The next crash

It is inevitable that the college loan bubble will burst as a result of government intervention in the education market.  How has this happened and why do these bubbles continue to recur time after time after time?   The how of this question is quite simple.  Any time the government intervenes in any market, distortions and abnormalities leading to booms and busts occur because normal free market pricing/cost incentives do not apply.  During the 1920's as the FRS engaged in major credit creation to stimulate foreign trade and help the Brits solve their currency valuation problem in the aftermath of WWI,   excessive investments were made by businesses simply because they could, not because they made economic sense.  Pricing signals were ignored, malinvestments occurred, a major boom led to the disastrous bust of the stock market followed by the severe economic depression of the 1930's.  All this happened because the FRS artificially allowed for the expansion of credit unrelated to the real demand in the economy.

"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained" - Ben Bernanke, March 28, 2007

"I don’t think student loans are a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government" - Ben Bernanke,August 7, 2012

Please mark your calendars accordingly as yesterday the Chairman just guaranteed that student loans will be cause for the next "financial stability issue."

Here are the facts, courtesy of a just released expose on the WSJ:

• Rising college costs and a sagging economy are taking the biggest toll on a surprising group: upper-middle-income families.
• According to a Wall Street Journal analysis of recently released Federal Reserve data, households with annual incomes of $94,535 to $205,335 saw the biggest jump in the percentage with student-loan debt from 2007 to 2010, the latest figures available. That group also saw a sharp climb in the amount of debt owed on average.
• Ms. Hofmeister, an insurance broker and financial planner, says she and her husband, an operations manager, combined earn a six-figure income that puts them in the upper-middle class and were surprised by the amount they will have to borrow. She says she feels trapped in financial purgatory, between "people with lower incomes who have a lot of subsidy, and the truly affluent, for whom this isn't a problem."
• The Journal's analysis defined upper-middle-income households as those with annual incomes between the 80th and 95th percentiles of all households nationwide. Among this group, 25.6% had student-loan debt in 2010, up from 19.5% in 2007. For all households, the portion with student loan debt rose to 19.1% in 2010 from 15.2% in 2007.
• The amount borrowed by upper-middle-income families, meanwhile, has soared. They owed an average of $32,869 in college loans in 2010, up from $26,639 in 2007, after adjusting for inflation, according to the Journal's analysis.
• The typical low-income family receives grants and scholarships totaling 36% of the cost, the lender says, while for higher-income families such packages total 21%.
• More than three million households now owe at least $50,000 in student loans, up from about 794,000 in 2001 and fewer than 300,000 in 1989, after adjusting for inflation.
• Some families are turning to loans because they spent heavily or used extra cash to save for retirement. More than one-third of parents with incomes of $95,000 to $125,000 with a child who entered college in 2011 didn't save or invest for that child's education, according to a survey by education consultants Human Capital Research.
• With their finances strained, some higher-earning parents are making their children pick up more of the tab. Among families earning $100,000 or more, students paid 23% of their college costs in 2012 through loans, income and savings, according to Sallie Mae, up from 14% in 2009; the share covered by parents fell to 52% from 61%.

And last but not least, those ever-altruistic baby boomers:

"The boomers are the first generation shifting the cost of college to their kids," both through increased student borrowing and reduced taxpayer support for higher education, says Susan Dynarski, a professor of education and public policy at the University of Michigan.

Because leaving them with $16 trillion in public debt is not enough.

* * *

Here is the issue in a nutshell: college tuition, just like government spending, is off the charts. Both are so high, that on an unlevered basis, the payback rate is N/M. Note the use of the world "unlevered" as it is one which will never occur, before the next systemic reset, when talking about anything involving the government. And what leverage does is mask true supply and demand. If college tuition was representative of real supply and demand, prices would be tumbling on average. Instead the easy access to student debt makes college seem quite affordable at any price point and thus there is no pressure to lower the equilibrium price. Which explains this chart, where the government-funded student debt surge is merely there to fill the needs of all those kids going to college, all of whom will never be able to pay it off especially as America increasingly transitions to a part-time worker society.

But at least they too, like their parents and grandparents, are indentured debt servants, just like the government wants.

And to the perpetually wrong Bernanke, the thinking is that if more people are on the same wavelength as the US Treasury, i.e., so deeply in debt that everyone will be begging for a dollar devaluation and/or debt hyperinflation, then the Fed will be not only able, but encouraged to debase the US currency at will.

Sadly, Bernanke is and always has been wrong, and when the student loan bubble does pop, and it will, the cost will once again fall squarely on the shoulders of that one nearly extinct species: America's middle class, which not only generates positive cash flow, but, gasp, saves a little money here and there.

Make no mistake: they are squarely in Bernanke's bulls eye, and are slated for extermination at all costs. In a world in which everyone is broke and defecting from every game theory equilibrium possible, those who still play by the rules are the system's mortal enemies.

In the meantime, we can't wait for Obama's next brilliant contraption: cash for flunkers.

Rhoda and Rhonda

R & R's stomping grounds 

Rhoda and Rhonda is the story of two mostly lucky Rhode Island Red chickens and their sisters who were purchased and given a lavish chicken coop and spacious foraging grounds by my cousin, John Moran,  clearly an imaginative and talented writer, and his equally talented wife, Gretchen. It's wondrous what some people do in their retirement. John and wife Gretchen live in the main house of a compound that includes a "guest house", a spare cottage and, at least to our feathered friends Rhoda and Rhonda, a rather inviting and spacious chicken coup and run. Their home is cosy and friendly, full of warm and friendly original art, much of it of Gretchen's hand,  memorabilia and interesting bric-a-brac. During most of the year, the two of them take daily swims in the low-60's Atlantic ocean, make that frigid ocean, a mile or two from their home. They grow all manner of vegetables, prepare original New England fare as well as paellas and surely other ethnic and regional dishes. So now I know a little of what at least one retired heart surgeon and his talented wife do in retirement.

The author in residence

Artist extraordinaire

RHODA AND RHONDA by John Moran

Not all chickens in a flock develop a personality. Most just go about their business and do not stand out as being different from their sisters. In fact, most of them seem to prefer to be anonymous, ciphers , ordinary, I suppose to avoid standing out , attracting attention, and possibly the hatchet. But Rhoda and Rhonda were different. Both were Rhode Island Reds, of course, hence the names.
   Rhoda was the last remaining of her brood of six. Her sisters had been gradually picked off one by one in the first couple of years on Fluffy Bottom Farms (no roosters here), but Rhoda seemed to have the knack of survival, among her other talents. After the first couple of years the farm was remarkably free of predators until she was 7 years old, but that sad story can wait. The subsequent batches of Rhodies , and the last remaining  of the Barred Plymouth Rocks (FBF is in Plymouth, MA) were let out to free range for 6-8 hours a day, happily pecking, scratching, doing the backward dance, eating the grass that turns their yolks a mellow orange color.
   Our introduction to chicken psychology came when our first batch was about 6 months old, almost fully grown, and hadn’t laid an egg. One day we went to the local craft store, got a couple of wooden eggs and put them in the nest. Presto! fresh eggs the very next day.
   At a time when Rhoda and one other were the only two remaining of their brood, another batch of day-old Rhodies arrived and were sheltered in a small coop away from the grownups who can be pretty mean. Several weeks later when it was time to introduce them into the main coop we moved Rhoda and her sister to a small coop out in the run. Being evicted from their familiar surroundings threw them into a depression; they moped around, lost their appetite, lost interest in free ranging, and even began to molt, giving them a really scraggly look. After a couple of weeks we felt they were ready for integration, and it went smoothly. Rhoda and her sister reclaimed their favorite perches, and the others acquiesced without complaint. Soon the feathers were back and Rhoda was prettier than ever.
   It was at that time she began to approach me, squat down, clearly wanting to be picked up and talked to, and I was happy to oblige, even though she would occasionally leave a vent deposit on my pants, sometimes in the pocket. Unlike the rest, she enjoyed the company of people, though I was the only one she went to for a chat and some stroking.  I think she recognized that I was the provider of all good things and her protector. I relished my god-like status, though in her eyes only.
   Rhoda was clearly aware of her status as matron of the flock, the abbess of the convent. For the daily treat of a handful of birdseed, she always made her way, front and center, to the top of the ramp leading to the shed where I kept the food. Another treat they especially enjoyed were grapes. In true pavlovian style I had them trained to return from the field to the run by ringing a bell, which meant that grapes were in the offing. The flock would race back, often from an invisible distance, Rhoda in the lead, obviously taking pride in having taught her minions the lesson. And of course she was front and center for the incisor-created half grapes, easy to swallow.
   Another of Rhoda’s games was, appropriately, playing “chicken”. Whenever I mowed the lawn, she’d be right there, daring me to run her over, strutting directly in front of my path. When she realized I wasn’t going to stop, she’d jump out of harm’s way at the last minute.
   Rhoda’s niece Rhonda gradually made her off-beat personality apparent.  The flock usually foraged as a group, but when I counted heads, one was often missing:  Rhonda. She was literally up to highjinks:  she loved to sneak into my tool shed and fly up to a 7 foot high shelf where I kept stuff like WD 40, 2 cycle engine oil, wasp killer, etc., invariably knocking several off the shelf. Once she even laid an egg up there. If the garage door was open, she loved to get in and snoop around. Once I caught her on top of a water heater 10 feet off the ground. She liked to lay eggs in an antique sleigh out there; all the others behaved themselves and laid them in the coop according to protocol. At sunset when instinct beckoned them back to roost in the coop, she would often fly up to the roof and spend the night there. You might say she was the Jonathon Livingston Seagull of the chicken world…..she had a different outlook and definitely flew to the wingbeat of a different drummer.
   One day when I was about to take off on some errands, she made it clear that she would like to come along. I opened the car door, she jumped up on the driver’s seat, then up to the dashboard on the passenger’s side where she stayed for the entire trip. It is safe to say that she has seen things no other chicken has ever seen.
   The flock sometimes liked to hang around our back deck , with sliding door that leads into the dining room. She was the only one who dared come into the house and look around. One time she hopped over the threshold and on up to the dinner table , wanting a little higher  ground and probably a handout.
   Over a period of a few days last summer, the flock was wiped out by one or more nocturnal predators, probably fisher cats, that got into the run that I thought was secure, and despite my best efforts to find and correct the security problem, they polished off the last two, one of which was Rhonda, Rhoda having been picked off a couple of days earlier.
   My only consolation is the fact that they had a happy chickenhood in an ideal setting, with freedom to come and go as they wished, and far outlived the average chicken life span.  Having failed in my responsibility to protect them, and in their honor, I promise to be more vigilant and creative  in protecting our next flock.  Can’t wait till spring.