Tag: Debt

Why the President’s College Plan Won’t Work

I’ve been thinking about the President’s recently announced plan to change the federal student loan program. Something about it bothered me and it took Alex’s post below to finally crystallize my objections.

It won’t work. Even if it works, it won’t work. It won’t work because Barack Obama, oddly enough for a Harvard man, misunderstands the nature of higher education and, not oddly at all for a Democrat, misunderstands the nature of the problem with student loans.

Here’s the plan:

The plan, which Obama rolled out as he opened a two-day campaign-style bus tour of college campuses, would create a rating system beginning in 2015 to evaluate colleges on tuition, the percentage of low-income students, graduation rates and debt of graduates.

Eventually, as an incentive for schools to make improvements in these areas, federal financial aid would be awarded based on those ratings. Obama said he could create the ratings system through executive action, but the plan to reallocate federal aid based on the ratings would require congressional approval.

In principle, this isn’t a bad idea. There are a lot of diploma mills out there that give out crap degrees and a lot of schools that really don’t care if your degree is useful or not as long as they get that sweet sweet federal money. So some form of accountability wouldn’t be a bad idea.

But in practice, it will fail. Badly.

Let’s put aside that such a system would inevitably be gamed by the colleges (most likely through grade inflation to bump up their graduation rates). Let’s put aside that rent-seeking universities will make sure that their school doesn’t get hit. Let’s put aside that this will only change how loans are allocated rather than the total amount — so the river of federal money will continue to flow. Let’s put aside that such rankings already exist in many publications. In fact, let’s put aside that the President’s plan is so dumb that even Kevin Drum can point out the flaws in it.

No, the bigger problem is that many people do not go to college to get an education. You can get a fantastic education if you want one. And for many specific professions — science, for example — you can learn a lot (although most of the necessary skills for me were learned in the lab and the library, not the classroom).

But most people go to school for credentialing: to get the bachelor’s degree that is a requirement for a steadily growing number of jobs that have little to do with education. Harvard could be giving out the worst “bang for buck” in America. But people would still line up to go because a degree from Harvard carries a cache in the business world that a degree from East Yachupetz Community College doesn’t (even though community colleges almost certainly give the best education bang per dollar). So let’s just say, for the sake of argument, that you use this system to cut down on student loans to Harvard in favor of schools that are more “efficient”. That won’t happen, of course, since Harvard has about three hundred friends on Capital Hill, but let’s pretend it does. What happens? Does Harvard care? They’ll have plenty of people who can pay. They have tens of billions in tax-free endowment to finance people who can’t. At worst, some people at the margins lose out on getting that ticket to the upper class that is an Ivy league diploma. Net benefit: nil.

Indeed, the exploding cost of education has nothing to do with education — faculty hires have been flat. It has been the result of growing administration and construction designed to make a university degree seem like a more impressive credential than it actually is.

The President has two more speeches to give on this subject but I doubt that he will address the real problem problem here which is that the federal government has slowly become the biggest predatory lender in the country. The simple fact is, as Matt Taibbi points out, we now have a system in which universities can charge what they want and the federal government will lock young people into massive loans for an eternity to pay for it. Loans that can not be discharged in bankruptcy but can tally up penalties and interest rapidly. Loans that are immune from Truth in Lending requirements. Loans that can destroy people’s lives by using powers that private lenders simply don’t have. Loans that make more profit for the federal government than they ever did for industry. The situation is so bad that even Taibbi is capable of seeing the truth:

Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.

I believe that the federal loan system has poisoned the education system. It has allowed naive young people take out six figure loans for useless degrees. It has bypassed all the consumer protections we have out there. If a private industry did this, they would be in prison (well, maybe not, given how the Obama Administration has dealt with the crooks in the mortgage industry).

Don’t fix federal loans; end them. Let private lenders subject to the same laws as everyone else take over. Let universities loan money and scale their reimbursement to future earnings of their students. In short, give the lenders and the schools a financial interest in providing a useful and affordable education. Because right now all the interests are aligned toward screwing the students, the taxpayers and the professors in favor of university administrators, big education lobbyists and politicians.

Our Shrinking Debt

This is good news:

U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.

Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private- sector borrowing is down by $4 trillion to $40.2 trillion.

So how can this be with trillion dollar deficits? Well, the private sector and non-federal public sectors are unravelling a tremendous debt bubble that built up in the last decade. Consumer debt is down by $1.3 trillion. Short term corporate debt is down by 55% as well. This isn’t as good as corporations need to borrow to grow. But for that much debt to be unravelled without a complete economic catastrofuck or massive inflation is remarkable.

It’s also helping with the national debt. Because consumer debt is so far down, the treasury has the loan market pretty much to itself. So all our borrowing is coming at low prices, despite the S&P downgrade.

I expect things to change soon. With debt down to much more manageable levels, people will start borrowing again. And if we can get control of federal finances, that will make borrowing even cheaper for private interests. Four years ago, I said that our economy would not move until we’d unravelled the tremendous debt we’d built up. We’re on our way to doing that, thankfully.

Happy 2012.. We are going to have some harsh times ahead

As 2012 opens people party but things look bleak here in the US. Unless you live under a rock you are bound to know about the 2012 change of the world – or end of the world – predictions and based on what the Keynesians have done to us, it sure looks like this is the year that it all will happen.. That’s why I was really impressed by what a Business Insider article titled You Can’t Solve A Debt Problem With More Debt, which basically is dead on, points out: the choices are all hard or bad, but we can not keep doing what the Keynesians have done for the last 2 or 3 decades. We where sold a huge lie by those that told us government could spend us into permanent prosperity, and do so while enforcing social justice, and pick the winners & losers. It’s all nonsense, and the chickens are now coming home to roost. Get prepared! Happy New Year….

Not “If”, but “When”.

As I have pointed out, we are sooner than later going to have another economic disaster, because the politicians that caused it not only didn’t fix it with a massive expansion of their power to influence which companies are protected by government and which ones can be taken down, and only made it worse, and others seem to agree. In fact it seems even the LSM now is feeling forced to report on that.

“There is definitely going to be another financial crisis around the corner,” says hedge fund legend Mark Mobius, “because we haven’t solved any of the things that caused the previous crisis.”

What problem is that you ask? Well, it’s those shitty mortgages that never should have been issued, to people that were not qualified and thus couldn’t pay them back, which where issued, under threat of losing your FDIC insurance if you did not comply, as part of a 3 decade long attempt at social engineering a collectivist utopia.

Through quantitative easing efforts alone,” says Euro Pacific Capital’s Michael Pento, “Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS).”

Think about that for a moment. The Fed’s entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets.

“As the size of the Fed’s balance sheet ballooned,” continues Mr. Pento, “the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.

“Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out.”

Get that? Our government now owns some $2.7 trillion of debt, much, if not all, of it bad debt, and has a measly $52 billion of capital behind it, leaving it leveraged by a ghastly 51–to–1 debt to asset ration. What is left out, to give you some perspective of how fucking insane and bad this is, is the fact that the Dodd-Frank bill capped banks at a 15-to-1 ratio. Our government carries more than three time the debt rated against their assets!

Worse yet, is the obvious fact that Dodd-Frank did nothing to deal with the fundamental problem that caused all this: being forced by government to give loans to unqualified people. The bill basically ignored this completely so the politicians could keep the same social engineering lending requirements that caused the problem in the first place, around. So in the current clime where there is pressure to make banks loan again, as soon as banks actually meet that 15-to-1 ratio, they open themselves to being forced to do more of the same or risk being accused of discriminating. And the whole game starts all over.

Now couple all of that with the horrible state of affairs of the European banking system, which is basically using buckets to drain water from a sinking ship with a gash the size of the one inflicted on the Titanic by an iceberg, and you can see that things look bleak. That’s why we get things like:

“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion.

Here is the scary part. None of the Eurocrats in Brussels have the foggiest idea on how to solve this. Don’t be fooled into thinking otherwise. All they are doing is more of the same Keynesian nonsense in an attempt to keep the doomed EU together. The French and German banks are stuck between a rock and a hard place, because they have so much money lent to the troubled members of the PIGS – Portugal, Italy, Greece, and Spain – that any one of those not paying back 100% of what they owe will send them into the abyss. And those that are honest don’t even believes that Greece, where the people have gone bonkers because they now have to wait till they are 60 to retire or are being told they will get less “free stuff” and are up in arms, can pay a fraction of what they owe, back. Those that play the odds favor the EU falling apart. The fall of the big European nanny state is going to hammer us.

Running out of other people’s money, sucks, but we better wake up to that reality or Team Blue, which thinks that they can recreate Greece here, but somehow magically without all the trouble that comes with that socialist utopia, will seal our doom. Maybe that’s the plan anyway. Nobody can be as inept as these people have been and continue to be on purpose, and survive this long. The universe can’t be that cruel.

The Worst is Yet to Come

Building on Rich’s post on debt, I stumbled across this article that summarizes Harrisburg, PA’s recent attempt to declare bankruptcy. Essentially, the city got themselves $310 million in debt (that’s $6,000 per resident) on an incinerator. Yes, a fucking incinerator. They took on a bad obligation, compounded it by signing a deal with the lowest bidder for renovation (lowest bidders always cost more) and are now trying to impose a commuter tax to get out of the hole before the state essentially takes over the city and forces them to lease or sell city assets.

This is not even the only scandal among Pennsylvania small towns. Numerous towns are facing financial difficulty over interest rate swaps and mine is potentially facing millions in losses on a possibly illegal naked interest rate swap — that is, we might have to fork over millions to pay interest and penalties on a loan we never took out.

This is going on everywhere in America. Not only are cities, counties and states in debt, many are tangled in such complicated financial schemes, it’s not clear how they’re going to crawl out. All over the country, people have forgotten the first rule of finance: do not invest in something you don’t understand; do not take on debts you don’t understand. And we’re supposed to believe these twerps will clean up Wall Street?

There are some people who are starting to get it:

Some 8 million U.S. consumers stopped using bank-issued credit cards in 2010, according to the credit-reporting agency TransUnion. The average credit-card balance has fallen 10 percent this year from 2010, to $6,472; U.S. consumer debt has dropped for 12 consecutive quarters, from a peak of $14 trillion in early 2008 to $13.3 trillion last spring, mainly because of mortgages repudiated or abandoned. People are cutting visits to the hairdresser, buying used cars without financing, and living on surplus cheese as they trudge toward the promised land of a debt-free existence.

Of course, many economists are claiming that this is a bad thing because we should all be out spending, spending, spending to “stimulate” the economy. Well, excuse my lack of Economics PhD, but what he fuck do they think the last decade was all about?! We borrowed and spent like mad — in both the public and private sector. The result was an empty economy with essentially zero growth and all economic gains concentrated among the wealthiest. Is that what we want to go back to?

We keep running against this reality: there is no short-term fix for the problems we are in. We can minimize the pain, but we can’t fix the economy with band-aids. Long-term fixes that will slowly right the ship over the next decade are the only answer. And part of that long-term fix is de-leveraging the country.

There is simply no alternative. As even Ezra Klein — in a great leftish article on the economy — acknowledges that this is not just a downturn in the business cycle. Financial crises are different. And while Klein wouldn’t agree, I think this cycle is different because of the truly staggering amount of debt out there.

As mentioned in the Atlantic article, one positive affect of the Great Depression was to instill an aversion to debt in a generation of Americans. My parents’ generation is obsessed with being debt-free (some of them anyway) and not getting into complex financial entanglements. I hope against hope that one of the good things to come out of this will be an aversion to debt among younger people. The OWS crowd and their calls for student loan forgiveness make me shudder for the future. But I just had a 5 year-old girl tell me today that people spend too much and need to save. And all her little friends agreed. If we want more people like that little girl and fewer like the whiny entitled students, we need to face reality about our debts. And make that reality as crystal-clear to the American people as we possibly can.

PS – The Atlantic article has one huge flaw. It describes Japan as having deleveraged their debt. I’m not sure what parallel universe Earth that Japan is on. On this reality’s version of Earth, Japan’s debt is more than twice their GDP. They also don’t mention countries that deleveraged successfully, like Canada or Sweden.

PPS – Oh, and we can we put a fucking axe through the lie that government budgets are being slashed?

The Ticking Of Inevitability

“Never a lender, or a borrower be”, what was Shakespeare smoking? The moving of money is now the drivers of world economies, and if too much of a good thing is a bad thing, debt-that ultimate result of an unbalanced ratio- has become more than a world problem:

Happy Monday!!

It’s like trying to read a link and those pesky commercial videos on the side keeps popping up, those turning numbers are so annoying. This chart is handy though, moving the cursor to different countries provides a snapshot of that particular country’s financial woes, not pretty.

People’s individual experiences in life shape their perceptions. No doubt because I was raised poor (only child, struggling single mom) my views on debt, financial obligations and unwanted encumbrances were shaped early on. On a OWS post last week we talked about student loans, I was one of those guys that postponed college because I had no money and taking on student debt was anathema to the way I was raised. Similar (although a bit different) with my wife, a proud Cal Berkeley/Hastings Law School grad, who borrowed the money from her dad (who secured a loan from her payable at a certain date with interest), freedom from financial obligations is big with both of us.

But municipalities, states, and country’s can not be run like individual households, obviously, borrowing and debt are an inevitability, but it is the fiduciary duty of those in power to manage and control that debt, not too much of that going on, anywhere in the industrialized nations of the world.

Watching those numbers spin can only be handled in short doses, but it is useful. Something has got to give, or I could use a domino example, either way, a reckoning is coming.

Why The Debt Ceiling Deal Was A Total Cave By Boehner et al

Because it didn’t limit the debt ceiling at all, that’s why. It simply put in place a nearly automatic raising of the ceiling as long as Republicans couldn’t overcome an Obama veto. Come Monday, 9/12/11, another $500 BILLION will be added to the ceiling, and all Boehner et al did was provide themselves political cover for that predetermined increase on that predetermined date. If there’s still any Boehner and Super Committee apologists out there, explain how this is a victory for either Republicans or the country:

Here We Go Again: US To Breach “Transitory” Debt Ceiling On Monday

It is hard to believe that the last time the US had breached its debt ceiling was a whopping one month ago. Courtesy of much toil, tears and televized theater (not to mention fake compromises), the Obama administration managed to get an accordion-feature extension of the debt-ceiling-cum-target, whereby it is currently at $14.694 trillion, and can be extended in $500 billion increments, for a total of $1.5 trillion provided congress and senate do not vote down such an expansion. The reason we bring this up is because as the data below demonstrates, the US Treasury will breach its brand new debt ceiling… on Monday.

That’s right: as of yesterday, total US debt was $14.717 trillion (obviously an all time record, and every day closer to parity with US GDP), while debt subject to the ceiling was $16.772 trillion, or just $22 billion below the total before someone has to go ahead and commence the whole debt ceiling fiasco from scratch. And since as the Treasury is auctioning off another $32 billion in 3 Year bonds on Monday, that process better scramble or else all that rhetoric about Social Security being nothing but a plundered ponzi scheme will be proven true yet again. And while we see flashing headlines that Obama’s proposal is now set to be a bullshit $450 billion (bullshit because republican will absolutely not go ahead with it), we are positive that not one word will be uttered to inform the public that as of this moment Harry Reed has already started the process of the next $500 billion debt ceiling expansion, one which will bring total US debt-to-GDP to over 100% for the first time since the post-WW2 period.

Most recent total debt breakdown:

And next week’s full debt auction schedule:

And the issue in question that will tip us over:


And the Super Committee hasn’t even gotten started putting the screws to us yet. Isn’t it great that we have Republicans to SAVE our country? Wiemar, here we come…..

Oh, and surprise!

Senate Attempt To Block Debt Ceiling Increase Fails: Debt Target Is Now $15.2 Trillion, Or Over 100% Of GDP

Got it? Debt target is now OVER 100% of GDP. Us Tea Party terrorists, racists and wannabe lynchers were just alarmists calling for Boehner to hold his ground, right? This country is doomed.




The Canadian Model

To circle back to the most pressing topic of the day: S&P may be nitwits but their downgrade of our debt was utterly correct. We have not made any real inroads on our staggering debt load, the hysterics over the debt ceiling not withstanding. Until we address entitlements, we’re not serious. The S&P downgrade is not some esoteric financialspeak that has no relevance to us. It’s the canary in the coal mine: the warning that we’re heading toward very serious problems.

But the WaPo makes a good point this morning. If we want to get out of this, we should be more like Canada. Seriously:

A quick Canadian history lesson: in the early 1990s, things were looking pretty grim. The country had regularly run fiscal deficits since the 1960s. In 1993, stood out among the G-7 as having the most foreign indebtedness. As one analyst noted, “From the beginning of 1990 to the end of 1993, Canada experienced a long slide in economy activity and employment.” The country lost its AAA rating in 1993. Feel familiar?

Facing an unprecedented fiscal crisis, Canada got down to work. The country passed a landmark budget in 1995. The plan tilted heavily towards cutting expenditures but also included some new revenue (the ratio was about $7 in cuts for every $1 of revenue). Canada cut the civil service by about 25 percent and overhauled its pension program. The plan worked. Canada is now on much more financially-sound footing; S&P restored its AAA rating in 2002. The turnaround is now referred to, in some economic literature, as “The Maple Leaf Miracle.”

The heavy ratio of spending cuts to tax increases was because Canada had high taxes to begin with. But they are not alone in restoring their debt rating this way. Australia, Denmark, Finland and Sweden also restored their ratings. They got there in different ways but they all had something in common: they didn’t stick their thumbs up their asses and wait for the problem to solve itself. Restoring the debt rating wasn’t the goal, per se. But it was a useful harbinger of their overall finances. When S&P upgraded them, it was a sign that things were finally under control.

We’re not serious yet. Despite Obama’s supposed overtures on the subject, his party remains diametrically opposed to entitlement reforms (Pelosi has made it clear she will oppose any “grand bargain”). Last night’s GOP debate saw all the candidates oppose a theoretical 10-to-1 cuts to tax hikes deal. The so-called “Super-Committee” is being rigged for failure.

I don’t know what it will take for us to follow Canada into serious reform. Maybe another downgrade or stock market crash. But we can’t put with this shit any longer. We can’t afford to.

Haven’t some of us been saying so?

What you ask? Well, that the real problem is the financial obligations to keep up the socialist bullshit:

When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco’s Bill Gross told CNBC Monday. Much of the public focus is on the nation’s public debt, which is $14.3 trillion. But that doesn’t include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures. The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show. Taken together, Gross puts the total at “nearly $100 trillion,” that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won’t find a solution overnight.

Lets’ break this revelation down…

Current US debt, yes, the same one Obama wants raised pronto so the left can keep spending like it’s other people’s money, is at $14.3 trillion. That’s the debt the Chinese recently accused us of already defaulting on. But that debt figure seems dwarfed by the $50 trillion in guaranteed Medicare, Medicaid, and SS outlays of $50 trillion! And that’s according to the government’s own numbers, which means you can likely double that freaking number based on past performance. $50 trillion! Wow? Is this adjusted for Obamacare? I bet not.

Then we have the bailout of the financial sector for which we get no details or numbers. Wonder how much of that is money we had to pay because the democrats wanted to play Santa Claus with homeownership, directly to the financial institutions that put their necks on the chopping block giving loans to bad risks, and how much more to bail out Freddie & Fannie, which they used to launder the shitty loans through before sending them to be auctioned for primo dollars on the credit default swap market? Last I heard Freddie & Fannie are going to stick us with anywhere from $1 to $65 trillion, but Gross seems to think the number is in the high thirty trillion from that $100 trillion debt obligation. This is scary stuff!

To think that we can reduce that within the space of a year or two is not a realistic assumption,” Gross said in a live interview. “That’s much more than Greece, that’s much more than almost any other developed country. We’ve got a problem and we have to get after it quickly.”

Worse than Greece? Ouch! And I cry bullshit! Debbie Wasserman-Shultz says president Obama has turned the economy around! Nothing to worry about people. All is peachy.