an average price of $35. Facebook, which touched $45 May 18, has averaged $29.49 on the Nasdaq stock market.

“Facebook share prices have fallen far below levels assumed in the state’s revenue projections,” the nonpartisan Legislative Analyst’s Office said yesterday in a report. If “the lower share prices persist through November and December, hundreds of millions of dollars of income-tax revenue assumed in the state budget plan are at risk.”

Perfect. Let me put this as simply as possible—if your budget is only "balanced" based upon assumptions of one-time revenue streams from viciously overvalued assets (whether those assets are internet stocks or McMansions or marijuana farms or whatever else), then your budget isn't actually balanced and you need to go back to the drawing board. That's true whether you're an individual, a corporation, a credit union, a babysitting co-op, or the world's largest local government. Math doesn't care who you are, and it can't be fooled (or manipulated) for very long.

The simple and uncomfortable truth is that this is why our nation has developed the unprecedented culture of bailouts and financial market manipulation that we now have, a culture that's robbing us all of our prosperity by warping and manipulating the underlying infrastructure of our economy. We've all been led to believe by any number of politicians and economists that deflation is our enemy, and that we need inflation (and $5/gallon gas) in order to prosper. This is, of course, obvious bullshit, but the party line actually makes a lot of sense when you dig a little deeper.

Simply put, almost every government in our country—whether local, state, or federal—depends upon high asset valuations in order to maintain anything in the ballpark of a balanced budget. Property taxes, capital gains taxes, sales taxes, even excise taxes, all of these are significantly higher when asset prices are inflated. When the housing bubble burst in 2007-08, it blew a gargantuan hole in state and local budgets nationwide, a hole that still hasn't been adequately plugged. Politicians will be damned if they're going to let this happen again, even if their actions guarantee that the next bubble will be bigger and uglier than the one that preceded it.

For more than a decade, governments made overly rosy assumptions about current and future tax revenues—and therefore made overly aggressive financial commitments—entirely because they believed that house prices could never decline. Then they did, significantly, and tax revenues dried up, but the financial commitments remained. Oops. And despite all of our government's best efforts, we haven't been able to reflate that housing bubble, so here we remain, in a position of constant stagnation.

When a state like California has its budget riding on Facebook's stock price, is it at all far-fetched to assume that California politicians will do whatever is necessary to prop up that stock, unintended consequences be damned? Of course not, and that's why we've got the system we've got. It sucks, but thousand of California pensioners now "need" Facebook's stock to rally. So won't you be a good neighbor and buy a few thousand shares?

[Bloomberg]

P.S.- For another cute example of how individual taxpayers end up on the hook to effectively (or directly) subsidize the corporations in their communities, check out these two recent posts from Deadspin, showing how the Kansas City Chiefs and Royals have been oh-so-cleverly using taxpayer dollars to pay ordinary operating expenses. This is yet another reason why we should never have conceded to the concept of taxpayer-funded stadiums and arenas. We pay for the company's expenses (as taxpayers), and then we pay for the company's product (as fans). Sweet business, huh? Beats stealing cardboard.

The downside of homeownership

In an article this week, The Economist wonders whether the decreasing labor mobility in the United States—which I've covered here before—is a result of a "more efficient market". They write,

The drop in mobility shows up almost exclusively in gross migration, the total number of interstate household moves... The trend predates the housing boom and bust; the crisis cannot explain it.

Some reckon the decline is caused by demography. Young workers, at the start of their working life, have most to gain from moving. An ageing population may therefore be less mobile. Growth in two-earner households could also play a role. When both partners work, it is harder to move if one of them loses his job or is offered a post somewhere else. New research by Greg Kaplan of the University of Pennsylvania and Sam Schulhofer-Wohl of the Federal Reserve Bank of Minneapolis casts doubt on these explanations...

The authors analyse census data gathered monthly between 1991 and 2011, and find that the pattern of falling mobility persists across all parts of the workforce. Mobility is down across “all education levels, for people of all marital statuses, and for both single-earner and multiple-earner households.” Ageing is a red herring: mobility rates have dropped most for young workers. It isn’t so much the American worker that is changing, they argue, but the American economy. Reduced mobility largely reflects two shifts in the nature of economic activity...

The first is that the mix of jobs offered in different parts of America has become more uniform. The authors compute an index of occupational segregation, which compares the composition of employment in individual places with the national profile. Over time, their figures show, employment in individual markets has come to resemble more closely that in the nation as a whole. 

This homogenisation reflects the rising importance of “non-tradable” work. As the name suggests, non-tradable goods and services are not traded across long distances. Californian dentists tend not to clean Floridian teeth; every city has its own dentists. Cars, by contrast, are tradable, so not every state has its own car plant... With more of the country’s employment mix present in each state, it is less necessary to move to find work.

... The authors suggest another force is also reducing migration: the plummeting cost of information.

Young workers in particular used to have to move to gather information: to see whether they could stand a Boston winter, say, or cared enough about the Californian climate to pay Californian rents. In recent decades, however, it has become much easier to learn about places without moving house. Deregulated airlines and innovative online-travel services have slashed travel costs, allowing people to visit and assess different markets without moving. The web makes it vastly easier to study every aspect of a potential new home, from the quality of its apartment stock to the surliness of its baristas, all without leaving home. Falling mobility isn’t simply caused by labour-market homogenisation, the authors argue, but also by greater efficiency. People are able to find the right job in the ideal city in fewer hops than before.

These explanations are, in theory, quite compelling. It's certainly interesting that labor mobility is falling the most among younger workers, and this does indeed seem to beg an explanation beyond just the housing bust and underwater mortgages.

Nevertheless, I can't help but think that the housing dynamic—or, at least, the wider debt bubble that fueled it—has a significant role to play here, if only indirectly. Might it be that young workers, overly burdened with student loan debt and unable to afford places of their own (either to rent or to buy), are shacking up with their (perhaps underwater) parents so as to avoid rent costs? Clearly these two dynamics can play off of each other, given that they both stem from the same basic problem of overwhelming debt, leading workers of all ages to stay closer to home.

In thinking through these problems, I was reminded of this blog post from Tyler Cowen from last month. Citing a study in El Pais, Cowen writes:

Here are the European countries with the highest owner occupancy rates:

1. Romania, 97.5%

2. Lithuania, 93.1%

3. Croatia, 90.1% 

4. Slovakia, 90.0%

How about the lowest rates?

1. Switzerland, 44.3%

2. Germany, 53.2%

3. Austria, 57.4%

Get the picture?

Cowen's point is clear. For years—decades, even—we heard politicians and economists touting homeownership as an integral part of the American dream, and a huge key to our future economic success as a nation. Now, we're starting to see the flip side of that coin, and we're not alone. The most prosperous nations in Europe in fact have very low homeownership rates, while the nations with high rates flounder. This absolutely cannot be a coincidence, and it must have at least something to do with labor mobility.

That, or a high homeownership rate is just a great indication of a society with a lot of debt, a lack of flexibility, and therefore a general lack of entrepreneurship. I hope that we won't some day be reading statistics similar to Cowen's list there regarding levels of college education, but I certainly have to wonder. Debt is an ugly beast, and we can't very easily explain it away by spitballing theories about "lower costs of information". It's a good effort by The Economist, but I remain unconvinced.

[The Economist]
[Tyler Cowen]

The great touring Olympic games?

Yesterday I was tipped off to this spooky Yahoo slideshow of Beijing, four years later. It shows what's become of many of the city's Olympic venues, many of which never had any real use after the games had concluded. I'll include some of my favorite pics, but I suggest you look at the whole presentation, for the full before-and-after effect.

Track & Field (and Opening/Closing Ceremonies)

Kayaking

Baseball Stadium

As I mentioned briefly in my post earlier today, the maintenance costs alone on some of these facilities is often more than the municipalities can bear, to say nothing of the ongoing burdens of the construction costs (especially if debt was used). This can often leave huge scars—and often, safety concerns—in these cities once the Olympics have left town.

It is for exactly these reasons that Chicago and many other cities have proposed the idea of "disposable" stadiums for the Olympics—facilities that are intended to be torn down or immediately repurposed, with the steel beams and sheet metal and concrete and whatever else to be recycled or re-used for some other project elsewhere in the city or surrounding areas.

I say, why not go a step further? What's the purpose of constantly purchasing and building and recycling and purchasing and building and recycling in a different city every four years when the types of venues needed rarely change in any meaningful way from one games to the next? Why can't the Olympics be more like a giant concert tour (maybe like the U2 360 tour) that just rolls into town and sets up shop somewhere every four years, then packs up and heads on down the road to the next tour stop? We could have facilities that are literally built and torn down in less than a month (remember, many of these venues are pretty small undertakings, not giant stadiums like those that host the track and opening/closing ceremonies), only to be rebuilt and torn down again somewhere else—with the same materials.

No, that solution wouldn't work for all venues, but it could certainly work for a few, couldn't it? And it would have to be a whole hell of a lot more cost-effective than doing it the way we're currently doing it, right? Of course, the problem is, who's gonna pay for the equipment and the tour? The IOC? Not likely. They're perfectly happy with the way things are, and they're probably not changing anything any time soon. But with municipal budgets in this country and around the world becoming increasingly strained, the IOC may ultimately be left with no choice, as nobody has any money left to build all these venues to the specs that the Olympic powers-that-be require.

This is all probably another one of my pipe dreams, but I'm nevertheless interested to see what shapes up over the next couple of decades.

[Yahoo!]

Quote of the Week (Malinvestment Edition)

One of the greatest criticisms of the extraordinarily expansionary monetary policies that we have seen over the past couple of decades (and past several years in particular) is that they create a widespread culture of malinvestment—companies and governments launch projects that look attractive solely on the basis of ultra-cheap financing, projects which then go sour when economic reality (or a higher interest-rate environment) returns. This exacerbates the booms and busts of our economic cycles, making recessions more severe than they should be (and much more difficult to cure).

This dynamic helps to explain the severity of the housing bubble (built as it was on ARMs and subprime mortgages), and also... Spain. Spain is in some pretty tough shape lately, asking for bailouts from people who probably can't afford them and possibly won't even provide them anyway. A big part of Spain's problem lies beneath the surface in the regional governments, which can no longer afford to finance their debts. It's essentially a bigger and more dangerous version of the budding problems with local pensions here in the United States, and it's a situation that seems like it pretty clearly could have been avoided.

This week's QUOTE OF THE WEEK

Ciudad de la Luz [an extravagant, publicly financed, near-bankrupt movie studio] has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.

Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.

                                             - Doreen Carvajal and Raphael Minder, New York Times

When governments of any kind begin to make "investments" in the economy to attract big events or simply more tourists—especially when such investment is geared toward attracting big international events like the America's Cup and Formula One (and the Olympics... more on that later)—it rarely ends well. At best, the local economy receives a short-term jolt, and then is left trying to figure out what to do with the infrastructure (and how to pay for its maintenance) after is it no longer in active use. At worst, we end up with a Valencia situation, with taxpayers on the hook for failed ventures, looking for bailouts from anywhere they can find them.

Yes, the taxpayers themselves are always to blame for allowing their governments to spend like this, but the central banks' "expansionary" monetary policies are aggressive enablers in the process. Appropriate, then, that they should find themselves under increasing scrutiny in the aftermath of these sorts of bubbles. But be aware, "doing more" is not the solution—on the contrary, it's at the very heart of the problem.

[NY Times]
(h/t Tyler Cowen)

One chart that sums it all up

This chart (courtesy of the Illusion of Prosperity blog) is one of the most frightening charts I've seen in a long time, and it says quite a bit about what's happened to our economy over the last 50 or so years. The ratio of net worth to debt in our nation is absolutely plummeting, and has been for decades. If you ever wonder why things are the way they are, just call up this chart and remind yourself. See you in 2059!

Clip of the Week

Okay, tons of material this week. If you've got a few minutes, I highly recommend all of these videos. As always, we'll kick things off with a couple of sports videos, including a perfect game in San Francisco and the worst way I've ever seen to kill a rally.

This weird little video about pollination was mesmerizing, and I got a kick out of this remixed version of Obama singing "Call Me Maybe". I also took a trip down memory lane by watching these old school junk food advertisements (remember the "Always Coca-Cola" ads? I'd completely forgotten about them), and as much as I dislike Apple, I have to give them credit--they're incredibly innovative, and this video gives an example of some of the cool and creative engineering techniques they use to "paint" their devices.

For a long time this week, this remix of Mister Rogers was the frontrunner for Clip of the Week. I think the whole auto-tuned speeches genre/trend is starting to get a little (or a lot) played out, but I think this one was nevertheless a pretty big hit.

But it's not our Clip of the Week, because my man Nigel Farage came along and absolutely killed it with a speech in front of the European Parliament in Strasbourg. If you're not yet acquainted with Nigel, I suggest you watch this epic takedown of EU President Herman van Rompuy, which may be one of my five favorite YouTube clips ever. In this case, Nigel took on the farce that is the Spanish bailout. In keeping with the European theme that I established earlier this week, Nigel Farage is your Clip of the Week.

Local governments dial up JG Wentworth

While Mayor Bloomberg has been receiving a lot of attention for his proposed soda ban, it's a different Bloomberg proposal that could have a much greater impact on life in Manhattan--despite receiving little fanfare at all (isn't that always the way?). Old friend Matt Taibbi has the scoop:

Readers of my last book, Griftopia, might recall a chapter about the city of Chicago leasing 75 years of its parking meter revenue to a coterie of private investors, some of them from the Middle East. The end result was and is a political obscenity: Native Chicagoans are now completely at the mercy of private interests when it comes to parking rates, collections, even holidays. When elected officials in Illinois can’t shut off the parking meters on Abe Lincoln’s birthday because a bunch of sheiks in Dubai don’t want the revenue stream turned off even for a day, you know something has gone seriously sideways in the national body politic. 

Well, Chicago isn’t alone anymore. Hizzoner Michael Bloomberg in New York has decided to do his own version of the Chicago infrastructure bake sale; the city announced that it is putting up nearly 90,000 parking meters for lease. They’re expecting to get over $11 billion in upfront money from the deal, which is great news if you’re Mike Bloomberg, who gets to use that money to patch current budget holes instead of making tough cuts or raising taxes. The news is less awesome for the next half-dozen New York City mayors, or for the citizens of New York, who now will get to spend most of the 21st century grappling with its increasingly monstrous deficits with a major tributary from the city’s revenue stream shut off. 

A New York parking meter deal, like the Chicago deal, would be a perfect example of the deeply cynical short-term thinking of many American politicians these days. These deals involve a sitting executive selling off a valuable piece of city property at a steep discount to private financial interests (often, to friends or campaign contributors), in order to solve a current cash flow problem that, surprise, surprise, will still be there the year after you finish spending the proceeds of your sale. 

In Chicago’s case, Mayor Richard Daley sold 75 years of meter revenue – worth an estimated $5 billion – for $1.2 billion. So he gets 20 cents on the dollar for the city’s parking meters in 2008, and then in 2009 the city still has a budget problem that’s now worse, because there’s no parking meter revenue anymore, ever. Meanwhile, a bunch of private investors rounded up by Morgan Stanley – these bankers go on road shows here at home and abroad to places like Geneva and the UAE to hawk discount American infrastructure to foreign billionaires and sovereign wealth funds – get to enjoy the fruits of raised rates. In some Chicago neighborhoods, the meter rates went from .25 cents an hour to $1 an hour in the first year of the deal, and then to $1.20 after that.

As Taibbi points out on his own blog, this is basically the government equivalent of dialing up JG Wentworth (877-CASH NOW!! 877-CASH NOW!!) to pull forward future government revenues into the current period. Who cares if I'll be broke in 5 years, it's my money and I need it now!! It's a slightly more desperate version of the privatization of liquor stores proposal put forth in my state two years ago, on a much larger scale with much more at stake.

For what it's worth, according to my math the discount rate implied in selling a revenue stream worth $5 billion for $1.2 billion in present-day cash (as Chicago's Mayor Daley did) is about 5.5%--in other words, the city government is effectively borrowing money at a 5.5% rate, which is.... eh, not great, not terrible. But the loss of control over the property is a significant problem, as the Chicago case has shown. Private parties can and will take advantage of the kindness of government bodies, and they have done so before. Those with foreign allegiances will feel even less shame when they do so--all is fair in love and international business.

We simply can't allow our governments--local, state, or federal--to continually take out mortgages on the nation's property just to plug current budget holes. If they continue to do so, what will be left of our sovereignty at all? Will we be the United States of America in name only, with all future economic production belonging to China or Dubai?

But by all means, New York, please pay no attention to this case. It's way less important than the size of your drink container, so please ignore it entirely, and direct your legal and political might toward challenging stupid and irrelevant nanny laws. Because by the time you realize you've been screwed, it will be far too late to do anything about it.

[Rolling Stone]

Still looking good, Arizona

Sure, I pick on Arizona here a lot, but let's be honest... they sort of ask for it. At any rate, when I looked at this map from Zillow showing the concentration of "underwater" mortgages in the country (remember, it's a lot easier to end up with negative equity when you hardly have any equity to begin with), Arizona really jumped out at me.

I expected to see a sea of red in California and Florida on this map, as well as in the Las Vegas area, but I was surprised to see the entire state of Arizona outlined so nicely for me, particularly when many of the surrounding states are almost perfectly clean. But so it is in Arizona, where they're seemingly still determined to scapegoat the immigrants for all of their problems.

The changing business of education

I've come across a couple of interesting articles recently that have made me wonder if (some) schools are actively anticipating the bursting of the student loan bubble, and responding in advance by streamlining their processes and making education less expensive (and more democratic). The most intriguing of these articles was cited in this post on the Marginal Revolution blog, discussing a new approach to math classes at Virginia Tech.

There are no professors in Virginia Tech’s largest classroom, only a sea of computers and red plastic cups. 

In the Math Emporium, the computer is king, and instructors are reduced to roving guides. Lessons are self-paced, and help is delivered “on demand” in a vast, windowless lab that is open 24 hours a day because computers never tire. A student in need of human aid plants a red cup atop a monitor. 

The Emporium is the Wal-Mart of higher education, a triumph in economy of scale and a glimpse at a possible future of computer-led learning. Eight thousand students a year take introductory math in a space that once housed a discount department store. Four math instructors, none of them professors, lead seven courses with enrollments of 200 to 2,000. Students walk to class through a shopping mall, past a health club and a tanning salon, as ambient Muzak plays... 

Virginia Tech students pass introductory math courses at a higher rate now than 15 years ago, when the Emporium was built. And research has found the teaching model trims per-student expense by more than one-third, vital savings for public institutions with dwindling state support. 

“When I first came here, I was like, ‘This is the dumbest thing ever,’” said Mike Bilynsky, a freshman from Epping, N.H., who is taking calculus. “But it works.” 

No academic initiative has delivered more handsomely on the oft-stated promise of efficiency via technology in higher education, said Carol Twigg, president of the National Center for Academic Transformation, a nonprofit that studies technological innovations to improve learning and reduce cost. She calls the Emporium “a solution to the math problem” in colleges.

This is an interesting development, particularly in light of Stanford and Harvard's recent decisions to begin streaming online courses for free to the masses over the internet.

While Stanford and Harvard's programs' ostensible purpose is to "democratize education", it's hard to understand why they would be so willing to give their product away for free (of course, we could argue that their real product is "diplomas", not "education", but that's an argument for another day). One answer might be that they're experimenting with new (and cheaper) ways of delivering their educational product to consumers, using the public as guinea pigs rather than their tuition-paying students. It's just a theory, but I think it makes a lot of sense.

The simple fact is, the traditional model of education (professor lecturing to a room full of bored students) has in many ways outlived its usefulness (a topic I first explored in this blog post). It's wildly inefficient, and it's now becoming overly expensive to deliver. Many schools on the cutting edge of education are wondering whether there might be a better model out there, and they're beginning to experiment with new options.

Granted, the schools are only doing this experimentation out of necessity, recognizing that the trend of ever-skyrocketing tuition costs simply cannot continue forever. If the schools don't adapt now, they risk being left behind (or left for dead) if and when the bubble bursts. But regardless of the reasons for the experimentation, the outcomes are nevertheless intriguing, and I'm interested to see if projects like the Math Emporium start to catch on elsewhere.

I'm certain that similar experiments will face an extraordinary amount of pushback in the short term (particularly from professors who earn their living from the old model), and maybe they should. But I'm hopeful that a new and more efficient higher education model awaits--and that I won't have to mortgage my house to send my daughter to receive it.

[Marginal Revolution]

"Predatory lending" in a target-rich environment

This Bloomberg article has been making the rounds lately, and given my history of writing about student loans, I feel as though I have to weigh in.

Susan Romano read her son Zach’s financial-aid letter from Drexel University, and her eyes jumped to the line highlighted in yellow: “$13,442 expected payment” for the first year at the $63,000-a-year school (my note: what in the hell? How does Drexel cost that much?? I digress...). 

“At first, I thought it was great,” said Romano, 48, an insurance claims representative from Huntington, Pennsylvania. “The more I read it over and over, the worse it got.” 

It turned out the college’s “offered financial aid” included $42,000 in loans to be taken out by the family, including a “suggested” $36,178 in parental borrowing or private loans. 

“A loan to me is not financial aid,” Romano said. “It is money I have to pay.” 

As many high school seniors face a May 1 deadline to decide where to go to college, families are struggling to understand financial-aid letters, which can be murky and confusing. While the federal government requires banks and mortgage companies to disclose interest rates and total payments on loans, financial- aid letters for college -- which can cost as much as $240,000 for four years -- are unclear about how much families will have to pay. 

“You have to be savvy enough to know the fine print exists, and then you have to be eagled-eye enough to find it hidden in the letters and on websites,” said Debbie Greenberg, a counselor with College Bound St. Louis, which coaches low- income students about admissions and financial aid. “You also have to have access to a computer.”

Sigh... I can already see where this is headed.

At the peak of the housing bubble, all sorts of banks and other mortgage underwriters engaged in similar behavior in an attempt to generate more business. They didn't particularly care whether or not the borrowers could afford the house over the long run, the goal was to generate as much business in the near-term as possible. When the whole thing blew sky-high, none of the now-underwater borrowers wanted to take any personal blame for the mess they found themselves in. People simply wanted to cast blame toward the "predatory lenders" for the fraud--but as we all know, there are (at least) two parties to any contract.

Now, with student lending creating our economy's newest bubble (and if you think it's not a bubble--and one that's about ready to pop--please read here, here, here, here, and here), I'm already seeing the blame game developing in advance of the inevitable crash. It's not the students who are to blame for taking on debt that they "didn't realize" was debt, or that they didn't realize was non-dischargeable in bankruptcy proceedings. No, it has to be those evil schools who tricked them into doing it... right?

I'm honestly tired of this line of reasoning coming from duped borrowers. If you don't fully know what's in the contract you're signing, DON'T SIGN IT. If you're buying a house with an FHA loan that's only requiring a 3.5% down payment, it's your responsibility to understand what that means (hint: it means that if your home value decreases by just 3.5%, your entire equity stake is wiped out and your mortgage goes upside-down). If you didn't realize that, then it's nobody's problem but yours when you find out that you can't ever move because you have no money left to cover your losses.

For generations in this country now, it has been taken on faith that a college degree is "always a good investment", and that we should all pursue a college education no matter what we have to do to finance it. People therefore rarely blink when asked to sign up for student loans, just like they rarely blinked when signing on the dotted line for a mortgage--remember, buying a house was "always a good investment", too, right up until the time that it wasn't.

More of us need to do what Susan Romano did here--she stepped up and realized that something wasn't quite right, and she took personal responsibility for the contract she signed (or didn't sign). The simple fact is, predatory lenders can't exist in a world in which there's no viable prey--but if we allow ourselves to become vulnerable, then we're just about guaranteed to find ourselves hunted down by some very capable predators.

It's as true in college as it is in the animal kingdom--predators thrive where prey is most abundant. We need to stop letting ourselves become prey, not blaming the predators for being what they are. Period.

[Bloomberg]