Posts Tagged ‘Financial Crisis’

Higher education is a bubble that needs to burst

March 18, 2010 3 comments

College is overrated

This Obama quote about college irritates me a lot:

After graduating high school, all Americans should be prepared to attend at least one year of job training or higher education to better equip our workforce for the 21st century economy. We will continue to make higher education more affordable by expanding Pell Grants and initiating new tax credits to make sure any young person who works hard and desires a college education can access it.

This is not unique to Obama, in fact every presidential candidate mentioned how they are going to expand the federal loans for college or something to that effect.  Rather this overarching obsession over college is infuriating. Many colleges promote the fact that “people with college degrees will make a million more dollars in their lifetime than those without”. I won’t breakdown why that implied causality is so silly, but lets move on.

College bubble ~ Housing Bubble

Remember in the early 2000’s when everyone was saying “invest in housing, its a sure bet!” Switch housing to college and you’ll realize how eerily similar they can be. Or when you remember how the government says it needs to, “make housing affordable” you realize we are on the same path to financial instability when we decide to make “college affordable”

I would argue there are huge parallels to our recent financial crisis

1.) You apply and pay to go to college/trade school etc. (You invest tens of thousands in cash on the latest and sexiest financial instrument)
2.) Well except, you don’t have the money to pay for said school, so you ask for a loan (Not actually having tens of thousands, you use leverage to pay for said instrument)
3.) Federal loan approves, informing you that your education will empower you with a job to service this debt later in life. (Loans approved on the basis of “housing prices rising”/”growing economy”)
4.) Colleges collect their share of the dough (Banks collect their fees for guiding you through this nonsense)
5.) You get hit with thousands of dollars in debt, the real world hits you with a paltry job, government promises of increased returns is a mirage (We all know what happened here, housing prices didn’t go up, the economy didn’t grow, BDK got laid off)

College has terrible returns

Notice how the money trickles down to everyone, well except to the people it needs to trickle down to. Much like housing is subsidized (mortgage interest is a tax write-off, home-buying tax credits etc.), so is college (federal loans, tax-free debt issuance, non-profit status etc.).Corporations, I mean colleges, will respond to incentives, and when the government says we will pay you money if you teach our kids something, people will do it; just not well….

But the problem has deeper effects than hurt feelings: the 54% graduation rate means that around 46% of all money used to finance college tuition results in no degree. Which means that financially speaking, the spectacularly high dropout rate boils down to a spectacularly bad investment.

Here’s another problem, when the government gives an unequivocal and categorical stamp of approval for “higher education” its almost like rating agencies dumping a “AAA” rating on terrible bonds. We all assumed it was a sure thing when Moody’s told us that, when its got the backing from the damn Federal government of course we will label it a worthy investment. Much like the label of AAA can make bonds are more pricey (in the form of a lower yield), this promotion causes colleges to be more pricey (in the form of higher tuition). Couple that with the fact that there is a lot of easy money in the form of federal loans in this sector, this demand can also artificially drive up the price of college. Kind of like how housing prices rose when we all bought them with our own glut of low-interest money. Much like the financial crisis people are finding out they aren’t really getting a super-safe investment, but one that carries an obscene amount of risk with a shaky return.

If you are reading this, you are probably not a representative of the population as a whole

Now you say, BDK you went to college, and so did I and we are doing pretty damn well. No? Well, true but I would also argue this is not as important as you think for many reasons.

1. ) Much of my college experience was largely irrelevant to my financial success (although I am unemployed). I moped around a lot; with most of my days spent farting and playing video games in my dorm. When difficult classes came I hunkered down and learned how to work hard, I gamed the system and dropped or Pass/Failed the class. For this, I earned a respectable GPA. Many of my peers, spent more time damaging their livers in a week than they did actually studying. The bank that I worked at (supposed to be a nice job) proudly lauded the fact that people of so many different majors were able to succeed. While that diversity might be nice, I think the bigger story might be most of the stuff you learned in college was not all that relevant. You take into account grade-inflation, soft degrees and

2.) I got a scholarship that immensely reduced what I had to pay for school. Paying interest on over hundred thousand dollars versus paying it out on a few ten thousand dollars can be a huge difference. This becomes more pronounced when you go to a school and end up with a job you could have had right out of high school.

3,) Some of you doctors and engineers might say “WTF, I worked my butt off!”. College actually does help certain people; especially people who are training for a position in high demand.  Problem is, objectively not everyone is smart enough to be a doctor or an engineer. Most of the people reading this blog probably should have gone to college, that’s not the argument I am debating. It’s just that the majority of people aren’t preternaturally gifted to get 30+ MCAT scores or understand advance physics principles. I am not saying we should say screw ’em, but I don’t think miring them in debt to feel good about ourselves is the right solution either. Reality tells us that a lot of people are wholly unprepared for college. Many students are unable to handle the workload of college. But our insistence on universal higher education is terrible for somebody who can barely pass high-school material. Much like “affordable housing credits” Freddie and Fannie subsidies brought about a higher default rate, freely disbursing loans to anyone regardless of their aptitude will only increase dropout rates. Thus I am not talking about you specifically, but those out there who got totally screwed by colleges. Look I think most of my friends made out well after college (not implying causation here), perhaps even a majority of students can definitely evaluate the costs and benefits and say the same. But there remains a large chunk of people who are getting totally f’d by this system we promote so heavily and insist on everyone to join.

4.) College serves for most others looking for jobs largely as a signal to employers. As mentioned before most majors don’t learn direct applicable skills. Now I am not sure this is worth the opportunity cost in 4 years and 200k. While certainly college is a great experience to meet friends and explore new horizons, it certainly isn’t a necessary condition for either. I almost think by indirectly driving up the price of college we are creating vicious cycle in which job-givers are raising the bar for prospective employees unnecessarily (Prisoner’s Dilemma?). Not sure why sustained work experience in a low-wage position couldn’t serve a similar and less expensive signal. If you are worried about smarts, how about a job-related test and interview?


I don’t think nobody should go to college, its just that we have vastly overrated its usefulness. While telling someone to work in a vocation is not sexy it is more realistic solution for many. As for college itself, we shouldn’t be passing out these loans as freely as we are. Perhaps the government could see a student’s performance in school before it dishes our some dough to a student to continue his studies. As I said before, by making these loans so easily available, we are also driving the price of the college up. Big picture, whenever the government places its hands on stuff there are a ton of unintended consequences. I wonder if the default rates on student loans is gonna increase to the point where it becomes nationally painful, especially amidst our economic slowdown.

What do you do in any Ponzi scheme when money starts running low? INVITE MORE PEOPLE!!! What do you do in any Ponzi scheme when money starts running low? INVITE MORE PEOPLE!!!

Maybe this isn’t the fault of a few bad apples?

February 17, 2010 Leave a comment

Mooched from NKS

Quoted from the article Portrait of the Banker:

“It’s the way humans are, and that’s a shame, but that’s how the thing works. People think that there’s one guy who plays the system. There’s not one guy. Everyone plays it a little. It’s a chain, and it’s harmless, but altogether it’s a disaster.”

It certainly is easier to just blame somebody else though, than, you know, actually finding a solution. By solution I don’t mean one towards the economic recession. It becomes much more difficult when we realize the problem begins not in others but ourselves. Everyone plays it a little.

Or we can build the jenga tower back up again. Lets just save the shock when that thing falls again. It’s made to fall when we are all pulling some pieces…..

Categories: Economics Tags: ,

Father Zosima vs. The Financial Crisis

January 26, 2010 Leave a comment

Excellent responses friends (the checks are in the mail) to my most recent post. A couple things….

Kevin wrote in the comments:

“Moreover, I think you are misappropriating responsibility to the architects of good legislation, instead of the seedy mortgage brokers who exploited it.”

I am not sure what he means by “good” legislation, perhaps morally sound or perhaps structurally foolproof. Regardless, the fact that mortgage brokers could “exploit” it, I think would mean quite the opposite here (I hate the word exploit in general because of its vagueness) My post was not to absolve mortgage brokers of guilt either, but I do think the issue becomes if they are not breaking the law; (in some cases, the law was actually breaking them per Thomas Sowell; throw in minority and underprivileged quotas you’ve got bigger issues pressing the backs of these lenders) You actually wonder how much some of these brokers knew? Just like Wall Street-ers relied heavily on faulty ratings and fees incentivizing transaction volume, I think I could safely say some brokers made assumptions that everybody else was making, including buyers. There were definitely snakes out there, but I attribute it more to a stunning lack of due diligence on both sides.  I bring this up because:

A) Its unremarkable, a lot of people screwed up and weren’t necessarily malicious in intent, in the sense I don’t think your average mortgage salesman anticipated he would trigger a massive financial crisis. Remember this was a popular product because it “worked” in a favorable interest rate environment and housing market etc.
B) I still think its unequivocally greedy and f’d up; and speaks to the infinite and insatiable desires of man

Government securing housing for those who couldn’t afford it, and actively encouraging it. Lenders seeing clients as transaction fees for their pockets. Buyers not understanding their inability to cover debt service. Hrmm. Its a macrocosm of Daddy encourages teenage Madison to get a no-limit high interest credit card and Payless Shoe Stores (where the hell do women shop?) suddenly thinks its rich! Notice this cycle perpetuates itself across nations, races and social class.

Regardless, the post is not one purely of political culpability, rather a moral/personal one. The operative quote here is from one of my favorite books, and a book everyone should read, The Karamazov Brothers (the way it really is titled sounds kinda just goofy):

“Each one of us is guilty before everybody for everything, and I am more guilty than anybody else.” Father Zosima

Neil wrote:

I treat human behavior as more or less exogenous and constant. Efforts to temper it, either through faith, institutions, norms, and culture usually fail. What we instead have is a means of organizing society around a given set of behavior preferences – namely sin. If greed is the primary driver of economic growth (Smith), then it is also the driver of crisis.

A really great point there and the topic of which I really want to hit. Thus the biggest problem I see in society is As a Christian who believes in personal redemption, I have to politely disagree. There are many reasons why.

1) Good rules don’t just restrict people they help them learn and process what is right – Take most children (microcosms of sin in my book). A kid might hit his brother to steal his toy. Now one could say he only stopped because of the fear that he was gonna get severely beaten by parents for being a deviant sociopath. Perhaps. But somewhere along the way I think conscience prevails and makes that action impermissible; it becomes unacceptable to him to see his brother needlessly go through pain just because he can’t get what he wants. The rule might be a good disincentive, but it also helps mold the child into understanding why he shouldn’t hit somebody he loves.

2) It’s depressing to consider our status merely subject to a series of exogenous variables – We certainly don’t behave this way. Only the sickest parents would treat their children as pawns in a social game, rather then children who can be nurtured to be responsible and loving beings, not just robots. People marry with the hopes that the covenant they undertake could help shape one another’s character and deepen their love for each other.I think by treating the human condition as immutable (sentiments that are echoed by fatalistic scientists, Amir? Neil?), we also take away a lot of the joy in life. Put it this way, if this were the final solution that was figured out by society, what really is the incentive for people (especially the lesser of us) to”live life to the fullest”?

3) Making rules is an incomplete and unsatisfying solution – as Kevin wrote before about legislation regardless of the rules, people will exploit them. More regulation is purely a palliative measure, I would argue this would only create incentives for people to rent seek with more lobbying/gov’t work instead of ripping off people on the private end.  We can continue to insist on making better and better rules, or we could start looking at the supply side and look towards heart transformation. I find Neil’s argument useful because reality presents transformation as insanely difficult; as a Christian I would actually say impossible purely by the strength of our own convictions.  Going back to Father Zosima and his thoughts:

“Love redeems and saves everything.”

This is the hope that I have in humanity. This financial crisis is painful, I know firsthand. I also know it was a lot more painful to others with more immediately dire circumstances. This is unmistakeably tragic,  yet all we are doing is addressing the issue of pain, we change the doses, prescribe stronger medicine but are unwilling to address the disease itself.  Humanity will never change if only presented with that option; its depressing to think  we are only left to find ways to numb the pain. Call me naive or innocent, but I think humanity has a much higher upside, not merely confined to the same patterns of behavior ad infinitum.

I have every reason to suddenly pretend I hate the banking industry, I don’t though. This cycle of behavior is not unique to them. Crucifying the bankers is numbing the wound but leaving it open to infection again. What is the idea of love I think is most convicting? I look at the idea of the Cross: Christ dying, not for personal gain, but but what was a selfless act done for others. Yea I know, perhaps its goofy and silly, or even offensive to some, I’ll admit it tough to really get a grip on this idea sometimes myself.   But I think this (the Cross) is the new cycle of behavior this world needs; the thing that makes transformation possible and what Zosima tells us can redeem all.

Romans 12:2

You’re greedy! But wait, so am I?

January 22, 2010 7 comments

So my buddy Neil wrote about Obama’s plan to tax wall street. Read it. He’s a smart guy and has a legit writing gig although definitely too Democratic party for my tastes. =)

Originally, I was going to write a rebuttal discussing how a punitively natured tax is bad form; whats to say banks won’t conduct their shenanigans outside the US, or move taxable liabilities off the books….yada yada. Well then again, Obama asked nicely, so maybe they’ll oblige:

“Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities,”

Regardless, lets talk about greed for a sec.

People are quick to point the finger of blame at “greedy, Wall Street businessmen” maybe rightfully so. It should piss people off that comapanies which were ostensibly on the brink of failure and bailed out by taxpayer money are now dishing out loads of bonus money to the very people who might have caused part of this crisis. But lets temper those sentiments for a second. Certainly it might be easy for us to excoriate the “rich” for their excess and greed, but the beginning symptoms of this problem manifested themselves in the form of people who had no business paying their mortgages. As Michael Lewis wrote about AIG,

“Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy.”

Are we to pretend that the vice of greed is only exclusive to rich people? Was the average American not buying homes they could not afford and taking out credit cards their income could not justify? Lets remember what happened here: Ordinary Americans taking out ridiculous mortgages, banking on the fact that home prices would continue to rise (astronomically too) and having no capability of covering their debt otherwise. How about you with the credit card app in your hand? You put down 100,000 as your income, even though you work at Mickey D’s? Greed was just as rampant in Downtown Detroit and Suburban Springfield as it was in Midtown Manhattan.

As I was discussing this topic with a friend today, we analyzed at a very general level how this mess got started in the first place. A point was made that the finance guy peddling what we now know see as toxic assets obviously did not understand the implications of his actions. He was assured by others that these were “triple A” and “risk-free” securities. He bought insurance to ensure that even if the securities failed they would be backed up. He looked across the street saw his buddy making a killing selling these products. He saw his buyers absolutely enthralled that they were getting stellar returns. Nobody did any homework and boom goes the dynamite.

This recession did not occur because a few ill-willed finance douches decided to incur their wrath on society. This more akin to a bunch of smart ass kids teaming up to do a group assignment, and when due date comes, everybody assumed somebody else did the work. I don’t know about everybody else, but these shortcomings don’t sound so spectacular or dramatic at all.

And maybe that is the exact problem. We are all used to games like Jenga, since we can clearly label the loser. The tower is fallen and the culprit is holding the proverbial piece of the puzzle. Yet in this grand economic version of Jenga, surrounded by our crumbled towers, we are all holding THAT piece. Our most clever solution has been to just rebuild these towers and in these vulnerable times its easy to embrace such a solution. Even the best of us, only slight scathed, are collecting our scraps and wondering how we can achieve that wondrous state of satisfaction. Yet its an illusory hope, the achievements we have mustered today become increasingly boring and irrelevant tomorrow. (see Michael Jordan)

That is why its silly for us to ask ourselves these questions about why OTHER people screwed up. Are these not questions we could fiddle around a bit with and ask ourselves? Its clear we all need to rebuild, but something tells me it goes a little bit deeper than credit cards and mortgages. What we really seem to be ignoring is our very human condition. Nowadays it might be taboo to say it, but Christians call this word sin. Dah! BDK How can you call me a sinner???? Sinfulness is reserved for  Hitler and Kim Jong Il and of course, George W. Bush, not me!!

Perhaps with a little introspection we can begin embracing true humility. When we realize we are just pretending when we think our deeds our so much better than others, we fail to see excess creep in other ares of our lives. Preaching savings, thriftiness and moderation is wonderful, but doing it is ten times more difficult.

“Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye. “

You see the systematic issue here was not just easy credit, or greedy executives or even dumb homeowners. My point is we are satisfied with blowing our noses but not curing the damn cold! This was a scramble to prove our worth to society, to distinguish ourselves in society as “Big Swinging D!cks” and “Masters of the Universe”. Unsatisified even in our state of blessedness, we need to inflate our human balance sheets with hope the enormity of our assets make us somewhat unique, different or better. If only I can run faster! if only I can be smarter! if only I could make more money! Humanity needs to embrace a true heart change; one that doesn’t base its self-value on a successful stock portfolio or the square foot of a home.

Until we can get to that point, we shouldn’t be surprised when our own Jenga towers crumble again. I wonder why we keep on rebuilding the tower even though it eventually falls down again.

Gather together and come; assemble, you fugitives from the nations. Ignorant are those who carry about idols of wood, who pray to gods that cannot save. Isaiah 45:20

We’ve all stopped playing stupid games like Jenga; maybe we can stop finding our redemption in our own temporal gains.

Romans 3:23-24

Gather together and come; assemble, you fugitives from the nations.
Ignorant are those who carry about idols of wood, who pray to gods that
cannot save.
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