Thursday, May 19, 2011

Subprime colleges – Student loan debt now equivalent to 7 percent of U.S. GDP

The explosive growth of student loan debt is troubling for a variety of obvious and not so obvious reasons. More needed attention is being drawn to higher education and questions are being sharply directed at the way college education is financed. The bubble in higher education has similar parallels to the bubble experienced in housing. Owning a home is a good thing and has been part of our national identity for close to a century. Yet during the mania very few questioned the method of financing this otherwise solid financial investment. It all depends on how you finance the purchase. The same dilemma is occurring with pursuing a college degree. Very few will argue that going to college is a bad idea. Knowledge is power as we all know. Yet is it necessary to go to a school just because they added a $10 million Olympic sized pool? The additional bells and whistles are similar to the peak bubble days in California where sellers tried to convince buyers that the new whirlpool and granite counter tops added tens of thousands of dollars in value. Value by what standard? Most of the mania was fueled by easy access to debt greased by Wall Street and backed by the government. The fact that we are approaching $1 trillion in student loan debt is staggering.

The chart of the student loan bubble

sallie mae loans

Source: Federal Reserve

The Federal Reserve now publishes a small snapshot of student loan debt encompassing debt covered by the Federal Government and Sallie Mae. The above chart should cause anyone to pause and consider what is happening. You can even run a quick measure to see where things stand today:

1990 GDP: $5.7 trillion

2000 GDP: $9.9 trillion

2009 GDP: $14.1 trillion

Now we can measure this against the student debt portion provided by the Federal Reserve data:

Fed/Sallie Mae student loan debt data:

1990: $19 billion (0.33 percent of GDP)

2000: $84 billion (0.84 percent of GDP)

2011: $355 billion (2.5 percent of GDP)

Now keep in mind that we are only looking at the small fraction of loans covered by the above data. As stated before total student loan debt including debt from private banks is closer to $1 trillion which is over 7 percent of GDP. College tuition and fees are certainly outstripping inflation by many measures. What is troubling about this trend is that it is being financed by debt backed by the government. Banks are willing to loan money knowing the government is on the hook if students fail. The spin is also disturbing. The evaporation of blue collar industries does make college a more important tool for future economic success if one wishes to enter the middle class (i.e., purchase a home and save a bit of money to avoid eating off the dollar menu every day).

Just like in housing, every home benefitted during the housing bubble. A large portion of the money is being funneled to for-profit colleges. The Government Accountability Office put out a report showing the costs of various programs at different schools:

for profit colleges

Source: GAO

Now look at the difference here. Take web page design. At a public college this should cost you $2,000. A reasonable amount of money. Yet the for-profit college is charging over $20,000! These institutions are nothing more than the Real Colleges of Genius that gouge students through deceptive loan practices and guess what? You remember that earlier chart showing the explosion of student loan debt owned by the government or Sallie Mae? A big player in that is coming from the for profits.

The GAO also found incredible amounts of fraud when they sent undercover agents to investigate these schools:

fraud at for profits

Same accreditation as Harvard? Barbers can earn up to $150,000 to $250,000 a year? This is the kind of misleading nonsense that is being financed with your government backed money. I think public colleges do serve a solid purpose and provide a great benefit. However the mania is exploding in these for-profit schools that are the subprime mortgage brokers of the college world. And this is where the growth is at:

for profit college growth

Nice to sell a product where results are merely a marketing ploy and where close to 40 percent of students end up defaulting on their debt (debt that you cannot walk away from). The colleges don’t care because there is no accountability just like the mortgage brokers that pushed off junk loans to people during the housing bubble. Wall Street is happy because look at the above chart. And when it all goes boom it is the sucker taxpayer that is on the hook. This is the new model of economic growth in our nation. Wall Street has learned to turn everything into a bubble including education with the deep pockets of taxpayers. Yet measurable results are nowhere to be found. Wall Street doesn’t want money flowing into public schools because there is little profit to be had. The government here is merely the dumping ground for the bad loans as it is the case with the housing bubble.

The GAO conducted the study because:
gao college study

Think about the above. Many of the for-profit colleges derive 90 to 100 percent of their income because of federal student loans. Students are lured in with late night commercials or aggressive sales teams that simply do not care about the actual education a student will receive. It is all about churning sales and suckering people into a false mantra. “Every person should have a college degree” which rings eerily similar to “every person should own a home.” At what cost? The only reason this is happening is because of Wall Street and government backed loans. Thanks to this new model, the for-profits are operating in the new world of subprime colleges. Yet there is no walking away from student loan debt which puts an albatross on an entire generation of college students. Will these people even be able to purchase a home in the future? Will their degree actually increase their earnings potential? Here is a case of a student out in Los Angeles:

student loan debt

“(CNN Money) I moved to Los Angeles when I was 21 to pursue a career in screenwriting. Now, I’m 34 years old and still barely getting by.

I’m a television writers’ assistant, and I’ve worked on some great shows like Desperate Housewives — but since I’m on a freelance basis, my income is far from steady.

I’ve taken side jobs waitressing, writing dating ads, and even pet-sitting. Since I’m not making enough money to pay rent, I gave up my apartment and decided to couch-surf with a different friend each week for 52 weeks.

It’s been more than a year now, and I’m still basically, homeless. To make matters worse, I have $99,000 in student loans to pay off (don’t go to two private schools in a row!).

The good news is, even though I still barely have an income, I am extremely happy and have started to write a book about the whole experience. I’m calling it 52 Weeks, 52 Couches: How I Slept my Way Through Hollywood (Without Sleeping with Anybody) and I hope to sell it soon. In the meantime, I’ll continue surfing from job to job, and couch to couch.”

Nearly $100,000 in student loan debt and no secure job to be found. You tell me if we are in a student loan bubble?

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The People vs. Goldman Sachs

A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges

They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.

This article appears in the May 26, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive May 13.

The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.

Photo Gallery: How Goldman top dogs defrauded their clients and lied to Congress

To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison. But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis. What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed.

Read Matt Taibbi on Goldman Sachs, the 'great vampire squid'

But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences. Thus, while much of the Levin report describes past history, the Goldman section describes an ongoing? crime — a powerful, well-connected firm, with the ear of the president and the Treasury, that appears to have conquered the entire regulatory structure and stands now on the precipice of officially getting away with one of the biggest financial crimes in history.

Read Taibbi's 2010 piece on how bailed-out banks are recreating the conditions for a crash

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.

To chill homeless, Sarasota pulls park benches

Mary Ann Lozeau reads a book at Five Points Park in downtown Sarasota on Tuesday. The City Commission has ordered the removal of the park's benches after local residents have complained about them being monopolized by the homeless. "It seems a shame that everyone has to suffer because of that," Lozeau said.

There will soon be no seating at Sarasota's recently revamped park at the heart of downtown — an effort to keep groups of homeless people from gathering at the park.

In response to complaints from downtown condo residents who say homeless and "vagrants" huddle around new benches at Selby Five Points Park downtown — making conditions unsafe and threatening property values — the City Commission voted to remove the benches this week on a three-month trial basis.

"I really feel we've reached a critical mass here," Mayor Suzanne Atwell said. "We've reached a level where we need to do something."

Vice Mayor Terry Turner said the commission had to respond to residents of "the highest property tax value in the county."

The removal of the benches comes as the city is drafting a smoking ban at city parks and property to dissuade homeless loitering downtown.

Heightened enforcement of a smoking ban at the Selby Library, officials say, has been effective.

"Many of the transients use the benches as their home offices," said Jim Lampl, a downtown Sarasota resident. "What happens is they are there for 6- and 8-hour shifts."

"The benches are used as a sort of headquarters," he said.

But some park visitors say removing the benches is a silly idea.

Mary Ann Lozeau works downtown and spends her lunch breaks sitting on the green park benches reading books, which she checks out from the Selby Library.

"It seems a shame that everyone has to suffer because of that," she said, adding aside from the occasional panhandler, she has not been disturbed by homeless people at the benches.

Now, she said she will likely spend her lunch breaks indoors.

Raising the Roof on Debt

Today the U.S. government officially borrowed beyond its $14.29 trillion statutory debt limit. And even though the Obama administration has assured us that accounting gimmickry will allow the government to borrow for another few months, the breach has given seeming urgency to Congressional negotiations to raise the debt ceiling. Republicans are making a great show of acting tough by linking their "yes" votes with promises for future budget cuts (that could even slow the rate of debt increases at some uncertain point in the future). But as we go through the process, many novice observers may wonder why we have a debt ceiling at all when our government has never shown the slightest inclination to respect its prior self-imposed limits.

The ceiling was first imposed in 1917 as part of a deal that passed the Liberty Bond Act that funded America's entry into the First World War. To make it easy for the Treasury to sell those bonds, Congress also amended the Federal Reserve Act to allow the Fed to hold government bonds as collateral. But given the potential for unchecked Federal deficits, Congress sought to limit taxpayer exposure to $11.5 billion.

The problem was that Congress never passed a law to prevent future Congresses from raising the ceiling. And even if it had, that law could have been rewritten by future legislation. Sure enough, when the Second World War rolled around the debt limit was raised frantically, leaving it at $300 billion by 1945. But believe it or not, after the War ended, the limit was actually reduced to $275 billion.

Despite the costs associated with the Korean War, the next increase did not come until 1954. And over the ensuing eight years, the ceiling was raised seven times and reduced twice, finally getting back to $300 billion in 1962. Since then, Congress has voted to raise the ceiling 74 times without a single reduction.

Practically speaking, a ceiling that is raised automatically is no ceiling at all. Given that, why not dispense with the pretense? The reason is politics. No Congressman wants to be on the record voting for unlimited debt, yet most are willing to rail against fiscal recklessness while raising the ceiling every time it's reached. Any Congressman who gives lip service to a balanced budget Amendment but votes to raise the debt ceiling is a hypocrite. No one needs constitutional help to hold the line on the debt right now!

But epic levels of Federal red ink and the approach of the 2012 elections have raised the stakes. Despite the newfound urgency, nearly all Democrats and a very large chunk of Republicans argue that failure to raise the ceiling will be tantamount to economic suicide. They argue that such a rash move will cause the U.S. to default on outstanding debt obligations, thereby sending interest rates sharply higher across the board. Higher interest rates they argue would cripple the economy and permanently increase debt service costs. As a result, they predict capping debt now will precipitate a far deeper economic contraction than what we have already seen in the last few years.

Few see the inherent absurdity in the notion that taking on more debt improves the economic health and creditworthiness of the United States. I would argue for the much simpler idea that more debt weakens a nation's financial position. More importantly, capping U.S. debt at current levels means bringing a future crisis into the present where it can be dealt with in practical terms. This is something that nobody in Washington actually wants.

If we do today what we have failed to do in the past, we very may well default on a portion of our debt. No doubt our creditors will suffer. But such near term pain will lead to a quicker and healthier recovery. Out of control Federal spending will have to be dealt with now. A downgraded credit rating will make it harder for the United States to continue borrowing, and as a result should be viewed as a blessing in disguise.

A reduction in debt levels is good economics. Remember, taxpayers will have to repay with interest anything the government borrows now. The more the government borrows, the larger it grows, and the larger it grows, the weaker the economy becomes. The less money the government borrows, the more that is available for the private sector to borrow to increase production and create jobs.

Failing to raise the debt ceiling will force Congress and the President to tell the truth to Social Security and Medicare beneficiaries who have been promised more than taxpayers can deliver. They will have to concede that so-called government "trust funds" are mere accounting gimmicks, and that benefits will need to be cut if the programs are to be solvent. They will have to tell the truth to our creditors that the U.S government has borrowed beyond the ability of its citizens to repay. And lastly, the stark reality will force the government to tell the truth to Federal employees whose salaries and benefits are unsupportable given our fiscal weakness.

But, on the other hand, if we raise the debt ceiling, we can postpone the crisis into an indefinite future. All of these tough choices could be avoided. Government pay and benefits will flow unabated, and our creditors will continue to get their interest payments now. But in the future, the value of principal repayments and government benefits and paychecks will lose purchasing power. That's because if we keep raising the ceiling indefinitely, we risk destroying our currency. But the long slow death of a currency and the ebbing of a nation's economic vitality doesn't make for huge headlines.

It is for that reason I am 100% confident that Congress will do the wrong thing and raise the debt ceiling for the 75th time in 50 years. In the end there will be some kind of phony compromise with each side claiming victory. But while the politicians celebrate another dodged bullet, the U.S. economy will continue to be shot full of holes.

Pat Buchanan: "You Have The Charlie Sheen Of Finance Running The IMF" (Fact: U.S. Gave The IMF 103 Million Ounces Of Gold)

Video can't be embedded.

Pat Buchanan on the sex scandal surrounding IMF director Dominique Strauss-Kahn: "I will tell you. Look, you have the Charlie Sheen of global finance running the IMF. The seriousness of it is this: He is dead as a presidential candidate in France. Good news for Sarkozy, he's out of the IMF, but more important, this is going to bring a focus on the IMF, which through the back door has been putting the American taxpayers on the hook to bail out Greece and Ireland and those European countries which are in fact bailouts of those European banks. And Ron Paul is right on top of this, and, Joe, I see this as bringing the IMF, at this critical point, when the bailouts in Europe are in big trouble, it is put a limelight on the one institution other than the European Central Bank, which is baling out these European countries and banks."

Pat Buchanan - The Dirty Old Man and the IMF

What is this satyr doing running the IMF? How was a man of his Eurotrash reputation approved by the United States government? Such conduct may be pooh-poohed over the pond, but has our country dropped that low?

As is not infrequently the case, Rep. Ron Paul nails it: "These are the kind of people running the IMF, and we want to turn the world's finances and the control of the money supply (over) to them?"

Indeed, there are issues here far beyond the corruption of character that drives aging compulsive lechers to criminality when their prey resist.

One of those issues is: Why is the IMF still being funded by the United States?

With the World Bank, the IMF was birthed at Bretton Woods, N.H., in 1944. In the monetary order established there, the U.S. dollar would be tied to gold, and the free world's currencies would be tied to the dollar, all at fixed rates of exchange.

All would contribute funds in their own currency to the IMF.

America would make the largest contribution. As its birthday gift, Uncle Sam gave the IMF 103 million ounces of gold.

Continue reading...

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