patrick.net

kewp,

Point taken on the part about not everyone *should* insist on obtaining a degree. However, I take exception to the "everyone not receiving 100% grants/scholarships is an idiot" generalization. It's simply not true.

I was:
--an A/honor roll student
--worked my ass off before, during and after college
--took mostly AP & honors classes (at a time --80's-- before they even offered AP track for many subjects)
--National Merit Scholar
--received Cal grants & a private scholarship

And it *still* wasn't enough to cover the majority of costs. Granted, pursuing an M.A. at age 22 was not the best decision, but how was I to know the U.S. was about to go into recession (1990)?

Besides, if there's anything in the world *worth* borrowing money for, shouldn't higher education be near the top of that list? Oh, right, I forgot --it's A-ok to borrow millions to flip RE and live it up like the Donald then default without recourse, but NOT for education, no sir. Odd priorities we have.

I thought it seemed harsh too but then again I went to JCs then to SDSU so my cost was small. I graduated in 1998 with a BS and $16,000 of student loans. $12,000 of which I used as a down payment on my first house. Hey, they said housing was a proper use of the money :)

I paid it all off in 2003, and in 2004 I went to grad school. $1,200 per semester hardly seemed noticeable and I think it was a good investment.

Off-topic: I just received 3 (count 'em) spam emails from Barbara Boxer that she had received my various opinions on the bailout.

It seems like ages ago that I sent them ....

I still have her letter from some time ago saying there were no bailout plans. LOL

If you are a bad student, you are better off not going to college rather than getting yourself up to your ears in debt. Join the Army, learn a trade or get a 2-year associates degree.

There are way, way too many people in college that simply should not be there.

I can mostly agree with this, though I don't believe not graduating at the top of your class automatically makes you a "bad"student. And for the record there are plenty of truly "bad"/unqualified legacy students who get there solely due to connections and money (our current President *cough*, *cough*).

In this country, you are looked down upon if you learn a trade vs. going to college, which does many people a disservice.

just got those same emails

I was a B- student in high school, and did much better in college. There is a difference to some of us between being forced to do something verses achieving something as a personal goal.

Me persoanlly, I think most people need to at least pursue an associate's degree. There is just too much stuff that people need to know to live as an adult that high school educations on their own don't provide.

Universities are massively overcharging right now.

Part of me agrees with kewp. Seems like everywhere you turn there is some "essential" service or asset that is supposedly worth mortgaging 20 years of your life.

If the kids bit on all of these (higher education, house, car), they will have mortgaged away the rest of their life. Heading into what could be a decade or longer of economic stagnation, it could be a massive mistake.

I agree but a JC here in San Diego is still $100 per semester full-time.

Universities are massively overcharging right now.

No arguments here. I have zero doubt that the very *reason why* private colleges and universities can get away with charging so much is that they know they have an iron-clad government backstop.

Take away taxpayer "insurance" on SLs and remove that bankruptcy exception, and we'd see prices dropping like a stone in no time.

Unfortunately, when I was 18, I was naive and did not have older, wiser people advising me and warning me about the dangers of leverage. My parents took graduating from college as the equivalent of winning the lotto --a "no-brainer". Of course, back when they went to college, it was far cheaper and mainly financed with grants and scholarships, not nondischaregeable loans.

Exactly Malcolm. Clearly education is worth something. But how much is the question?

At a $100 a semester its a no brainer. At $20K a semester, it's a ripoff.

Yup, studies show the extra money doesn't translate to much more earning power over a lifetime.

credit crunch n [Latincreditum krisis] 1: general situation where grant of monetary loans are withheld from persons without the income based ability to repay 2: period of re-instated prudent lending policies following period of prosmiscuous loan grants; esp : loans formerly granted based on presumed perpetual appreciation of mortgaged asset, and the ability of the lender to divest collection responsibility through favorable sale of receivables

@Headset,

:lol: Worthy of additon to the HB Glossary --well done!

Welcome back, Harm!

Bank forum addresses housing bubble

The housing mess, as some may assume, is not simply a product of stock market failure and greed.

“The government helped stoke the mania,” Northwoods Bank CEO Mark Hewitt explained to a group gathered for a forum on the issue.

“A housing bubble is not unusual,” Hewitt said. “But this is the first time it’s occurred on a national level.”

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of loans going to low and moderate-income borrowers, he said.

In 1996, the Department of Housing and Urban Development (HUD) required 12 percent of all mortgage purchases by Fannie and Freddie to be “special affordable loans,” he explained. These loans are typically granted to borrowers with income less than 60 percent of their area’s median income.

That goal increased to 20 percent in 2000, 22 percent in 2005 and 28 percent in 2008.

Fannie and Freddie, which are Government- Sponsored Enterprises (GSE), met the goals every year, funding hundreds of billions of dollars in loans. Many were sub-prime loans (to borrowers with low credit scores) and adjustable rate loans, and made to borrowers putting down less than 10 percent, according to an article in the Wall Street Journal, to which Hewitt referred.

“Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run,” the Wall Street Journal asserts. “It was political free lunch.”

The Community Reinvestment Act (CRA) was “strengthened” in 1995, causing an 80 percent increase in loans going to low and moderate-income families, Hewitt said. The CRA encouraged traditional banks to serve both the bottom line and the common good.

The Taxpayer Relief Act of 1997 increased demand for real estate by expanding the availability and size of capital gains exclusion from $125,000 to $500,000, Hewitt said. “There was no age limit and it was no longer a one-time exclusion.”

The Federal Reserve - or Fed - created easy and cheap money to combat the recession after the tech bubble. U.S. Central Banking System funds hit a 40-year low of 1.25 percent.

“Investment banks and mortgage brokers entered the market in a big way,” Hewitt said. “Mortgages originated, were pooled, packaged and sold on Wall Street.

“These factors dramatically increased the demand for housing,” he said. “Between 1997 and 2005, the average price of a home more than doubled in the U.S.

“With ever rising housing prices creating a speculative bubble and the government’s push to increase home-ownership rates to historic highs, the sub-prime market took off,” Hewitt said.

“There was a dramatic weakening of underwriting standards for sub-prime loans,” he said. “Securitization passed the risk from the originator to the investor.

“Lenders over-lent, builders overbuilt and buyers overpaid,” Hewitt said.

“The hidden cost has been hundreds of billions of dollars funneled into the housing market, instead of more productive assets,” the Wall Street Journal notes.

Federal Reserve Chairman Ben Bernanke has stated once the “crisis at hand” has been dealt with, a “stronger, more resilient and better regulated financial system” must be developed.

It’s a sentiment echoed by Secretary of the Treasury Henry Paulson.

Community banks, like Northwoods, are mostly funded by local deposits and make loans locally, Hewitt explained. “We hold our own portfolio and don’t lend to the outside market.”

Perma,

How about a PermaLink instead ?

OT:

What happened last time we elected for President a born-again Christian fundamentalist, anti-intellectual governor from an oil-rich state?

Does anyone really want this to happen again?

I was watching "Hardball with Chris Matthews" earlier today and the above was the thought that came to mind. I can't believe nobody has seen that analogy already ???

In this country, you are looked down upon if you learn a trade vs. going to college, which does many people a disservice.

That may change. I would not be surprised if five years from now steel workers made $250k a year and hired MBA's to mow their lawn and paint their house. Assuming the MBA's can figure out how to paint a house, that is.

I personally don't look down on tradesmen regardless. They are the foundation of our Great Society.

Re: Your personal experience. Times change. From the wiki on Princeton, one of our countries most selective schools:

Princeton is one of the most selective colleges in the United States, admitting only 9.25% of undergraduate applicants in 2008.[26] In September 2006, the university announced that all applicants for the Class of 2012 would be considered in a single pool. In this way, the Early Decision program was effectively ended.[27] In 2001, expanding on earlier reforms, Princeton was the first university to eliminate loans for all students who qualify for aid, . U.S. News & World Report and Princeton Review both cite Princeton as the university that has the fewest number of graduates with debt even though 60% of incoming students are on some type of financial aid.[28] The Office of Financial Aid estimates that Princeton seniors on aid will graduate with an average indebtedness of $2,360, compared to the national average of about $20,000.

Expect top quality education to get cheaper over time thanks to swelling endowments. Of course, this may all change if the economy goes south.

I do think that if the government stopped subsidizing higher ed via Sally Mae, that costs would come down. No different than health care and housing costs would come down if got rid of Medicare and the GSE's.

Today, it is not triggered by PPT, surprisingly, it is triggered by this:
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN1361207920081113

The moment of truth is drawing near as there will be dwindling amount of money available to buy US Treasury from the Arabs (falling oil price), China (their own stimulus), and Japan (simply out of gas).

One of those days not far off in the future, something will set off the collapse of the US Treasury, which will trigger a massive exodus of USD fixed income assets. Today is just a rehearsal.

@OO

So if there is a mass exodus, where will the money it go? Stock market? other currencies?

OO,

The People's Republic of China may be in the process to cause the collapse of the US Treasury. They have a bailout to pay for and lots of Tbills to liquidate. They may force the fire sale of our gold reserves to pay for their bailout or else we watch the dollar go to crap.

Care to explain, neutron? A fire sale in T-bills would force down the price, which would in turn increase the guaranteed yield. How could anyone force us to liquidate our gold reserves? And who in the world has the capacity to buy $1T of government bonds, and how would China maintain our trade deficit without them?

So if there is a mass exodus, where will the money it go? Stock market? other currencies?

Into the great, dark abyss of deflation.

Eh, it seems as though some higher education is of value.

I have several friends who never made it into college. One has a fine well-rounded career and life, and she just headed back to college (full ride, German business school) in her 30's for a sense of completion. Another can write code but cannot seem to organize any other aspect of his life. Two more work in retail, cannot quite understand the full impact of their recent real estate purchase (I tried, I swear), and feel that anything over $10/hour is real money. And the last two are highly intelligent people who simply never received the inputs necessary to see a bigger picture. I cannot begin to tell you how awful it was to explain to them that their condo purchase would not generate $300K in equity within 2 years, and that in fact they could lose money on the condo (disbelief and the assumption that I was a jealous bitter renter--I would have stayed silent if they were not making major plans that hinged on their false assumptions).

Given all of that, I think I'll stand by the idea that for most people, a basic grounding in liberal arts, life skills, mathematics, and economics has value, and as high school does not provide, higher education is the way to go.

I've taken great JC classes and terrible private university classes, so a good education does not necessarily have to be expensive, and an expensive education is of course not necessarily good. But *some* education will probably help you out at least a bit.

If the Tbills are sold by the Chinese to finance their bailout, the value of the Tbill and dollar will drop. The only thing left to keep the value of the dollar up would be trading our gold for their Tbills.

This is economic warfare. The only thing that I see that could prevent this from happening is a major food shortage in China. I was only 5 at the time, but I do remember the news about the USSR buying up all the excess wheat in the mid 1980's.

Eliza,

Make no mistake, I truly believe the pursuit of knowledge and higher education is the most important thing in the world. It's what makes us human.

And its why I *choose* to work in that arena, despite the frustrations and crappy salary compared to the private sector.

I just personally don't think its for everyone and its certainly not worth going many tens of thousands of dollars into debt for.

And I'll point out that Wall Street is/was full of Ivy League MBA's and look where that got us.

It depends on whether we default on our T right away or we choose to print.

It is extremely unlikely that we will choose to default. The fact that Fed has grown its balance sheet by $1.3T in a matter of 3 months indicates that Fed is willing to print.

In the extremely unlikely event that we default, don't bother. Other countries will become financially unstable as well so there is no place to hide. We are all toast, worry about survival at the basic level, stock up on food and water, load up ammo.

In the more likely scenario of unabated printing (printing whatever we need to fund the deficit), buy consumer staple stocks (condiments, toilet paper, sanitary napkins), and commodities that people cannot do without, not copper nickel zinc, but energy, wheat, rice, sugar etc.

I am now convinced that every country will go ZIRP within the next 12 months, so save your breath on FX, they are all heading to 0, if you can manage to leave no paper trail at all, get some physical gold.

Neutron,

No, China is NOT in a position to force us to do anything. But they are in a position to not buy our new T, and they cannot afford to.

First of all, we are not able to send over that much USD any more since all our consumers are pooping out. Then, they need to save their own ass since China is slowing down drastically. Think about a country of 1.3B population with 20-30 million migrant workers already losing their jobs, and this is just the beginning of the tsunami of unemployment. Proportion wise it sounds fine, but the sheer scale of it is scary, because if 1% of them are disgruntled, the country will be in for lots of social unrest. That's why China has to go for the huge stimulus, and there is another one on the way, rumored to surpass the first stimulus in the range of a T, USD, not entirely funded by their foreign reserve, but it will make a dent.

So one thing is clear. China will not be able to buy as it used to any more. Let alone the Arabs, their single-source revenue is tanking faster than China so they won't chip in.

The bag holders of US debt are like audience in a dark theater. Somebody mutters fire, and we smell some smoke. But nobody screams or yells or runs, because we know if we all start to run for the door, most of us won't make it out alive. But at the same time we hope the others are not noticing what we noticed so that we will have time to proceed quietly to the door ASAP. When the smoke gets thicker, someone will start to run, we don't know who. But we know that is when everyone will be forced to run at the same time.

The 2009 budget as it stands today has $436B deficit.

We all know the tax receipt will fall off a cliff, so that part of the deficit is definitely understated. Then, it assumes lots of government cuts, which will not all go through, particularly when depression is on the way. Then, we may still get a few more stimulation in terms of tax cut or rebate checks on the way, and when was the last time you saw a US government budget on the mark?

So the bottom line is, we are on our way to $500B+ deficit next year, plus some existing US debt to be rolled over. Just to provide a reference for this, just look at the the current T holding by different countries, and tell me which countries combined can buy that extra $500B Treasury?
http://www.ustreas.gov/tic/mfh.txt

Btw, I have been trying to find the maturity/duration of all US government debt on the Treasury site, but couldn't find any. Does anybody have that data handy?

OO,

I'm still struggling to understand all of your theory. If China sells a bunch of T-Bills, won't they get dollars in return? At some point they have to convert to their own currency. How do they convert $500 billion while keeping the exchange rate pegged?

News from Sun is bad this morning. 5,000-6,000 layoffs.
They did not state where and I know Sun has a gisnificant presence in Colorado, but I think the BA is once again shedding jobs.
Yikes!

On November 13, I said:
And there are more cuts coming. Very credible rumors about Cadence, Yahoo, Sun, and another search-engine company that I am not at liberty to mention.

There you go - Sun announced massive layoffs. In late October, I had heard about 2000 jobs being cut. I don't know if something else in the last two weeks made them go back and cut even deeper.

Even more BIG numbers are coming from other Bay Area companies, based on what I hear. If you are in the market for a house, do yourself a HUGE favor and wait - even if you are sure your job is "safe". This is a dam-buster event.

There is cash on the sidelines, big piles of it in unexpected places. Is a possible scenario China issuing massive debt to attract this capital, using their US Treasury holdings as backstop collateral? Might they have learned the game we have played on them, maybe their next endeavor is to join the con? Offer an attractive return.....much more covert warfare.

As US financial landscape will be a smoking crater in 12 months, maybe China *freedom* bonds become the capital safe haven? Ah, probably they lack the institutions of higher education and a serious cultural chasm that would facilitate an effective army of smooth MBA's to convince folks to buy chinese debt issues.....

But maybe....it's all so unpredictable now. Very forward thinking country, been around for a very long time, relatively stable, tight control of their population, very nationalistic.....man, if China actually could raise the sophistication of their finanical and banking game, we would be in real trouble.

HARM said:
Besides, if there’s anything in the world *worth* borrowing money for, shouldn’t higher education be near the top of that list? Oh, right, I forgot –it’s A-ok to borrow millions to flip RE and live it up like the Donald then default without recourse, but NOT for education, no sir. Odd priorities we have.

HARM, I totally get what you mean. But it is not an "odd priority" we have, but an "odd reality".

Borrowing for education only to graduate into a collapsing economy seems far less prudent in hindsight compared to dropping out of college, borrowing recklessly at low interest rates for speculation, keeping the profits and getting bailed out when the SHTF.

We may not _like_ it, but that is what it has become.

Mish's has good explanation about how currencies fare during these times. I really like his analysis. He's been mostly on target. Take a look at his analysis.

FDIC now in the act:
http://money.cnn.com/2008/11/14/news/economy/fdic_bair/index.htm

There are two key elements to the proposal.

In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan.

I would like to see the "31% of gross" calculated on the amount the borrower declared in the original loan application. Otherwise, caught up buyers would be tempted to ship a few payments, under-report thier gross, and thus get a 3% loan stretched for 40 years.

I am all for going back to the 31% gross loan requirement.

With the FDIC plan in motion, it does not make sense to approve loans with higher than 31% gross, right?

I see the Fortress cracking. :twisted:

@sa

Where on Mish's blog would I find how currencies fare during these times?

First, housing payments for delinquent borrowers would be reduced to 31% of gross monthly income.

The only incentive for homeowners to stay in the home is if they have enough equity. If you have -ve equity, why do you even care about monthly payments. The 300B plan for homeowners passed by congress is an utter failure. They are not getting any applications at all. The few applications they received were from banks (probably were defaulted ones). The bill was about reducing loan amount and giving some equity to FB. I can't imagine people embracing a lower interest rate plan. All these policies are probably based on assumption of policy makers about people being dumb.