Monthly Archives: June 2012
Knowing that allowing the 3.4% interest rate on student loans to double as of July 1st would be political suicide, Congress pushes the decision out one year and keeps the lower interest rate in place.
Victory for students? Nope. Victory for Congress. You betcha.
While saving the average borrower around $1,000 a year, it is likely to cost students a lot more than that over the long term. The agreement that lawmakers passed Friday will keep interest rates at 3.4 percent for another year.
Anthony DeLaRosa, a 23-year-old University of Colorado graduate, says it’s a big victory. “I think the reason that students should support this, first and foremost is the fact that the 3.4 percent interest rate is being extended,” he says, “something that students pushed for very, very hard over the last several months.”
By passing this agreement, Congress sent a message to the Republican attack dogs that said, “We’re keeping the agreement in place for a year, but we’re really going to make them pay.”
DeLaRosa works for the U.S. Student Association, a lobbying group. He says 7.4 million students who rely on subsidized Stafford loans can now breathe easier. But, this is no victory, given the rest of the deal. “In the last year, Congress has actually trimmed tens of billions of dollars in student aid,” says Joel Packer, executive director of the Committee for Education Funding.
Packer says lawmakers — Republicans and Democrats alike — have actually made it more costly for students to borrow, and those costs dwarf whatever savings students can expect from lower interest rates.
For example, graduate students will now have to pay the interest on their loans while they’re still in school. All students will have to start paying back the money they borrowed immediately after graduation — the six-month grace period during which the government paid the interest is gone.
“That’s disappointing because Congress shouldn’t pay for one education program by cutting another — in this case it’s actually cutting the same one,” Packer says. That’s not all, he says. Lawmakers have limited the number of semesters needy students can receive a Pell Grant and made it harder to qualify for the maximum award. “So they’ve made a whole variety of changes.
Overall, about $4.6 billion came out of students’ pockets to pay off the federal deficit,” Packer says. The total cost to students, according to some estimates, $18-20 billion extra over the next 10 years.
This all began a year ago, during the pitched political debate over the federal budget, the deficit and what federal government programs to cut. The student loan program was clearly not exempt, says Getachew Kassa, legislative director for the U.S. Student Association. “This was disheartening. When we started this campaign as a coalition of student advocates, we said that ‘No way in hell are you going take money from education,’ “he says.
But that’s what lawmakers did, says Kassa, a University of Oregon graduate. So even with interest rates remaining low, Kassa says the bigger story here is that students appear to have lost more than they gained. “In the past year, we’ve had deals where students have basically been robbed. I think the real question to ask is, where does this stop?” he says, “because sooner or later, you take a little bit here, a little bit there — you have nothing else to take away from.”
So, unfortunately the headlines will read, “Congress comes together to keep student loan interest rates low.”, and both Republicans and Democrats will take credit for keeping interest rates from doubling, while the real headline should read, “Congress stays in office by screwing students with increased education costs.”
But he says students will be back in nine months, yet again fighting to keep interest rates at 3.4 percent for another year — and fighting to keep Congress from cutting student aid even more.
The future of the Euro and the Eurozone is bleak and will likely look like a series of prolonged, rolling crises that slowly evolve to reveal just how critically the financial health of each country is affected by their individual sovereign debt and their failing banks.
The inevitable result will be severe Eurozone-wide stress, emergency liquidity loans from the IMF and the European Central Bank and politicians from all the countries involved increasingly attacking each other over allegations of blame and corruption. To no good end.
Even the optimists now say openly that Europe will only solve its problems when there are no options left and time has run out. Less optimistic analysts increasingly think that the Eurozone will break up because all the proposed solutions are essentially Pollyannaish jokes. Let’s say the realists are right, and Europe starts to dissolve. Markets, investors, regulators and governments can stop worrying about interest-rate and credit risk, and start worrying about dissolution risk.
More importantly, they need to start worrying seriously about what the repricing of risk will do to the world’s thinly capitalized and highly leveraged megabanks. European officials, strangely, appear not to have thought about this at all; the Group of 20 meeting last week seemed to communicate a weird form of complacency and calm.
So, for all of the European officials and the U.S. bankers, here’s what dissolution risk means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is not real clear. See? That’s dissolution risk.
Let’s say you have lent 1 million euros to a German bank, payable three months from now. If the euro suddenly ceases to exist and all countries revert to their original currencies, then you would probably receive payment in deutsche marks. You might be fine with this — and congratulate yourself on not lending to an Italian bank, which is now paying off in lira.
But what would the exchange rate be between new deutsche marks and euros? How would this affect the purchasing power of the loan repayment? More worrisome, what if Germany has gone back on the deutsche mark but the euro still exists — issued by more inflation-inclined countries? Presumably you would be offered payment in the rapidly depreciating euro. If you contested such a repayment, the litigation could drag on for years.
What if you lent to that German bank not in Frankfurt but in London? Would it matter if you lent to a branch (part of the parent) or a subsidiary (more clearly a British legal entity)? How would the British courts assess your claim to be repaid in relatively appreciated deutsche marks, rather than ever-less- appealing euros? With the euro depreciating further, should you wait to see what the courts decide? Or should you settle quickly in hope of recovering half of what you originally expected?
What if you lent to the German bank in New York, but the transaction was run through an offshore subsidiary, for example in the Cayman Islands? Global banks are extremely complex in terms of the legal entities that overlap with business units. Do you really know which legal jurisdiction would cover all aspects of your transaction in the currency formerly known as the euro?
Moving from relatively simple contracts to the complex world of derivatives, what would happen to the huge euro-denominated interest-rate swap market if euro dissolution is a real possibility? Guess what? No one really knows.
But, what I am really talking about here is the balance sheets of the really big banks. For example, in recently released filings with banking regulators, JPMorgan Chase & Co. revealed that $50 billion in losses could hypothetically bring down the bank. JPMorgan’s total balance sheet is valued, under U.S. accounting standards, at about $2.3 trillion. But U.S. rules allow a more generous netting of derivatives — offsetting long with short positions between the same counterparties — than European banks are allowed. HA!
The problem is that the netting effect can be overstated because derivatives contracts often don’t offset each other precisely. Worse, when traders smell trouble at a bank that has taken on too much risk, they tend to close out their derivatives positions quickly, leaving supposedly netted contracts exposed. Remember the final days of Lehman Brothers?
When one bank defaults and its derivatives counterpart does not, the failing bank must pay many contracts at once. The counterpart, however, wouldn’t provide a matching acceleration in its payments, which would be owed under the originally agreed schedule. This discrepancy could cause a “run” on a highly leveraged bank as counterparties attempt to close out positions with suspect banks while they can. The point is that the netting shown on a bank balance sheet can paper over this dynamic. And that means that JPMorgan’s regulatory filings vastly understate the potential danger.
JPMorgan’s balance sheet, using the European method isn’t $2.3 trillion, but closer to $4 trillion. That would make it the largest bank in the world. Holy Moly!
What are the odds that JPMorgan would lose no more than $50 billion on assets of $4 trillion, much of which is complex derivatives, in a euro-area breakup, an event that would easily be the biggest financial crisis in world history? Slim. And, None.
No one on these shores seems to see the storm coming. In an effort to forestall the impending global crisis, the Federal Reserve should be insisting that big U.S. banks increase their capital levels by suspending dividends, and set up emergency liquidity facilities with an emergency and across-the-board suspension of dividend payments, but it won’t. The Fed is convinced that its recent stress tests show U.S. banks have enough capital even though these tests didn’t model serious euro dissolution risk and the effect on global derivatives markets.
The Fed is dead wrong about that, and the pending Euro-crisis is very real. Our mega-banks are in no position to weather even the known storm, let alone the real storm when all the European counter-parties pony up to the bar with their real exposures, and the true sovereign debt gets exposed. Then, what do you think that means for smaller banks?
How do you think that might affect the U.S. economic recovery? What is gold trading at? $1,575 an ounce? Hmmmm.
Home prices appear to report higher for the third straight month as “sand states” drift away from the crisis. Sand states are Florida, Nevada, Arizona and California. But, what’s really going on is far more interesting.
For the third straight month in April, American home prices twitched a tiny bit higher as values in the “sand states” further firmed while listings in some key northern cities continued to chill, the Case/Shiller survey reported Tuesday.
The Standard & Poor’s/Case Shiller composite index of 20 metropolitan areas showed a year-over-year decrease of 1.9 percent but a 0.7 percent national bump from March to April on a seasonally adjusted basis (1.3 percent non-seasonally adjusted), led by ongoing price rallies in a clump of warm-weather markets beaten up by the housing slump, including Miami, Tampa, Las Vegas and Phoenix.
“I’ve seen (listings here) jumping just like they did back in the day when the banks were approving everything,” said Michelle Tremblay, a Realtor with West USA Realty in Phoenix.
Since last October, home values in Phoenix have inched 12 percent higher, gaining ground during each of the past six months, according to the Case Shiller index.
From Tremblay’s vantage point, however, those loftier home values are akin to steroid-swelled athletes: synthetically pumped prices caused by banks stockpiling foreclosed properties and purposely keeping them off the market until area prices truly soar. Then those same financial institutions can cash in by selling those properties at fatter profits.
“We can see on the street what’s vacant and what’s not. We’re watching these (foreclosed and non-listed) houses just sit and rot,” Tremblay said. “The banks are letting these houses just deteriorate.
“They’re holding them and releasing them slowly to drive the value up.”
Some Realtors in another so-called “sand state,” California, recently have joined that chorus, offering similar, albeit unproven, theories about banks hoarding foreclosures and thus shrinking inventory in most markets.
In three California cities on the Case Shiller index -– Los Angeles, San Diego and San Francisco – home prices have increased during February, March and April.
Fellow “sand state” cities Miami and Tampa each have posted five straight months of home-value gains. Las Vegas, the largest metro area in Nevada – the fourth “sand state” – in April notched its third month in a row of heightened property prices, according to Case Shiller’s survey.
“Realtors across the country are all talking about the same stuff: the banks are the ones in control right now and they know it and they’re going to make the money again – and again and again,” Tremblay said. Not long ago, distressed homes “were selling, I think, too cheaply. And the banks weren’t making the money that they wanted to. So they tightened their inventory.”
Robert J. Shiller, one of the two developers of the monthly index, agreed that “it is an artificial market in that there is a lot of inventory held off.”
But Shiller, an Arthur M. Okun Professor of Economics at Yale University, sees still another hidden reservoir of prospective properties for sale – “a shadow inventory held off by homeowners who might sell if home prices come back up enough.”
Two weeks ago, market analytics service CoreLogic reported that the “residential shadow inventory” – which includes bank-owned homes – had declined to 1.5 million units in April, representing a four-month supply as well as a 14.8 percent drop from the same month one year earlier. In April 2011, the shadow inventory held a six-month supply of homes – roughly the same level as October 2008 when the housing crash began.
Still, with about 90 percent of American mortgages held by Fannie Mae, Freddie Mac and the Federal Housing Authority, “it’s really a government market now,” Shiller said. “So anyone contemplating speculating in housing has to think about what the government is likely to do. And we’re in limbo right now.
“We have a presidential election coming up. We haven’t resolved what were going to do with Fannie and Freddie – presumably something will be done with them afterward.”
Projecting the direction of home prices in several vital northern cities has grown more challenging the past year. In Boston, home prices have dipped during six of the past eight months, according to Case Shiller. In New York, property values have declined for seven consecutive months. Chicago, up a tick in April, has nonetheless posted seven price drops in nine months, the index shows.
Is any of that political and financial uncertainty perhaps fueling some fall-off in home prices those metro areas?
“I guess it is. People are holding off … People are hoping for prices to go back up (in those cities),” Shiller said. “And we’ll see the shadow inventory converted into real inventory if people start to see the prices go back up.”
But in Chicago, where home prices are off 7.2 percent since last August, the Case Shiller index reports, some Realtors are blaming another segment of the home-financing equation.
“The appraisers are keeping the prices low,” said Patrick Hawkins, a broker with Dream Town Realty in Chicago, so buyers can’t get enough financing, and credit is tighter than ever.
The last time Chicago property values were this depleted on the Case Shiller index: November 2000.
“Buyers are willing to spend a little more money right now. Inventory is low. But the appraisers just are reticent to come in with a strong enough number,” Hawkins said. “What I’m assuming an appraiser would say is: It’s the market conditions, it’s people not having enough jobs, it’s the economy.
“Appraisers – they’re killing the market. The prices have been driven down, beaten to a pulp.”
It would be nice if the numbers supported a shift in the markets, and that the housing slump had hit bottom. But, based on this data, and in spite of what the Obama Administration dreams about, I am afraid we have a long way to go.
One good thing about Europe’s financial disaster is we should see lower prices at the pump in the near future.
Oil traded below $80 a barrel for a fourth day amid speculation that another meeting of European leaders this week will fail to halt the debt crisis that threatens to slow the economy, and curb fuel demand.
Chancellor Angela Merkel hardened her resistance to sharing euro-area debt to resolve the region’s financial crisis, while Moody’s Investors Service severely cut the ratings of 28 Spanish banks to essentially junk bond status.
“The ongoing problems in Europe continue to push down expected future crude oil consumption,” Mike Sander, an investment adviser at Sander Capital Advisors in Seattle, said in an e-mailed note today. A “macro-economic picture of slower global growth” is weighing on prices, he said.
Yeah, when countries are engulfed in deep economic depressions, it is kinda hard for everyday Joes and Janes to think about spending money for road trips, unless they happen to be fleeing their country. And, it’s summer, so no one needs any heating oil.
Some Persian Gulf members of the Organization of Petroleum Exporting Countries may trim exports if Brent crude stays within a range of $80 to $90 a barrel. So, in spite of falling demand, OPEC intends to hold price points (inventory) about where they are. Poor guys. You might want to stop building skyscrapers in Dubai, for a few months anyway. This Euro thing could get really ugly. And, I hear China might be cutting back on growth. Remember that scene in Syriana, where Matt Damon’s character chats with the Arab leader about oil economics?
War is Hell. Not in any way to celebrate the Global crisis, it doesn’t bother me that here in the U.S., we could see $3 gas again as early as July.
Let’s just say for shits and giggles, that I have no dog in the Presidential hunt and that I think that Bush and Obama both made fine Presidents.
Let’s also say that I just dropped in from Mars and heard a bunch of people in a crowd complaining about how terrible Obama has been as President, and how he is a big government socialist, can’t create private sector jobs, is destroying the country and our future by raising our national debt to historic levels, and has created an environment where both business and Wall Street are suffering.
Then someone rushed out of the crowd and showed me these charts:
As you can see, under Obama, private employment snapped back much better than it did during Bush’s first year.
State and local government employment, however, fell much harder under Obama than it did under Bush.
This is of course, exactly the opposite of the big government socialist stereotype that the Obama economy is portrayed as, but hey.
And here, just for the hell of it, is the same chart but with the performance of the S&P 500 (in orange) during each period:
Here’s a chart with the National Debt growth in it, represented by the black line. As you can see, the national debt has grown a little bit faster under Obama, but hardly any faster than under Bush, and the trajectory is almost identical:
If anyone thinks for one minute that there isn’t a private competition among the elite financiers and investment bankers, about who can speak in the most arcane, cultivated, scholarly and lettered style, you haven’t been listening to Goldman-Sax bankers lately:
“Overall, Greece will remain a source of uncertainty due to its macro-dynamics. The country is undergoing extreme economic pressures that are likely above and beyond austerity; prolonged uncertainty have led to a multi-year suppression in confidence and a collapse in credit growth, which has helped compressed the private sector, create supply shortages and has contributed to the lack of investment or privatization efforts, higher structural unemployment and persistent inflation currently observed. Unless this uncertainty of tail events is lifted over Greece, moderate solutions will be prone to marginalization, while extreme and populist views could become ever so prevalent.”
Let me translate:
Greece is screwed. Their economy is worse than any austerity measures can fix. Greeks have no confidence. Investors have no confidence. There is no credit available to Greece. Businesses are failing because they can’t borrow money. Because businesses are failing, there are shortages. Because no one has confidence, no one will lend any money. Unemployment is really bad and getting worse, because there are no jobs. Money is worth nothing, so things aren’t really worth what they cost. All of these conditions result from poor fiscal and political leadership and corrupt banks. If no one can fix these conditions quickly, austerity (meaning going without) will not work. If it continues or gets worse, extremists and fascists could take over the government. The end.
It doesn’t surprise me that when people are exposed to that kind of Sax-speak, they tune out. I had to read that first paragraph like, five times before I understood what they were saying. Bernanke, while an improvement over Greenspan, talks like this all the time. No wonder Congress has no idea what’s going on. And, God forbid any of them from whispering to the next guy with a “Huh?” These guys don’t roll out of bed really smart to begin with, so we should not be amazed, I guess.
I wonder whether the G-Sax boys will be as eloquent and arcane when they try to describe the financial disaster after it hits next year, or will they simply say, “Oh. Holy Shit!”
No. I forgot. They will all be in St. Barts.
I don’t have a clue as to why the Dow is still trading above 12,000. The global economy in 2013 looks awful.
The Eurozone crisis is worsening, heavy-handed, almost emotionally-driven fiscal austerity measures are deepening recessions in most member countries, continuing high oil prices and a severe credit crunch are completely undermining any prospects for recovery.
And, I am an OPTIMIST!
The Eurozone banking system is turning into isolated stovepipes as cross-border and interbank credit lines are cut off and capital flight continues. Greece’s upcoming disorderly exit from the Eurozone will create a huge, apocalyptic bank run. I have only used “apocalyptic” once once in 370 posts.
Spanish and Italian interest rate spreads are back to their ridiculous and unsustainable levels, and the Eurozone appears to need not just an international banking bailout (as happened recently in Spain) but a sovereign bailout as well. Smart money says the Eurozone goes full bore into a disorderly exit from itself in 2013.
Back at home, the US economic performance is weakening, with first-quarter growth a ridiculous 1.9%. Job creation stalled in April and May, and it is probable that the rate could completely stall out by year end. We have talked about why jobs aren’t coming back before. There is the real risk of a double-dip recession next year, as tax increases and a continuing housing market disaster will reduce growth in disposable income, consumption and confidence. Doesn’t matter who gets elected in November.
Political gridlock will continue. There will be fights over the debt ceiling, student loans, the JOBS act, fiscal policy and taxes. There will be new rating downgrades and this time, a real risk of a government shutdown, which will further depress consumer and business confidence, reduce spending and accelerate a flight to safety that should knock the Dow down to below 8,000.
China, is actually a mess. Their growth model is totally unsustainable, their leadership is way too slow in accelerating structural reforms, and its investments are heading underwater. Leadership must reduce national saving and increase consumption, but politics and a difficult leadership transition will result in policy that does too little, and does it way too late. And, how many women do you see here?
We are all tied together now on this little planet. The Global economic slowdown will create a massive drag on growth in emerging markets, given their trade and financial links with the US, China and the European Union. At the same time, government intractability in emerging markets, and a collective surge towards greater state capitalism, will slow the pace of growth and will reduce their resiliency.
If all of that isn’t freaky enough, consider the long-simmering tensions in the Middle East between Israel and the US on one side, and Iran on the other, on the issue of nuclear proliferation. The current negotiations are likely to fail, and as we have pointed out on this blog a couple of months ago, tightened sanctions will not stop Iran from building nuclear weapons. The US and Israel will not accept negotiations, so even if the rest of the world were rosy, a military confrontation in 2013 would lead to a massive oil price spike and a global recession.
If you are a Global economic leader, you’re first response should be to shy away from risk, especially when no matter in which direction you turn, you see more and more. So, most leaders are adopting a wait-and-see position which exasperates the slowdown and makes a Global recession largely self-fulfilling.
And, if you think that we have already seen this movie in 2009-2009, and think, so … how bad can it be? Think again. Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of, or have already run out of policy bullets. Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. And, “Twist” is a cruel joke. Cruel, because it creates a sense that Congress is actually doing something to fix the economy when the time for fixing has come and gone.
Economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited any possibilities for further fiscal stimulus.
Sovereign risk has now become bank risk. In the Eurozone, sovereigns are dumping a larger fraction of their public debt onto their banks’ balance sheet.
To try and prevent a disorderly outcome in the Eurozone is futile because of the first law of cat-herding. The current fiscal austerity needs to be implemented much more gradually, a growth contract should complement the EU’s new fiscal contract, and a fiscal union with debt mutualization (Eurobonds) should be implemented. In addition, a full banking union, starting with Eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the Eurozone. But, of course none of that is possible. Look no further than Germany for the answer.
Germany, understandably, resists all of these key policy measures, as it is obsessed with the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. Why on earth, should Germany carry the weight for countries who have irresponsibly led themselves into fiscal and economic policy disaster?
The Eurozone bubble may be the largest to burst, but it is not the only one threatening the global economy in 2013. Stay tuned. Sell all your equities. Stock up on canned goods and booze, and batten down the hatches.
Today’s post is by Michael Broady, our Special Issue Editorial Contributor. The topic is, well, topical, as millions of young people just graduated from college and are preparing to figure out how to enter the work force in the next few weeks. And, maybe asking themselves whether all of that was worth it.
This week, I listened to another sound bite for an upcoming dialogue on NPR about college; the interviewee intended to argue that college shouldn’t be the go to choice for high school grads. The idea that college may be a counterproductive life choice is nothing new. I’ve listened to the reasons why it’s a waste for probably the past 5 years – four of which I spent earning my B.A., and I’m unimpressed.
First off, I recognize the financial burden of college. Last year college loan debt averaged $25,000 per student. No doubt, that number will be higher this year. In no way am I supporting the steady increase in tuition at both private and public universities. That higher education is unaffordable for the majority of us is absurd, not because it’s worthless, but because it is so valuable.
From a purely financial perspective, David Leonhardt’s article in the NY Times last year shows that college graduates make close to 40% more money than high school graduates – even in job fields that don’t require high school degrees. Another study shows that investing in a college degree is equivalent to making an investment with returns of 15.2% per year. That number is far higher than average earnings in stock market investments or investments in corporate or government bonds.
Arguments against a college education aren’t purely financial though. There’s been a tonal shift in the discussions and I don’t like what I’m hearing. It seems that the college degree itself is being undervalued, that it has come to generally represent things stuffy and outdated. When I told a friend I’d be writing on the topic, she pointed me to an article about start-ups building sites where you can go to college for…free-ninety-nine!
The creator of Udemy lays it out for us, in case we’re confused: “It’s cool to be a drop out these days,” Bali says. “It’s the dying companies that value college degrees. You have to think beyond that piece of paper.” The same article also points to another site, Udacity, with the same goal – to give people access to courses and the power to take their education into their own hands.
This post isn’t a thorough review of the above-mentioned sites, but I did check them out. The latter’s classes are actually free to a certain point and the classes look like they could be really useful, if you’re interested in building a website or cryptology. The former is a bit more of a free-for-all with some classes costing more than $130 and others free. One course discusses energy and the environment; another course tells you how to promote your own Udemy class to grow a student base – to increase sales. Even if these sites are geared more towards photoshop and wordpress tutorials, I’m a fan. I’ll probably even take a class.
Interesting as these courses are, ultimately, they strike me as supplementary to a college education, not because the info isn’t all there – I’m sure “Fundamentals of Physics” taught by Yale University’s Ramamurti Shankar covers everything a 200 level class should. For that matter a library should have all of the physics you could want too. The courses are supplementary because neither the textbook nor the free online class provide office hours with your teacher/T.A., or help you to build study groups, or encourage you to study loosely related topics based on a personal assessment of your likes/dislikes and natural aptitudes.
Mainly (and this is a constant but valuable response to the old do it yourself education) college is about learning to think, to process the world through selective filters, to draw connections and value the steps toward discovery more than it is about any specific equation or class.
Sure, plenty of people find success without college and some grads become bums. Negative reactions to big corporations and institutions are absolutely called for and necessary; that doesn’t make dropping out of college a practical option, and I’m not a fan of loose language that devalues the kind of education college provides alongside the broken system that allows for such hyper-inflated costs to that education.
Propagating that message seems like a solid step towards lots of very well made wordpress sites with very little worthwhile content.