GOING DOWN

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Posted on 6th February 2013 by Administrator in Economy |Politics |Social Issues

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Student Loans Going the Way of Housing

Colleges are good at getting people enrolled. They get kids lined up with education loans. The money goes to pay exorbitant prices on textbooks. It pays for meal cards. Tuition is crazy high. Parents go along and shell out until their bank accounts are barren.

What colleges are not good at is getting the kids degrees. And those without those degrees have a hard time getting a good job to pay back a student loan. Instead, they fall into delinquency, starting off life saddled with an unpayable debt.

According to Fair Isaac Corp. (FICO), delinquencies on student loans made in the last two years have reached 15%. The pool of loans made between 2005-2007 is almost as bad, with 12.4% past due. Bloomberg reports that “almost 60% of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.”

The analogy with housing is unavoidable. Do you remember 2007? The peak in the price of housing had come and gone. But the leverage of the major investment banks was peaking at over 30 times at Bear Stearns, Merrill Lynch and Morgan Stanley.

Freddie Mac announced it wouldn’t buy risky subprime mortgages and mortgage-related securities. Subprime lender New Century failed. Bear Stearns liquidated two hedge funds that invested in mortgage-backed securities. The interbank market froze completely. A deal to take Sallie Mae private fell apart.

And in the middle of 2007, subprime delinquencies reached 15%. Catch that number? It’s the same as the student loan delinquency rate today.

Of course, when the subprime delinquencies hit 15%, that market was circling the drain, but few people realized it. In contrast, more and more people are realizing that there is a serious problem with student loan debt.

“This situation is simply unsustainable, and we’re already suffering the consequences,” stated FICO analyst Andrew Jennings. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever larger student loans without greatly increasing the risk of default.”

Curiously, Sallie Mae stock (SLM) rose on the delinquency news. But then again, the company would appear to be very much a going concern. Core earnings for 2012 were more than $1 billion, benefiting from the lowering of loan loss reserves and operating expenses.

Charge-offs increased to 4.19% of loans in repayment. Not to worry, says Sallie Mae: It expects that to decline in 2013. The company pays a 50 cent annual dividend, so it sure beats money market rates. And SLM says it will make $2.30 a share this year.

What could go wrong?

“You’re starting to see delinquencies pick up, and that trend is going to continue,” Compass Point Research & Trading’s Michael Tarkan told Bloomberg. “That’s the reality that we live with in student loans.”

The day after Bloomberg spilled the news from Fair Isaac, TransUnion made public that according to their work, “more than half of student loan accounts are in deferred status, where the repayment of the principal and interest of the loan is temporarily delayed. Deferred loans now represent 43.5% of all student loan balances.”

TransUnion points out that “more than half of college graduates under 25 are unemployed or underemployed — the highest rate in 11 years.” This makes going back to school and racking up debt a reasonable option.

“With the economy either in recession or slowly coming out of it during the study period, we had expected that student loan balances might increase as consumers frustrated with the job market went back to school to work toward a different career path,” said Ezra Becker of TransUnion. “However, the rate of growth we observed was truly eye-opening,” he added.

What kind of lender would be lending money to permanent students with bad prospects? The government, of course. “Between 2007-2012, federal loan balances jumped 97%, while private loan balances only rose 4%,” writes TransUnion.

There is a wide difference in delinquency rates between student loans backed by the government and private student loans. “From 2007-2012, federal student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2% in that same time frame,” claims TransUnion. “The 90-plus-day delinquency rate for federal loans was 12.31% as of March 2012, compared to 5.33% for private loans.”

The idea of students actually graduating from college is starting to get some attention. The New York Times reports:

“‘This is the first time in the history of modern higher education in which all the communities have come together — community colleges, research institutions, public universities, and small liberal arts colleges — and reached agreement that completion needs to be our most important priority,’ said E. Gordon Gee, the president of Ohio State University and chairman of the National Commission on Higher Education Attainment.”

The Times points out that 80% of students think they’ll graduate. Well, statistics show only half that number actually get the job done. So a report coming out this week calls for colleges to:

“find ways to give students credit for previous learning, through exams like the College Board’s College-Level Examination program, portfolio assessments, or other college equivalency evaluations. It also calls for more services and flexibility for nontraditional students, suggesting innovations like midnight classes, easier credit transfers, and more efficient course delivery, including online classes.”

Another idea gaining attention: a $10,000 degree, a so-called 10K-B.A. The extremely smart head of the American Enterprise Institute writes that this is what he obtained. “It is true that I am no Harvard man,” he writes. “But I can say with full confidence that my 10K-B.A. is what made higher education possible for me, and it changed the course of my life.”

While traditional colleges wrestle with the quandary of passing out degrees, you might wonder if Sallie Mae’s dividend is safe. Everything looks peachy over there. But one should remember Sallie’s sister, Fannie, that paid $1.18 in dividends in 2006 and $1.50 in 2007. The stock traded just below $66 a share in August 2007.

Today, it fetches less than 28 cents, and dividends are a distant memory. Get ready: We could be on the precipice of a wild ride in the student loan market. How it will play out in real life will be as surprising as the wreckage of the housing crash.

Sincerely,
Doug French

EMPIRE

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Posted on 2nd April 2012 by Administrator in Economy |Politics |Social Issues

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 The decline and fall of the American empire

An Aging, Bankrupt Empire

by Doug French

The U.S. government has created borders within the country’s borders at every airport in the country. Technologies abound in ticketing and check-in on one side of the border while commerce thrives on the other. In between is a massive government apparatus requiring that shoes be kicked off, laptops be unpacked, and less than 3.1 ounces of liquid be carried in any one container. The only technology in sight is the offensive porno scanners. And for those that refuse scanning, a brutish pat-down is administered.

These Transportation Security Agency (TSA) borders are guarded by 58,401 bureaucrats in blue, at a cost this year of $8.1 billion. The taxpayers must not spare any expense in convincing themselves that the government is making us safe.

The arbitrariness of rules at borders is brought to mind in the opening pages of Charles Goyette’s sobering new book Red and Blue and Broke All Over: Restoring America’s Free Economy. Viewing borders from the air, one can hardly tell where they are, these imaginary lines drawn by governments. However, while the terrain on either side of a border may be identical, satellite imagining provides a stark contrast of neighboring countries where capitalism operates on one side of a border while socialism reigns on the other.

The native culture and language may be identical, but roads that are paved on the capitalist side, turn to dirt on the socialist side. While lights burn brightly in the capitalist night, those living under socialism are shrouded in darkness.

Within its borders, America once provided an example to the world of what free markets and sound money can provide. But as Goyette painstaking points out, those days are over. Today’s America is but an aging bankrupt empire. Not so different than the last days of Rome. Its armies spread thin throughout the world. Its treasure wasted long ago, government finances are in shambles, and it can only pay its promises with money it creates from nowhere.

While Republicans and Democrats bicker on Capitol Hill, each party is equally to blame. The various cable news networks root for one side or the other without realizing “that both parties worship in the same statist church and share obedience to the same economic priesthood.”

In Red and Blue and Broke All Over, Goyette writes in the same dry and witty style that made his previous book, The Dollar Meltdown, a bestseller.

In the book’s first of three parts, the author examines the state of freedom in America. It’s not a pretty picture. Once upon a time, America had no income tax, no federal reserve, no endless list of regulatory agencies, and no involvement in foreign wars.

Now we have all of that and much, much more. The average American doesn’t know what a free market looks like. “Keep the Government out of my Medicare!” read signs at 2010 Tea Party rallies. While Americans collectively spend 6.6 to 7.5 billion unpaid hours a year complying with the taxman, the government sends out 88 million checks each month. Forty-six million Americans depend on taxpayers to buy their groceries.

We hear plenty about the glories of the U.S. Constitution this campaign season, always to great cheers from hopped-up campaign workers. But the millions of square feet of Washington D.C. office space aren’t needed because congress is following that sacred document, but just the opposite.

Red and Blue’s Rothbardian author sees the state for what it is – the enemy of prosperity. Those on Capitol Hill honestly believe they can centrally plan our economy, at the same time lawmakers like Rep. John Conyers can’t figure out why the Senate Hair Care Services (Senate barber shop) requires $300,000 in taxpayer subsidy to keep open, while the privately-owned House barber shop turns a profit and offers its members cheaper haircuts.

Goyette has the guts to use the F-word while describing the U.S. economic system – fascism. Most wavers of the red, white and blue can’t bring themselves to understand that capitalism isn’t what’s operating in America. The author looks to John T. Flynn’s As We Go Marching to describe an American economy with business carried out by private owners but under the direction of government.

What spews forth from this sort of system is the Goldman Sachs to Treasury Department pipeline that Goyette terms “The Wormhole Express.” Anyone who questions how Goldman is so blatantly propped up and bailed out, must only see how many of the firm’s alumni are working in government.

An especially interesting part of Red and Blue is the author’s look at The Brothers Karamazov, Brave New World, and 1984 and the modern manifestations of the literary archetypes created by those three authors. Goyette shows that life has certainly imitated art.

Goyette quotes investment legend Jim Rogers. “There is nothing like crossing outlaying borders for gaining insight into a country.” And while Rogers was writing about third world countries in Adventure Capitalist, Americans should travel overseas and notice how easy entry into many countries is, compared to America.
From landing to calling a cab takes no time most everywhere – except the land of the free and home of the brave. Visitors to America are fingerprinted and digitally photographed on the way in. U.S. Immigration and Customs is an ordeal that takes a couple hours if everything goes right. And the process will get more cumbersome. According to the Department of Homeland Security, “At a date to be announced in the future, all travelers who provide biometrics when entering the United States will be required to provide biometrics when departing the United States.”

What has kept the American empire in operation has been the dollar’s reserve currency status. Once backed by gold, the dollar is now but a flimsy promise. A promise taken seriously by those who remember America as it once was, not what it is today.

America is bankrupt, Social Security is a Ponzi scheme and the country’s financial situation worsens each day. The author points out that the Federal Reserve’s holdings of Treasury debt increased from $777 billion to $1.6 trillion in a year’s time. America owes more to its own central bank than it does China and Japan. This should be the very definition of a banana republic.

We use the debauched dollar because we have to by law – legal tender laws. Drug dealers, who are not quite as respectful to the authorities, would rather take bottles of Tide in trade. Foreigners will follow suit, increasingly looking for alternative currencies.

Goyette provides no political solutions in Red and Blue, but instead calls for individuals to do something quite foreign to them – embrace freedom.

“The state must just stop,” Goyette repeats. “The state must STOP.”

Doug French [send him mail] is president of the Ludwig von Mises Institute and the author of Early Speculative Bubbles & Increases in the Money Supply. He received the Murray N. Rothbard Award from the Center for Libertarian Studies. See his tribute to Murray Rothbard.