Slaying the Debt Dragon – or Feeding the Beast?

slaying_debt_dragonby James A. Bacon

There aren’t many things that almost everyone across the ideological spectrum agrees about, but one of them is that indebtedness from student loans is out of control. Here in Virginia, about one million students owe roughly $30 billion, according to the Richmond Times-Dispatch — or about $30,000 each on average.

The loan burdens can be difficult enough for students who graduate with degrees, but the debt can be devastating for those who don’t complete their degree requirements and don’t achieve the earning power they expected. Commenting on the Richmondsunlight website, Ruth Hall asks:

What about a person who becomes disabled before completing their education? Where is the concern for them regarding paying back student loans when their only source of income is social security disability? My daughter has a rare disease (as defined by the NIH) that struck her in her early 30’s. She is unable to work, but her social security disability check is garnished to pay her outstanding student loans. Already living in poverty with an income of $1000 a month, losing $150 a month to student loans affects her ability to provide for herself. Student loans never go away and she will never be able to finish college or return to earning a living due to this rare disease.

But not all debtors inspire the same degree of sympathy. The Times-Dispatch quotes one student griping about the $250,000 cost of his education, including the interest on the $190,000 he borrowed to attend the University of Virginia and the University of Richmond Law School. Is his complaint really with the debt and interest — or with the outrageous cost of higher education? The young man worries that he might have to sacrifice his career in public interest law. Perhaps he should have considered the consequences such a massive debt before embarked upon that particular goal!

Another student said she didn’t realize she owed $32,000 for a nine-month medical assistant diploma from Corinthian College, which she says turned out to be worthless, until it showed up on her credit report. She said she had been told grants and scholarships would cover her costs. “I still to this date have never received a bill” or documentation, she said. Either she was defrauded, in which case she should collect damages in a civil suit, or she was negligent in understanding the obligations she was incurring, in which case it’s hard to muster much sympathy.

Regardless of the circumstances of individual loans, it’s clear that thousands of Virginians have a problem. The question is, what do we do about it?

Sen. Janet Howell, D-Reston, and Del. Marcus Simon, D-Falls Church, are lead patrons of SB 52 and HB 400 respectively, identical bills that would create a Virginia Student Loan Refinancing Authority. The Authority would be tasked with creating a program in which Virginia students with educational loan debt “may receive a loan from the Authority to refinance all or part of his qualified education loans.”

Where would the money come from to refinance the student loans? The Authority would issue bonds. However, the Commonwealth of Virginia would take on no financial risk. The bills explicitly state: “No bond of the Authority shall constitute a debt or pledge of the full faith and credit of the Commonwealth or any political subdivision of the Commonwealth and each bond shall be payable solely from the revenues and other property pledge for such payment.”

Bacon’s bottom line: Howell and Simon deserve credit for devising an innovative approach to the problem of student indebtedness. I have major reservations, but I think their idea deserves deserves thorough airing and debate. The devil, of course, is in the details.

Investor appetite for the Authority’s bonds will determine how much money the Authority will have to work with and how many students it can help. I would like to know how prospective bond underwriters would evaluate the quality of the debt, what interest rates they would demand, and what flexibility the Authority actually would have to offer students better loan terms. I presume that the bonds would be classified as tax-free municipal debt, which would be cheaper than private-market financing. On the other hand, participating students , presumably those with the greatest need, pose a higher-than-normal risk of default, which could push interest rates higher.

Currently, the federal government assumes the risk for student loans gone bad. A Virginia student loan authority would assume that risk for the debt that it restructures. The transfer of risk needs to be examined very carefully. Even if the state’s full faith and credit weren’t on the line, bond defaults by the Authority would be a debacle for the state.

Otherwise, my main reservation is that creation of a Virginia Student Loan Refinancing Authority is only a palliative. This proposal would not address the underlying causes of the problem — out-of-control costs at Virginia colleges and universities, and indiscriminate lending by the federal government regardless of a student’s likelihood of repaying their debt. That’s what got us into this predicament, and anything that dulls our laser-sharp focus on those realities only delays addressing them.

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37 responses to “Slaying the Debt Dragon – or Feeding the Beast?

  1. The cost of a college education has increased exponentially more than almost any other consumer expense over the last two decades.The cost of college has gone up because whatever they charge, the government loans will cover. The students (even those graduating) are increasingly finding that the available jobs will not come close to covering the student loans.

    A simple (maybe simplistic) fix. Pass a federal law that will cap the annual student loans a student (or parent PLUS loan) can borrow to an amount between $10,000 to $15,000. The educational establishment has gotten fat and happy on the backs of student and parent borrowers.

    If the loans were capped, I guarantee that many (most) colleges would find a way to operate very nicely with tuitions and fees totaling $15-20K instead of $40K plus. Some administrators and professors will have to cut back on six-figure salaries. (It is doubtful many of them would quit as few could ever find other work paying close to what even their reduced salaries will pay).
    Palatial buildings and dorms will become more utilitarian. Students will not be charged fees for many unnecessary and expensive pastimes used by a few.

    Colleges have become places where the powers that be routinely criticize businesses and capitalism, while, at the same time, no one gouges and takes advantage of their consumers more than colleges do to their students.

    • when I looked at who the biggest employers were on a per state basis – it was either WalMart – or …you guessed it – Higher Ed….

      I totally agree on the cap idea.

      I’d make it even stricter.

      No loans for occupations not in demand. No loans if you donj’t work in the summer – even as an intern, etc.

      major stick/carrot incentives…

      the Colleges are sucking up every dime in loan guarantees.

      This IS a case where the govt IS totally screwing up … and WHERE the ding-dong are all those Conservatives ranting and raving about govt spending on this issue? Not a peep.

  2. talk about making a bad idea worse!!!

    The College Loan situation is a disaster and it really does encourage horrible attitudes about debt – and too many young people think it’s “okay” to go into debt up to your hind end – before you’ve even worked a day at a real career!

    I cannot believe how fiscally stupid as a society we have become on this. And no wonder we make up fairy tales about how the sub-prime crisis came to be…

    repeat after me – “You do NOT go into debt up to your hind end just because someone will loan you the money”!!! Geezy Peezy!

    you are LITERALLY mortgaging YOUR future!

    I cannot believe this is becoming the norm… A doctor or some 12 year education careers – maybe – but not for most 4-year occupations… it’s just mind boggling!!!

    we look down our collective noses at those who got snookered in the sub-prime disaster – and this is – really – not that different…

    Colleges have become – not much better than sub-prime loan companies – “free money” – get your degree!!!

    And Parents are part of this. When, in heavens name, would you tell your kid to do this to themselves in the first place?

    Here’s where you MIGHT convince me that Conservatives think more clearly about deficit and debt. How many kids of Conservatives take on horrendous debt as compared to kids of lefty liberals?

    Got a Wallet Hub for that?

  3. Let’s look at the real numbers.

    The average U.Va. grad leaves school with around 23K in debt. The average William and Mary grad leaves school with around 25K in debt. The average Virginia Tech grad leaves school with around 28K in debt.

    The mid-career salary for all 3 institutions is around 100K, take or give a couple thousand.

    That’s a pretty good investment for students. It’s also far from “out of control” or “crushing these students with debt.”

    • Cville, the debt problem doesn’t reside with the students who graduate from Virginia’s elite universities. It resides with those who graduate with degrees that command less of a premium in the labor market and with the high percentage of students who never complete their degree.

  4. pretty bad when you’re 25K in debt the day you start your first full time job, need a car, a place to live, insurance, etc…

    I guess I’m out of touch with current realities, eh?

    There are less expensive colleges and summer jobs… etc.. used to be anyhow..

  5. might need to look at current data:

    ” The class of 2015 is reaching new heights, though perhaps not the way it had hoped.

    College graduates this year are leaving school as the most indebted class ever, a title they’ll hold exclusively for all of about 12 months if current trends hold.

    The average class of 2015 graduate with student-loan debt will have to pay back a little more than $35,000, according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of websites about planning and paying for college. Even adjusted for inflation, that’s still more than twice the amount borrowers had to pay back two decades earlier.”

    http://blogs.wsj.com/economics/2015/05/08/congratulations-class-of-2015-youre-the-most-indebted-ever-for-now/

    so it’s high – gets higher every year – and instead of capping it we’re talking about re-financing it – and no I do not believe the State can do this without consequence. Investors who would buy the bonds for these loans are going to want a pretty penny for the risk.

    25K is “okay” perhaps even tolerable for jobs in demand that pay well …. 35K is worse.. and not “ok” …

    are the numbers for Virginia lower than nationwide?

    the trendline is awful (look at the chart at the referenced link).

  6. As we say in the South: Day-um. Larry and I agree on something…again…and probably within a two week time period. He recognizes the perverse incentives present in higher education.

    My only comment to the idea of a refinance authority: Can you say “Credit Default Swap”? Can you say “CDO”?

    • in the case of the sub-prime – it was the banks, not the govt .

      in this case – it is CLEARLY the govt – no ifs, ands or butts.

      but this movie has played before with higher Ed – with armed forces GI benefits – slurped up by for-profit scammers…

      the difference now is that the public Universities have gotten into the game. Sure you get a real quality education but it’s gonna cost you out the wazoo and who better to prey on that young folks with little financial experience and apparently AWOL parents.

      No one in their right mind should go into debt 35K worth before they’ve even started a career – and especially not in today’s global economy where jobs that used to be jobs – are gone…

      The good jobs today go to folks who go for the harder degrees – medical, science, engineering – and yes a solid Business Degree.

      the folks who shilly-shally through high school living the life of Riley academic-wise – are headed for the proverbial double-whammy – 35K in debt and a degree fit for the likes of Starbucks.

      It’s almost obscene that we now call this the “sharing economy” , eh?

      • >in the case of the sub-prime – it was the banks, not the govt .>

        Well, you would get some push back from me on this statement. In the same way that universities have responded to the government intervention, so did the banks, investment houses, etc. in the 2008 “crisis” I think you need to recognize that problem. You have no doubt read “Flash Boys”, about high frequency trading in the markets. Take a look at Regulation NMS, which led to the HFT mess. The government doesn’t have to be directly involved to introduce the kind of truly perverse incentives that cause havoc:

        “The rise of high-frequency trading (HFT) was encouraged by a regulation passed in 2005, which aimed to open large exchanges such as the New York Stock Exchange and Nasdaq to stiffer competition. The idea was to make trading fairer; it instead unleashed, in Lewis’s view and that of other critics, a tidal wave of algorithmic front-running by traders whose superfast connections to stock exchanges allow them to react to buying and selling before others can. ”

        “The S.E.C., responsible in the first place for the market rules, known as Reg NMS, that led to the mess, remained fairly quiet, though its enforcement director let it be known that the commission was investigating exactly what unseemly advantages high-frequency traders were getting for their money when they paid retail brokers like Schwab and TD Ameritrade for the right to execute the stock-market orders of small investors. (Good question!)”

        The SEC remained pretty quiet when approached by Michael Burry (See recent movie, The Big Short) about the problems caused by the government’s perverse incentives to create sub-prime mortages and the mortgage industry’s incentive to parley away their risk by creating all the CDO’s.

        Don’t tell me the government had nothing to do with the CDO and CDS’s.

        • Crazy – have you seen the list of Companies that the SEC has fined for their role in the sub-prime crisis?

          It would seem that if the govt truly encouraged them – that they would present that as an affirmative defense.

          Not a single one has – they all paid their fines and admitted wrongdoing.

          tell me why they did that? want the list of companies and their fines?

          • They did it to avoid the problem. Unlike my clients, they can buy their way out of a problem with money. The amounts they pay are chump change when you consider the time they would spend fighting the problem. Michael Millken recognized this when he pled out to the five charges in the late 80’s. Some say he got lousy advice from White & Case and never should have done it. But he recognized that fighting the stupid government simply impeded him from doing what he did best, which was make money for people. And I would like to see the list of companies and fines.

  7. The loan figures for UVA, W&M and VT are misleading.
    That is the average for all students, whether they have loans or not. The wealthier students do not have loans and there are some students from certain economic/ethnic strata who get all or most of college for free.

    Thus, the debt load for the large number of students in the middle is significantly higher than the figures reported. These are the students who are competing for a limited number of jobs while shouldering a crushing debt.

  8. Hardly chump change…. and as far as I know – not a single company claimed it was the govt that encouraged them to engage in their illegal activities. – not a one

    Number of Entities and Individuals Charged 198
    Number of CEOs, CFOs, and Other Senior Corporate Officers Charged 89
    Number of Individuals Who Have Received Officer and Director Bars, Industry Bars, or Commission Suspensions 53
    Penalties Ordered or Agreed To > $1.93 billion
    Disgorgement and Prejudgment Interest Ordered or Agreed To > $1.47 billion
    Additional Monetary Relief Obtained for Harmed Investors $418 million*
    Total Penalties, Disgorgement, and Other Monetary Relief > $3.76 billion

    actual list of companies:

    http://www.sec.gov/spotlight/enf-actions-fc.shtml

  9. Geeze -Crazy – even Virginia is going after the sub-prime guys:

    “Eleven banks to pay $63 million to Virginia to settle fraud allegations

    Eleven banks have agreed to pay a total of $63 million to settle allegations they defrauded the Virginia Retirement System during the real estate bubble that led the nation into an economic recession.

    Virginia Attorney General Mark R. Herring’s office announced the settlement Friday and said it was the largest non-health care-related recovery ever obtained in a suit alleging violations of the Virginia Fraud Against Taxpayers Act.

    The state sought to recover $383 million in damages, including $250.66 million of realized losses for the Virginia Retirement System when it was forced to sell toxic mortgage-backed securities.
    The state had alleged that the banks misrepresented the quality of those residential mortgage-backed securities, which had been sold to VRS starting in 2004.”

    http://www.richmond.com/business/local/article_1101c687-e76b-5ee7-8a04-fab65e2e02e5.html

    and notice, one again – not a single one of them claimed the govt made them do it!!

  10. Larry,

    Well, one of two things is happening here. Either I have failed to adequately explain, or you have failed to miss the point.

    You seem not to recognize the difference between the government going after somebody in order to 1. make political hay, or 2. cover their tracks,or 3. enforce legitimate rules against fraud, and the government causing the problem in the first place. I will try again.

    It is absolutely true that the enforcement actions you speak of have taken place. But look at the enforcement actions. Did you read them? The actions were/are against those who apparently knew they were packaging crap and then misrepresented the crap to the buyers. These folks were not the creators of the crap, so they could not claim that the government made them create the crap. Instead, they were the packagers and further repackagers of the crap. They then misrepresented what was in the package. The government didn’t force them to make misrepresentations, and misrepresentation in its extreme is ordinary fraud. Of course there will be enforcement actions.

    But you seem not to recognize that none of it would have happened if there had been no CDO industry to begin with. Had government not forced, by regulation, the financial institutions to book a certain % of sub-prime loans, there would have been no incentive to get rid of them as soon as possible. There would have been no incentive for Goldman and Deutsche to invent something (the CDO, the CMO, the Credit Default Swap) to try to take care of the problem. After it became apparent through the efforts of Burry and others, that, in the words of the pps link I posted, “crap is still crap”, there were still further efforts to bail out the crap. After that, it simply snowballed. In other words, had the markets been left to themselves, no sub-primes would have been issued and the packaging of crap would not have existed. It was liberal left thinking that said, “Oh, the poor dears should have houses, let’s waive all the normal credit requirements.”

    Goldman et al, couldn’t claim the government made them do it because they were at least one or two steps removed from the original problem. There simply is no affirmative defense to stupidity.

    Why don’t we leave it this way: I’ll recognize (how could I not?) that the financial institutions were stupid in trying to bail out this mess and make money doing it. I’ll also recognize that some actors committed fraud, as individuals will often do. In return, you’ll recognize that the origin of the problem started with the federal government attempting to tamper with the free market. No tampering, no structural incentive to commit fraud. This is what the rule of law is about, Larry. When you set up a law/regulation/rule that attempts to tamper with long established free market principles, all hell can play. I’ll await your concession as to the origin of the problem

  11. re: ” Had government not forced, by regulation, the financial institutions to book a certain % of sub-prime loans, there would have been no incentive to get rid of them as soon as possible. ”

    that’s a fairy tale Crazy.

    and the thing is – WHO was packaging these loans if not the ones who were selling them as investments?

    name the actual companies that were making the sub-prime loans and show the regulation that was “forcing” them to make those loans.

    then go look at the companies fined – and see who’s not on both lists.

    you guys have to believe in your ideology or else you have to admit that regulation is needed.

    I understand that – but until you can provide some proof of your claims – it’s a fairy tale – an ideological myth…

    the only links provided are not credible links – they’re unsubstantiated accusations from the right wing media and folks who fancy themselves as discoverers of conspiracies…

    no one – not a single company has claimed the govt forced them to do these much less provided anything that substantiated that claim.

    it’s totally bogus.

  12. “No one – not a single company has claimed the govt forced them to do these much less provided anything that substantiated that claim.”

    How do you know this, Larry? Have you pored through the depositions and interrogatories of these cases? No. You don’t know what evidence has surfaced — but you act as if you do. You make surmises from the fact that cases are settled, and then denounce everyone else’s surmises as “unsubstantiated accusations” and “conspiracy theories.” Your favorite rhetorical trick is putting the burden of proof on others to disprove what you assert to be true. If they can’t disprove you, you deem yourself validated.

  13. From “Reckless Endangerment” by Gretchen Morgenson and Joshua Rosner:

    In 1994 Bill Clinton launched the National Partners in Homeownership, a private-public cooperative with the goal of raising the number of homeowners across America. “The government enlisted help from a wide swath of American industry. Banks, home builders, securities firms, Realtors — all were asked to pull together in a partnership made up of 65 top national organizations and 131 smaller groups.” …

    Amid the hoopla surrounding the partnership announcement, little attention was paid to its unique and most troubling aspect: It was unheard of for regulators to team up this closely with those they were charged with policing. …

    In just a few short years, all of the venerable rules governing the relationship between borrower and lender went out the window, starting with the elimination of the requirement that a borrower put down a substantial amount of cash in a property, verify his income, and demonstrate an ability to service his debts. …

    Fueled by dubious industry practices supported by many in Congress and unchecked by mot of the regulators charged with oversight of the lending process, the homeownership drive helped to plunge the nation into the worst economic crisis since the Great Depression. …

    The partners in the Clinton program embraced a corrupt corporate model that was also created to promote homeownership. This was the model devised by Fannie Mae, the huge and powerful government-sponsored mortgage finance company set up in 1938….. Fannie Mae had perfected the art of manipulating lawmakers, eviscerating its regulators, and enriching its executives. All in the name of expanding home ownership. …

    Fannie Mae led the way in relaxing loan underwriting standards, for example, a shift that was quickly followed by private lenders. [CEO James A.] Johnson’s company also automated the lending process so that loan decisions could be made in minutes and were based heavily on a borrower’s credit history, rather than on a more comprehensive financial profile as had been the case in the past. Eliminating the traditional due diligence conducted by lenders soon became the playbook for financial executives across the country. …

    Washington played not one but three starring roles in creating the financial crisis of 2008. First, it unleashed the mortgage mania by helping to relax the basic rules of lending that had been in place for decades. Then its policymakers looked the other way as the mortgage binge enriched a few and imperiled many. Even after the disaster hit and the trillion-dollar bailouts began, Congress and administration officials did little to repair the damaged system and ensure that such a travesty could not happen again.

    That’s from the prologue. The rest of the book documents those claims. Try reading it, Larry.

    • talk about making things up from whole cloth!!!

      Jim – where in your excerpt from this bogus book is anything other than claims without producing one piece of evidence to support it?

      This is how you guys think apparently. someone can spin a tale – make it sound plausible and then claim it’s documented!!!

      show me the documentation guy… all the book is – is one made up passage after another without an iota of anything at all substantiating what she claimed.

      If what she said was true – then why did none of the accused companies produce evidence of what she was claiming?

      No memo. no regulation. no policy statement. nothing!!! and you guys continue to propagate this TRIPE!

    • Jim – how about you provide some documentation that shows what the govt “forced” on lenders with the “National Partners in Homeownership”.

      why don’t you GOOGLE it and come back with some evidence of what it did?

      why do you believe this stuff without verifying it?

  14. As Jim says, your argument is by assertion, one of the informal verbal fallacies. You try to shift the burden to others after you assert. Jim’s citation pretty much answers it. What do you have, Larry?

    Unfortunately, I have to disengage at this point because I am preparing to leave town in the morning and I do actually have to shovel the driveway in order to do so. I am happy to engage in this debate when a get back a week’s time. I will not run away from this as the left does. Will you, Larry?

    • Crazy, I’ll say one thing for Larry: He never runs away from an argument.

      I’ll also say this: He’s not making up stuff from whole cloth. I’ve been having a similar argument with a friend who is a business school professor at the University of Richmond — and is teaching a course on the 20o8 recession. He is a very reasonable, fair-minded fellow (for a different perspective, he distributed one of my blog posts to his class), but he hadn’t heard of the Morgenson book nor was he familiar with the arguments in it.

      Have a good trip.

      • do you guys THINK that ANY of the companies accused of wrongdoing would have refrained from producing the evidence that “forced” them to make bad loans?

        when I say – not a one – I mean exactly – NOT A ONE has produced that evidence and you can be sure if they had it would be trumpeted all over the right wing echo chamber.

        and HEY – I’m RESPONDING to the CLAIMS that the “govt made us do it”.

        I think it’s crystal clear that no evidence has been presented by those who make the claim – none.

        and yet the folks who “believe” continue to make it up – as if bcause they say it – it’s true and must be disproven!!!

        this is the kind of logic the right uses in this.

        we make the claim – you have to disprove it!!!!

        yes indeed!!!!

        look again at all of these companies that have been accused of FRAUD and admitted they were guilty of it.. They KNEW these securities were bad because they themselves had been bundling them and selling them!!

        when you guys produce the evidence to support YOUR CLAIMs then at the least I’ll believe you’re no longer in the business of making it up!

        but until then – it’s as clear as a bell – that you’re making it up as part of your beliefs…

      • re: ” Crazy, I’ll say one thing for Larry: He never runs away from an argument.”

        I search for the truth Jim. Look at my posts… over the years. I do not make stuff up. I OFTEN provide links to back up what I am posting.

        What I find over and over and over these days -are fabrications, propaganda, misinformation from the right routinely – where basic fundamental things – fairly easily proven – are just outright misrepresented!

        I’ve ask you – for instance, over and over to post how MedicAid Expansion is ACTUALLY funded since you (and others) repeat over and over the same falsehoods from the opponents that talks about the deficit – which is patently false – and I bet you know it …. so I’ve asked for you to post the truth about the funding – and where is it? Have you every admitted it’s not funded from general revenues?

    • Crazy – I am RESPONDING to the claim made! l How do you guys reason here? I am ASKING for you to PRODUCE evidence that supports the claim you are making…. WHERE is it?

      Jim thinks it’s a book where someone repeats over and over the claim without producing one thing that proves it!

      GOOD LORD Guys!!!

  15. Regarding Jim comment from “Reckless Endangerment” by Gretchen Morgenson and Joshua Rosner. I have not read the book but agree with general thrust of their comments copied in above but have a different slant as to the moving parties. For example: their statement:

    “Fannie Mae had perfected the art of manipulating lawmakers, eviscerating its regulators, and enriching its executives. All in the name of expanding home ownership. …

    Fannie Mae led the way in relaxing loan underwriting standards, for example, a shift that was quickly followed by private lenders. [CEO James A.] Johnson’s company …”

    My slant on what happened was quite the reverse. That CEO’s Johnson and Raines inflicted poor underwriting and accounting standards on Fannie Mae at the behest of their political masters. And those political masters gave them the sword and shield they needed to deepen those bad habits until they ignited the match that blew up the US economy. The corruption took over 15 years to gestate then spread and ignite the debacle.

    The underlying problem began after the S&L collapse when Federal Regulators (FSLIC & RTC) forced the liquidation of S&L troubled assets. Here in 1990s Wall Street began to package multifamily housing projects, mixing prime and subprime into securities wrapped by Fannie Mae’s guarantee. Here the political pressure from Executive and Congress shoved a bad result into the marketplace, doing far more harm than good.

    One of the most pernicious results was the later political pressure exerted on Fannie to shift the same technique developed for troubled multifamily projects over into sub-prime loans in minority neighborhoods. This is what exploded the economy.

    I wrote about this several years ago around 2012 or 2013 on Bacon’s Rebellion. These comments still have relevance to what is happening today, in all sorts of public private partnerships:

    “As we grow far too accustomed to our own bad habits, we cannot see how over time those bad habits enlarge and twist themselves out of shape in ways that put us finally on a road to our own failure, producing catastrophic results.

    This lesson we never seem to learn. I suggest that now this public private financing of roads, tunnels, and bridges, and attendant private assumption of essential government functions may be growing out of control.

    And that, in so doing, these ever more complex public private transactions are twisting our state and local governance institutions and private enterprise structures out of shape, leading us into catastrophic events.

    This is happening right now in government financing of student loans, despite the very recent US financial collapse sparked by public private manipulation of the housing market. So we never seem to learn.

    See Playing with Other Peoples Money article on this website. Here’s a shortened and edited version on one long comment below that article.

    “Private enterprise is no more moral that government. Out of control experts can be found in abundance everywhere. They work for governments and private enterprise too. Indeed many private enterprise experts work for government for lots of money. And the successful ones learn how to work the system, how to win low bids and flip them into maximum profits. Unfortunately today’s financial realities can easily acerbate this all to common and current government, expert and private sector overreach.

    Take, for example, how non-govt investment rating agencies told non-govt Banks that sub-prime MBS were “prime” investment grade securities?” This rating agency debacle is example of experts run amok, driven largely by government mandates. Muni bonds being only one of endless examples.

    But where things most likely get bent out of shape is where politics enters the marketplace to achieve political results. In the case of sub-prime mortgages it was Fannie Mae following the dictates of its political masters.

    In short, a creature of the Federal government, Fannie Mae, was captured by Congressional politics. Congressional mandates shoved Fannie into the business of using its credit to guarantee sub-prime mortgages that were securitized then sold to the public until ever more and ever riskier loans polluted the nation’s pool of home mortgages and the scheme collapsed.

    This is a long story. But one could see the risk of these structures being guaranteed by Fannie long before the sub-prime debacle. Real estate is unique. It’s unlike other assets typically used for security. It’s very local and peculiar insofar as its quality as security of loans. So it’s properly the business of local lenders familiar with the unique nature of their local market. Hence the first multifamily Wall Street securities wrapped by a Fannie Mae Guarantee done in the early 1990′s which involved mixing “sub and prime mortgages” from across the nation raised red flags among those knowledgeable about real estate by reason of real experience. But the Wall Street folks, whose black box computer models and endlessly complex esoteric financial structures comprising multiple levels of risk (differently priced tranches cutting across thousands of loans) were untethered to the dynamics of the real estate securing them, could not see the risks.

    Nor would anyone see the risks – not the government regulators, the Congress, Fannie Mae, Wall Street, the rating agencies, lawyers and appraisers, bundlers and mortgage closers and brokers. Nobody would listen or act responsibly. Too much pride, too much political influence, to much political posturing and agenda, and to much money, was involved.

    And, of course, as always happens the crooks (smelling blood on the water) arrived for the killing. But this happened mostly later. Still, from the get go, people were making tons of money for getting these troubled assets off the books of troubled lenders as required by yet another government program of 1990′s regulations, so everyone forged ahead.

    Money corrupts. So experts began to run amok, fueled by the fact that the experts creating the problem earned huge fees doing it before they offloaded the “hidden risk” to the public. Fannie Mae provided the perfect cover, giving triple A credit to less than triple A product. Thus a federally created program that for decades had built a liquid highly efficient mortgage market for properly underwritten home loans that was rightfully the envy of the world, was hijacked.

    The problem was further turbo-charged by more politics and government intervention. The ruse behind this maneuver was as American as Apple pie. Every citizen gets to own a home of his or her own, irrespective of their ability to pay for it. (a simplified overstatement but not by much.)

    Of course, Wall Street and conduit bundlers of sub-prime loans (all private) were only to happy to jump in, make a bundle, then offload even more junk onto the public, leaving Fannie Mae holding the bag by reason of its federally mandated guarantee.

    It was a perfect deal by Federal government and Wall Street standards. The politicians got all the credit. Wall Street and conduits that packaged the mortgages got high risk free cash profits up front. The taxpayer got the shaft (gigantic losses) in the back. The sub-prime homeowner got his own bankruptcy by reason of his federal government feeding him and/or her financial crack cocaine, all for political advantage.

    One great tragedy was the near ruination of Fannie Mae, which up until the early 90s was a poster child of successful government at work. The benefits that Fannie brought to this nation are incalculable. One can say this institution, as much as or more than any other, brought the American Dream to the the American people. Every credit worthy family got a home of their own, one they could afford, from a starter home, right up the ladder. No other country enjoys the success that Fannie Mae created for us. But how easily even the greatest of Federal government programs can be twisted out of shape, and then used for purposes that poison the financial health of a nation, its individual families and citizens. And this poison goes right to the core of the American dreams, our homes.

    And, while private companies, more often than government, put the brake on experts taking undue advantage, and private companies typically cannot afford to go broke, those rules get blurred if private companies get tangled up with government regulations, mandates, and guarantees that twist these iron rules of private enterprise out of shape, and so thwart the rules of free enterprise functioning within a properly regulated marketplace.

    Here the problem started in the 1990’s after long success when Multi-family securitization by Fannie Mae began to include the bundling big commercial individual mortgage loans (each secured a rental housing project) with weak credit into packages of stronger loans, matching risks, to get the weaker loans off the books of troubled S&Ls as defined by federal law.

    So here a government bail out program began to twist the market. It was also a logical first step to later securitizition of INDIVIDUAL home loans by mixing sub prime individual loans in with prime loans, and selling them off together. The practice, fueled by politics, driven by political influence, and the politicians need to get himself reelected, quickly began to fed on itself, growing with each election, and ever higher profits for those who could offload the debt, under the cover of a federal guarantee.

    The gigantic failure that resulted shows how gov. intervention as a player in the marketplace, tilting free markets to government mandated results, so often results in unintended consequences, often catastrophic ones. ”

    — Bottom Line —

    The above example shows how a Government that inserts itself as a chronic, deep, and continuous player in free markets can easily blow up the market. Obviously, the fact pattern of roads, bridge, and tunnels differs quite a bit. But I suggest that when a society and/or its government encourages its private business sector to become a chronic, deep, and continuous player in the historic tasks of public governance, that society and government is also playing with fire. One that can easily flare out of control.

    • It is important to note that these CEO’s were political appointees. They arrived at the head of Fannie Mae carrying the culture, ethics, aims and ideologies of the political establishment in power, not the ethic and culture of Fannie Mae. In my opinion it was from there that they when about changing the how Fannie Mae did it work, to satisfy and /or in response to the political establishment in power at the time. Otherwise they could not have, and likely would not have, tried to do, what they in fact did and got away with for so long. That of course is common as mud in Washington DC.

    • It is also important to note that this variant of crony capitalism infects our body politic under both US Democratic and Republican Party regimes. And it has been alive and well since before the founding of the American Republic.

      “The (Jamestown) colony was a private venture, financed and organized by the Virginia Company of London. King James I granted a charter to a group of investors for the establishment of the company on April 10, 1606. During this era, “Virginia” was the English name for the entire East Coast of North America north of Florida. The charter gave the company the right to settle anywhere from roughly present-day North Carolina to New York state. The company’s plan was to reward investors by locating gold and silver deposits and by finding a river route to the Pacific Ocean for trade with the Orient.”

      See http://www.britannica.com/place/Jamestown-Colony

      George Washington was a notorious crony capitalist. This is one reason why Washington DC and his Patomack Canal and his vast landholdings were so close together in location and time, and why he also insisted, using bare knuckle politics, that parts of Fairfax along the south shore of the Potomac be carved off and included within District of Columbia.

      Similarly the privatization of Airports under President Reagan morphed in private over-reach activities by various public private partnerships such as those that we have recently seen with regard to the ill founded expansion and operation of Dulles Airport and closely related events.

      These problems or their lack instead relate to the particular ethics, morals, and systems of oversight embedded within a culture at particular times and the ethic of individual players during those times, rather than any theory of INHERENT corruption within the US Democratic or Republican Party.

      This, however, is quite distinct and from the inherently authoritarian or totalitarian systems of government rule, such as Fascism or Communism, where business, commerce, and “religion” must be merged into or otherwise controlled by the central government if the political system is “to work”.

  16. here’s the deal. The claim is made over and over that the meltdown was caused by the govt “forcing” companies to make bad loans.

    I ask for the folks that say this to provide the law, regulation, policy, words -that the govt actually did this. Something beyond just a claim or belief.

    I ask if such a thing was actually true surely some documentation exists that demonstrates the govt was indeed forcing loans to be made – and such documentation would surely be produced and used by any company accused of making bad loans as proof they were forced.

    why would any company admit to fraud if they had proof the govt forced them to make bad loans?

    Now Jim, Crazy and others make the claim that it’s up to the person who says there is no documentation to “prove” the govt did force the loans – it’s up to him to prove the govt did not force the bad loans.

    that’s totally bizarre!!!! Is’s Nutty!

    it’s like a conspiracy theory – and you have to prove there is no conspiracy!

    😉

    how can one prove that the govt did not do it? how do you prove that?

    and how in the world would anyone deduce from that – that the govt DID do it without providing any evidence of it what-so-ever that they did? It’s nutty! No wonder we have conspiracy theories out the wazoo these days!

  17. Larry –

    You are living in a world detached from reality.

  18. An interesting article about Louisiana’s system of colleges & universities; two much duplication of programs; and, believe it or not, too much central overhead.

    http://theadvocate.com/news/13640103-123/too-many-universities

    • TooManyTaxes:

      You reference an excellent article. It’s required reading for anyone seriously interested in the scam called “higher education” in America today.

      It helps to show how far too many of our current institutions have lost their mission to educate students. How we’ve replaced that mission with a system that far too often wastes the precious time, talents, energy, aspirations, opportunities, financial resources of our students while it steals from them the chance for an education they desperately needed to succeed.

      And it casts a bright light on how this corrupt system works by illustrating that even strong efforts to cut its costs does ever greater harm to the already abused students while its protects and enhances the wealth and security of those scamming the students they’re bound as fiduciaries to serve.

      Here we speak of the college administrators and elite members of the Academy, the tenured professors, and their parasitic functionaries who live off the fat of today’s system of “higher education”, collecting high pay for very little work and almost no results at dysfunctional institutions that today perpetrate a vast hoax on generations of young Americans.

      Remarkably, this corrupt system is increasingly funded and enabled by our Federal Government via its public funding of loans or grants or its underwriting of private ones that serve to feed ignorance and bad habits to our nation’s young, killing their future while their teachers claim it an education.

      There are many aspects of this problem. One is the ever growing cost of elite universities. Every year these institutions teach ever more ignorance to many of the brightest kids on the planet, the kids who often succeed because of their God given talents, and do so despite their education, and because at graduation they receive a jump to the front the line not because of what they learned at their elite university, but because they got into it in the first place. After all grades are meaningless when all are inflated to absurdity.

      But the greatest scam is the one imposed on so many less talented students such as those “accepted or recruited” into those many institutions of higher learning in Louisiana where the goal is simply to fill up seats and keep students sitting there pretending to learn while going deeper in dept, when they should be somewhere else learning a trade or skill or work ethic and confidence necessary to not only survive but to thrive as productive fulfilled adults.

      Not long ago C’ville Resident on this blog pointed out the a student graduating from UVA, Virginia Tech, or William and Mary made a good investment by going there despite ever rising costs because their earning potential after graduation from there justified their time and cost.

      Likely this is often true, but too often is it by reason of the talent it took to get in, not the quality of the education they received there. I went to UVA when as I recall it was ranked to 11 nationally. Save two one semester courses, I learned next to nothing in class save for far too much nonsense. The advantages at UVA for me were the students I met there, and the reputation I carried away by virtue of the fact I had attended. So it was worth the cost for me.

      The great problem is that very few students nationally have the chance to attend Colleges and Universities with the reputations of UVA, W&M, and Va. Tech. And they don’t get any education either. Nor a reputation worth a plug nickel as a college graduate of where they went, or of friendships made. Nor in far too many cases on graduation they lack the necessary facility with writing, spelling, math, verbal expression, social skills or work and employ skills to find job. Then all they have is no job worth having plus 4-7 years on average of wasting the most critical time of their young adult lives, plus heavy dept load to pay off, and no useful skills when high skills are critically needed to get a start, and succeed, in today’s economy. In the young, such an experience can shatter one’s hope and confidence beyond repair.

    • TooManyTaxes –

      There is an important article in today’s WSJ by Professor Jacob E. Gersen at Harvard Law School.

      The article confirms your long standing contention that the Federal Government under the current administration circumvents the Administrative Procedure Act by declaring its ruling making non-binding guidance, allowing the rule makers to forgo the normal rules of publication and comments by the public before issuing a private rule, when in fact doing the exact reverse with a vengence, deploying the tactics of a bully to force compliance with their bonus non-binding claim.

      As you have pointed out before, one of many examples of this is the “Use of Title IX to Bully Universities” by the Department of Education.

      See “How the Feds Use Title IX To Bully Universities” by Jacob E. Gersen in January 25, 2016 Wall Street Journal.

  19. so much blather for so little benefit!

    GAWD!

    No one forces anyone to pay more for something than it’s worth. All those free-market blatherbutts completely forget this basic concept in their effort to endlessly blame others including govt for what they themselves refuse to do.

    If the folks who bleated the most piously about personal responsibility, integrity, etc… simply refused to be taken advantage of by the unprincipled – we’d not need anyone “forcing” those colleges to stop being “bad”. Who is going to force the colleges to do right – the govt?

    Now THAT’s amusing – ESPECIALLY coming from those who condemn govt left and right at the same time!

    The simple reality is – too many folks today -many who espouse “conservative” principles and whine about the deficit and debt and tax & spend – willingly go into 30K of debt or advise their kids to.

    Do as I say not as I do.

    Hypocrisy is the right word. those who blame govt – ALSO want govt to do – what they themselves won’t do…

    the blame game has become the generic “make me feel better” salve for too many faux conservatives who instead want “principles”.

    Real conservatives don’t take those loans much less whine incessantly about Colleges and Govt and anyone else they can blame.

    The country runs – as the people who live in it – conduct themselves. If you take the sugar – don’t be complaining about the taste.

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