The Pin That Pricked The Bubble

One need not look hard to find any number of articles talking about how student debt in the U.S. recently reached the $1 trillion threshold.  Regardless of what it means to our nation in general, and more specifically, the individuals who graduate with no salient marketable skills to show for their debt, it has been my opinion for quite sometime that the generally accepted annual 6% inflation modeled into virtually all future cost of higher education projections could not go on forever. As is the case in every corner of the business world I can think of, it takes disruptive innovation to bring about a real paradigm shift. It began a few years back, but it seems that we are finally on the cusp of what I believe will be the disruptive innovation that pricks the high cost of education bubble.

NY Times article: Harvard and M.I.T. Team Up to Offer Free Online Courses

 One could argue that only schools with billion dollar endowments such as Harvard, Stanford, M.I.T. and their peers have the luxury of offering free non-credit courses precisely because they have benefited in the past from the high cost of education, but that misses the point. In a digital world, where it becomes faster and easier to connect to the internet every day, "what you know" will become more important than "who you know" or where you went to school. In the end, results matter. If somebody sitting on a dirt floor in Tanzania can absorb, digest and implement an idea derived from the same course content as somebody sitting in a mahogany-lined classroom in New England, what does it mean for the local economy in Tanzania, and to the bigger picture, the world in general?

College is not for every one; never has been and never will be. I think one of the greatest shams pulled on our nation's youth has been to inculcate them with the belief that if they just go through the motions and do whatever it takes to graduate with a 4 year degree regardless of the discipline, they would be entitled to a life of privilege. Ivy League course content, offered for free, to basically anybody with an internet connection, is the death blow to this notion. In the end, the world will be better for it.

How to Fix Income Equality

Here's a humorous look at one way to do away with income inequality.

$10 mil loans for everybody!

I recall an article in The Economist a few years ago that highlighted a Harvard study about student's attitudes towards wealth. 

The question was this; would you rather: 

a) make $100,000 a year when your friends made $200,000

b) make $50,000 when all your friends made $25,000

Of course this presents a false choice, as the study did not ask if they would be content to make the same amount of money as their friends. Nevertheless, the answer is instructive. By a margin of 4 to 1, the students chose B.

The moral of the story is self-evident as far as I'm concerned..

US Credit Rating Outlook Cut To Negative

Yesterday the big story was that S&P put the US government "on notice" that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. I love the terminology. Anybody that's sat through a mandatory firm-wide harassment seminar will immediately recognize that when you put somebody on notice it means they've officially crossed the line of comfortable civility that should exist between adults in the workplace. The real question here is why it took so long for S&P to recognize the fact the the government crossed the line? I am of two minds on this one. On one hand they're stating the obvious, but better late than never. On the other hand, given their record of complicity and the very prominent role they played in the housing bubble debacle, why should they have any credibility at all? Nevermind that, why are they still in business?

Consuming ourselves

Bill Gross' most recent investment outlook likens our current fiscal path to the mating ritual of mantises. He has this to say:

The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow. Four major factors come to mind:

1. American wages will lag behind CPI and commodity price gains.
2. Dollar depreciation will sap the purchasing power of consumers, as well as the global valuation of dollar denominated assets.
3. One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible.
4. Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable: witness Greece, Ireland, or a host of Latin American countries of generations past.

Read the whole thing.

Is $250,000 really rich?

 Who knows where the number came from, but whenever the subject of extending the Bush tax cuts comes up, the line between the haves and the have-nots seems to be $250,000. If you make more than $250,000 you can afford more taxes is what many politicians on the left apparently believe. Fortunately, President Obama caved to GOP pressure and went along with the tax-cut extension by saying something along the lines of, "when you're in hostage negotiations, it's best to not harm the hostage. In this case the hostage was the American people." Silly illustrations aside, I think he did right by extending the tax cuts to all tax-paying citizens. As a recent Economist article pointed out, Federal Government spending is 24% of GDP and tax receipts are 15% of GDP this year. If you raise taxes on  those who make more than $250,000 a year and raise capital gains by 5% to 20%, the extra tax revenue will only cover the deficit for 9 days.When it is put in that perspective, one is left with the feeling that $250,000 is an arbitrary number pulled out of thin air; and those that argue people making more than that are "rich" are promoting class warfare whether they realize it or not.

The following article, "Down and out on $250,000 a year"does an excellent job revealing what a family of four making the magical $250,000 really has left at the end of the year. To control for geographical cost and local tax rate differences, the article models 5 different cities across the nation: Huntington, NY, Plano, TX, Pinecrest, FL, Naperville, IL and Glendale, CA.

The results are shocking, but not surprising.

How sausage is made

I recently returned from a three day trip to Washington D.C. where I attended the annual Security Traders Assoc. conference and met with a few of our elected officials as a representative from the board of the San Francisco affiliate of the STA. Generally the convention is in a more exotic location, but this year since Wall St. is everybody's favorite punching bag and with so much pending legislation that will fundamentally alter US equity markets, the organizers thought it would be prudent to really focus on the political end of our existence.

Good advice from the grave

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.
—President John F. Kennedy,
Economic Report of the President,
January 1963

The politicians of yore sure were different animals.

Geithner: unemployment could rise

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said the U.S. unemployment rate could rise for two months before it drops, potentially deepening Democrats' problems in the November congressional elections.
"It's possible you're going to have a couple of months where it goes up," Geithner said on ABC's "Good Morning America" interview broadcast on Tuesday and taped a day earlier.
"But what we expect to see ... is an economy that's gradually healing. Of course we want to do what we can to reinforce that process because it's not growing back as quickly as we'd like."

I wish it would rise by one person, Turbo-Tax Timmy to be exact. Everything he says is preempted in my mind by the words "tax cheat." It has the effect of discounting everything else he has to say, even if he has a point. That's not an admirable trait in a Treasury Secretary of the United States.

Do as I say, not as I do

The WSJ recently reported a case where a carpenter's union hired non-union picketers to protest a building project that was using non-union labor for the project.
 

WASHINGTON—Billy Raye, a 51-year-old unemployed bike courier, is looking for work.
Fortunately for him, the Mid-Atlantic Regional Council of Carpenters is seeking paid demonstrators to march and chant in its current picket line outside the McPherson Building, an office complex here where the council says work is being done with nonunion labor.

Logic v. Emotion

There are two recent op-eds that illustrate rather succinctly what motivates the opposite ends of our political spectrum. From the right comes Art Laffer's piece that appeared in the WSJ this morning titled Unemployment Benefits Aren't Stimulus:

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.
The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics. With five job seekers for every job opening, the unemployed are desperate for work and increasing unemployment benefits will have very little if any disincentive effect. This view hinges on a total change in employee behavior from "normal" times to the current period of "the Great Recession."

 From the left we have Paul Krugman writing a recent piece in the NY Times titled Punishing the Jobless:

Today, American workers face the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks. Yet the Senate went home for the holiday weekend without extending benefits. How was that possible?
The answer is that we’re facing a coalition of the heartless, the clueless and the confused. Nothing can be done about the first group, and probably not much about the second. But maybe it’s possible to clear up some of the confusion.
By the heartless, I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do — including, or perhaps especially, anything that might alleviate the nation’s economic pain — improves their chances in the midterm elections. Don’t pretend to be shocked: you know they’re out there, and make up a large share of the G.O.P. caucus.

 The questions we should ask ourselves are these: do we make better, more informed decisions using logic or emotion; and which of the authors makes the more logical argument?

Keeping track of the TARP

TARP COP: Get tough on banks

The top cop tracking the $700 billion bailout program said Monday that he's concerned federal officials are ignoring his proposals for preventing tax dollars from being wasted or pilfered.

Neil Barofsky, the special inspector general overseeing the Troubled Asset Relief Program, released a 260-page report detailing a long list of concerns about government efforts to prop up hundreds of banks, Wall Street firms and auto companies.

Testing the waters

One of my current concerns as I voiced in a previous post is that the Obama administration may try to take over the Federal Reserve by using the strong arm of a Democratic Congress. Looks like they may be testing the waters:

Bloomberg article: Fed Said to Retreat From Seeking Power to Sell Its Own Bills

At the House Budget hearing, a lawmaker brought up the idea of making Fed district-bank presidents subject to Senate confirmation. Currently the presidents are nominated by the banks’ boards of directors and approved by the U.S.-appointed Fed governors in Washington.

Observing the weathervane

This quote summarizes this week’s sentiment rather succinctly: "There will likely be a growing steady recognition that in trying to prevent a Depression, the transfer of risk has been shifted from the private sector to the public purses and this may create a longer, more drawn out problem."

• Geithner admits overnight that the US credit rating is in jeopardy in light of our heavy issuance
• PIMCO's Bill Gross said the U.S. will eventually lose its AAA rating
  
• Moody's did say Thursday it is comfortable with the triple-A sovereign rating on the United States, but it is not guaranteed forever
• Goldman Sachs said the hike in oil prices this week was due to real oil market fundamentals and not just hedging against a weak dollar and equity market rallies. "The oil market was shocked by disruptions in Nigeria, refinery problems in the U.S. and a strong gasoline market," Goldman said in a research note. (Not sure why they think they have any credibility. Last year when oil was at $140/bbl they were calling for $200/bbl by year end. Their prop desk was probably getting short on the call, but I digress...--Ed)
• US Treasury was getting hit hard at the end of the day yesterday as the market was getting ready for big new supply coming next week - $101B of fresh Treasuries to be auctioned
• WAPO reported that the Obama administration is preparing to send GM into bankruptcy as early as the end of next week under a plan that would give the auto maker tens of billions of dollars more in public financing
• Mastercard will lose more than half of a $59B portfolio of debit-card users after JPMorgan Chase & Co. decided to shift more business to Visa
  
• The FDIC seized BKUNA, the 34th bank failure of the year, with $12.8B in assets, $8.6B in deposits and 85 branches
• AIG announced that Chairman and CEO Edward Liddy will step down and also proposed a 1-for-20 reverse stock split

I think that at some point in the not too distant future the Obama Administration, with the help of Congress, will attempt to take over the Fed. I bet the majority of Americans will see nothing wrong with that, at least the ones who have no idea (and don't care to have one) what the Federal Reserve system is and why it was created in the first place.

The elephant in the room

Bruce Bartlett at Forbes does a good job of quantifying exactly what it would take to fully fund all of our upcoming Social Security and Medicare liabilities.

The 81% Tax Increase

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."

The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.

Trickle up poverty

Ed Yardeni once again nails it:

The politicians in Washington, DC have an advantage over many of us: They don’t work for a living. So they have plenty of free time to figure out ways to take money away from those of us who do. Working stiffs like us don’t have much time to stop them. We need a national Tea Party to check and balance the Kleptocrat Party running amuck on both sides of the aisle of our nation’s capitol. On April 15, there were tea parties in several cities around the nation to protest ballooning federal deficits and rising taxes. Most of the demonstrations were held during lunch time when people could get away for an hour from work!

The noose tightens

“You never want a serious crisis to go to waste — and what I mean by that is an opportunity to do things that you didn’t think you could do before.”--Rahm Emanuel

Today, governments around the world are taking power back from free markets, particularly financial markets, under the pretext that they have failed. In fact, the markets were hobbled by a combination of anti-market regulations and the lack of enforcement of regulations that leveled the competitive playing fields. In the US, the power grab is spreading to banking, autos, energy, and health care. Here is a brief chronology of recent developments around the world in this epic power struggle:

The Black Hole of fiscal responsibility

I'll withhold the niceties: anybody that thinks government is a good custodian of your current and future tax dollars is a moron.

Congress needs Google to find out where stimulus money went

On February 14, with the passage of the American Recovery and Reinvestment Act, Congress shoveled $787 billion of stimulus money out the door. Now they're using Google to find out where it went.
During the stimulus debate, the bill's supporters stressed that it included strong oversight safeguards. But audits and reports are months, if not years, away. Oversight will be after the fact; right now, with the money actually beginning to flow, members of Congress have little or no idea where it is going. What, for example, is the Department of Housing and Urban Development doing with the $1.5 billion Congress approved for a new program called the Homeless Prevention Fund? Lawmakers don't know.

Read the whole thing.


"No man's life, liberty or property are safe while the legislature is in session."--Judge Gideon Tucker 1866

Congress and NASCAR

Here's a great idea. Every member of Congress should wear a one piece uniform emblazoned with the icons of their corporate sponsors:

There's that saying...

Oh you know the one, something about pictures and what they're worth in words...

Budget deficit: past, present and future (source: Wapo)



This one has words and pictures. That doubles its value!

The Dodd Amendment

I do believe that the Obama administration and his congressional enablers finally have a plan in place to remove the last vestiges of faith in the federal government any of us may still harbor exempt their campaign contributors from having to take unsavory responsibility for their bad business decisions:

While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. The provision, now called “the Dodd Amendment” by the Obama Administration provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” -- which exempts the very AIG bonuses Dodd and others are now seeking to tax.

He was for the bonuses before he was against them. John Kerry would appreciate that. Also, it's pretty rich that they want to "tax" these bonuses. As the tax laws already stand the federal government will get about 35% of the gross amount. And depending on what state the recipients live in, they'll be lucky to see 55% of the gross amount after the local governments are through.