Subprimes and such

[awm]

Elizabeth Warren won a debate scholarship to George Washington University at age 16. John McCain went to the Naval Academy (no tuition).

 

I see that Warren has also introduced legislation to reform the federal college loan program:

 

What will she do next?

 

Sadly, even these sorts of very popular proposals are unlikely to become law. The extreme gerrymander in the house of representatives has lead to a situation where Republican legislators routinely oppose such things (even with a majority of Republicans in support) because they only need to appeal to enough ultra-right-wing evangelicals (who "get out the vote" in primaries) and moneyed interests (to keep a more moderate Republican from getting the funding needed to have traction in the district) in order to guarantee re-election. The vast majority of Americans' opinions simply don't count for much any more.

[kenberg]

in response to Adam: The article that I read, and I will try to find it, referred to a plan to discontinue giving loans to the people who were the least likely to be able to pay them back. There were interviews with college administrators discussing how this would cut into the budget of the colleges. It seemed pretty clear to me that these administrators wanted the bucks to keep flowing from the government to the colleges, and if the mechanism was to funnel the money through loans that would most likely not be repaid, well that wasn't their problem.

 

Needy students can sometimes get help to attend private schools, they can also get help to attend public schools. I would love to see a solid study on this. My expectation is that, at least for most students, they can keep their indebtedness substantially lower by attending good public universities instead of private colleges. I would be very very surprised if a solid study showed otherwise.

 

Most unfortunately, many people seem to not understand the concept of a loan. The repayment part simply doesn't register. I have seen enough examples up close enough so that I can say this with confidence. A loan is money today, repayment is far away. This attitude twists everything. College tuition is high and getting higher? No problem, get a loan. We are making a mistake approaching it this way.

 

And by the way, reducing student loan interest rates to 0.75% sounds to me like a terrible idea unless you want to encourage everyone to borrow to the hilt. I might sign up for a few classes and take out one of those loans myself.

[mike777]

I strongly agree with you.

 

btw Oregon has a novel suggestion.....free college you pay for the next 30 years or so some fixed%(3%) of your future earnings. Make a lot the state wins.

 

In any event I like innovation and trial error for new ways to finance college.

 

---

 

" My expectation is that, at least for most students, they can keep their indebtedness substantially lower by attending good public universities instead of private colleges. I would be very very surprised if a solid study showed otherwise."

 

 

I was surprised as a 21 year old and later to find such discrimination against state colleges compared to the ivy league in hiring practices. I still to this day remember my interview with Northern Trust Bank..ugg. In some cases the insults or attitudes by those who hire was extreme. I speak as one who from first grade dreamed of getting into U of I.

----

---

 

 

btw my student loans were my debt, my parents had nothing to do with it. I worked but the student loans were a big help.

 

sidenote when I went back for my MBA much later in life I found scholarships going for the begging......I got a couple for no reason other then I think/assume I was the only person who asked for them....wow.

[kenberg]

How to get along with people from other backgrounds is, for me, a side issue. I seldom have issues, but my wife says it is because I am oblivious. Obliviousness is a useful trait sometimes. Anyway, this is not my focus.

 

I am looking at the loan program and asking whether the current approach makes sense.

 

Let me tell you about my scholarship. It was for four years, $600 a year, usable at any college in Minnesota. Note what it did not do: It did not tell me to pick a college, find out how much the tuition was, and then they would adjst the funding upward to suit my tastes. This makes enormous sense to me. The money was a great help, but I was given the responsibility to use this set amount in a manner that I thought best. Carleton College is a good private college in Minnesota. Macalester is a good private college that was (longish) walking distance from my home. The University was eight miles away and very definitely my choice. The scholarship was for $600 whether I chose one of the privates or picked the U. Duh. And more duh. I thought, and I have never seen a reason to change my mind, the U was the best choice and it left me with some cash to rent a boat for water skiing. Later it helped pay the bills when I decided to move out of my parent's home.

 

Perhaps my point is unclear, so let me try. Some younsters will need financial assistance in getting to college. Maybe a scholarship, or regrettably maybe a loan. I think a reasonable approach is to decide on how much help is needed for the kid to get a decent education, and key the support to that. Maybe then a rich uncle will add something to it and the kid can go to Yale. Or maybe not. That's for him/her and his/her family to work out. The support is designed to be very helpful in allowing the kid to get to some reasonable place, everything else is his/her responsibility.

 

Among other things, this will help the parents. Parents are supposed to be able to say no but it seems that many just are unable to say "No we cannot afford to send you to X and no we are not going to take out loans that it would take us decades to repay so than we can send you there. Go to Y, it's a good place and with a little help that we can pay back over not too long a time, we can manage that."

[blackshoe]

My experience: my parents divorced when I was in junior high. Part of the divorce agreement, I found out years later, was that my father, who at the time (early 60s) was making about 100K a year, would pay for college for all four kids. I don't know if a dollar limit was set on that. I went to Cornell. I was a National Merit Scholarship Finalist, but did not get a scholarship there. I would have received a NYS Regents Scholarship, but... "no financial need". So Dad paid for my first two years. Then I went in the Army. Came out, went back to school on the GI Bill. By this time, Dad was making considerably less (basically by choice - he moved away from the city). GI Bill wasn't enough. So, some work, some loans, a bit from Dad. And the Bill. Add two years of grad school (all on my dime, plus loans, the Bill and an assistantship) and I owed quite a bit by the time I was done. Took me six years to pay off the debt, but I did it. My oldest sister never went to college, the younger one did two years community college. My brother did a year or two at some small school in NH. I have no idea what financial arrangements were made or how much it all cost. I'm pretty sure four kids at Ivy League schools would have been tight for Dad, even before the pay cut. BTW, he (and both his brothers) went to Princeton.

[onoway]

I think that one thing that none of this discussion is addressing is that University education doesn't mean a whole lot anymore. Saw an ad a year or so ago requiring applicants for a traffic person for highway construction projects (the person holding the sign saying alternatively stop or slow) had to have a B.A. When so many graduates are unable to find work in their chosen field and end up at home again with a huge debt, a nicely framed piece of paper and a job delivering pizza or some such, perhaps a rethink of the whole system is in order.

[barmar]

On this week's "Real Time with Bill Maher", one of the guests was Mike Rowe, the host of "Dirty Jobs", a cable TV program where each week he profiles people working in disgusting professions. His message was that there are millions of jobs out there, but they go unfilled because Americans aren't interested in them. He's not even talking about the extremely unpleasant jobs from his show, or the grunt work that's filled by (mostly illegal) immigrants, but ordinary blue collar jobs: mechanics, plumbers, factory workers.

[blackshoe]

Inflating job requirements to add in unnecessarily high levels of education, or skills, or whatever, makes absolutely no sense to me.

[onoway]

Inflating job requirements to add in unnecessarily high levels of education, or skills, or whatever, makes absolutely no sense to me.

When there are a bunch of applicants for a job then employers tend to use criteria which on the face of it has little to do with the job in order to filter out the number of people they have to deal with. Education level is a quick and easy way of doing that and is very common here.

 

OTOH when jobs are much more plentiful than applicants it all goes out the window. A number of years ago I once phoned a store to ask if they had something or other in stock (as I had never been there)and got offered a job over the phone. They had no idea if I was the bride of Godzilla, and apparently didn't care.

[kenberg]

I can see how employers might think that a college education indicates some sort of ability to "stay on task", as the expression goes. But at some point this thinking may be counter-productive. A college grad who who is taking a job as a sign turner may have a couple of issues. First, he may be resentlul, believing he is entitled to something better. Secondly, he may not stay long. I don't suppose that the training [rogram is all that lengthy or expensive but still, you want some stability o the job. Quite likely he will someday just not show up, having gotten something better. Thirdly, although I would compliment any college grad who dealt with reality by taking the job he could get rather than the one he had hoped for, it seems likely, even in a tough market, that his ability to stay focused may not be all that is hoped for. Every college has students who are majoring in beer drinking, and some of them graduate.

 

I imagine that we all know college graduates we would not hire for any purpose, and high school graduates who are honest, hard working, effective employees. It wouold certainly be desirable to hire on relevant criteria, but perhaps employers find that shortcuts work. I think that they could do better with their selection process.

[kenberg]

For those opposed to regulation and who still claim Fannie Mae caused the financial meltdown and Great Recession: Source

Everyone should read and understand the implications of these two sentences from the 2011 report of the Financial Crisis Inquiry Commission (FCIC).

 

"From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers…it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were 'blacklisting honest appraisers' and instead assigning business only to appraisers who would hit the desired price targets" (FCIC 2011: 18).

[/Quote]

 

Winston, I apologize, I had not realized that it was you who had revived this thread. Oops, it was Y. Ok, I got that right.

 

Anyway, I would not draw nearly as extensive conclusions from these two sentences. First, there is the style:

 

"From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers

 

What sort ofa sentence is this? How does someone ultimately deliver something from 2000 to 2007? I suppose that he means that it was delivered in 2007 but what is the role of 2000? The date of the first signature was in 2000? Did they have, say, 8,000 signatures in 2005 but figured that they had to wait until they had 11,000? I would not want to draw conclusions from such a sentence..

 

 

More to the point, it would not surprise me at all to learn that there was some funny business going on with some appraisers and some banks. Wouldn't surprise me before 2000. between 2000 and 2007, after 2007, or today. [i should add, however, that i a recent transaction I regarded the appraisal as a thorough and professional job. He definitely did not just walk by and declare it to be a house]. Whatever the case, bad appraisal practices, through laziness or connivance, hardly constitutes proof that the actions of Fannie Mae had no effect.

 

 

Back to my riff on loans to parents for college expenses for the kids. As I mentioned, it seems that there are new rules that will result in loans not being made to people who, on the basis of their resources and their credit history, are unlikely to repay those loans. Sounds like a good idea to me, but they are taking some heat.

 

Smaller loans for people with lesser resources might work well. Just as people don't need ot live in McMansions on five acres, students don't need to go to high priced private colleges.

[blackshoe]

They had no idea if I was the bride of Godzilla, and apparently didn't care.

Sheesh. Stop following the news for a while, and look what happens. When did Godzilla get married? :D

[barmar]

Sheesh. Stop following the news for a while, and look what happens. When did Godzilla get married? :D

Probably some time before Son of Godzilla came out.

[kenberg]

Probably some time before Son of Godzilla came out.

 

A traditional sort of guy, is he? Very reassuring.

[y66]

I posted that story about Warren and McCain teaming up to bring back Glass-Steagall here because this thread came up when I searched for Glass-Steagall and this legislation seems like a good, partial solution to the problem of banks using FDIC insured (?) deposits to make dubious loans. It is heartening to me to see Elizabeth Warren fighting for the middle class and McCain showing signs that he still occasionally remembers what responsible governing looks like.

[billw55]

I can attest that appraisals were generally a formality, and expected to reflect the value that the bank intended to loan. After a point I wonder why they bothered at all. Even when we refinanced last year to get in on the low rates, the appraisal came back at the exact amount we originally paid - no way that's a coincidence.

 

I have a friend who works in the mortgage industry. He tells a story about the company he was working for in the mid 2000s. He had concerns about how aggressively they were lending, and brought these concerns to his supervisor. He was told, essentially, "we don't care if the borrowers can afford it in the long run. We just want them to make the first few payments so we can sell the loan." Such was the business then.

[blackshoe]

I have a friend who works in the mortgage industry. He tells a story about the company he was working for in the mid 2000s. He had concerns about how aggressively they were lending, and brought these concerns to his supervisor. He was told, essentially, "we don't care if the borrowers can afford it in the long run. We just want them to make the first few payments so we can sell the loan." Such was the business then.

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

[kenberg]

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

 

Your question reminds me of an interview with John Mitchell during Watergate days. I wish I had it on tape but I swear it went something like this:

 

Interviewer; You stated under oath that you did not do X [i forget what X was], is that right?

JM: Yes

Int: The record now shows that you definitely did do X, is that right?

JM: Yes

Int: Isn't that perjury?

JM: No.

 

What I get out of it all is that fraud, or perjury, becomes fraud or perjury if you are caught and convicted. Otherwise it is not.

 

I don't see matters that way, but apparently more than a few do.

[billw55]

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

Agree. There was a lot of this kind of fraud, and a lot of suckers.

[mike777]

I posted that story about Warren and McCain teaming up to bring back Glass-Steagall here because this thread came up when I searched for Glass-Steagall and this legislation seems like a good, partial solution to the problem of banks using FDIC insured (?) deposits to make dubious loans. It is heartening to me to see Elizabeth Warren fighting for the middle class and McCain showing signs that he still occasionally remembers what responsible governing looks like.

 

 

btw just a quick reminder for those who may not be aware. If you separate the investment banks that may be a very good idea for many reasons but they still get their funding(loans) from the big FDIC banks. This is often in the form of very short term loans, using triple A rated collateral. Yes the same triple A rated stuff from 2008.

 

Clearly this business model in 2008 was destroyed.

 

Keep in mind we need investment banks in whatever form you prefer, they provide a very important capital function.

 

With all of that said we cannot continue down the road with these too big to fail banks.

[blackshoe]

Your question reminds me of an interview with John Mitchell during Watergate days. I wish I had it on tape but I swear it went something like this:

 

Interviewer; You stated under oath that you did not do X [i forget what X was], is that right?

JM: Yes

Int: The record now shows that you definitely did do X, is that right?

JM: Yes

Int: Isn't that perjury?

JM: No.

 

What I get out of it all is that fraud, or perjury, becomes fraud or perjury if you are caught and convicted. Otherwise it is not.

 

I don't see matters that way, but apparently more than a few do.

Heinlein was right. These are the Crazy Years.

[Winstonm]

btw just a quick reminder for those who may not be aware. If you separate the investment banks that may be a very good idea for many reasons but they still get their funding(loans) from the big FDIC banks. This is often in the form of very short term loans, using triple A rated collateral. Yes the same triple A rated stuff from 2008.

 

Clearly this business model in 2008 was destroyed.

 

Keep in mind we need investment banks in whatever form you prefer, they provide a very important capital function.

 

With all of that said we cannot continue down the road with these too big to fail banks.

 

Nothing wrong with investment banks gambling - a lot wrong with depositers' banks gambling. Even more wrong with unregulated, opaque commodity trading by banks of any flavor.

[mike777]

Nothing wrong with investment banks gambling - a lot wrong with depositers' banks gambling. Even more wrong with unregulated, opaque commodity trading by banks of any flavor.

 

 

Yes *I just want to remind many of you that FDIC banks will still be lending billions and billions and billions to investment b anks after you separate with new laws.

 

 

FDIC banks will still be as you put it gambling.

 

btw any commodity trading fdic banks do today have thousands of pages of regulations.

 

 

There is much to be worried about.....zero regulation is not the issue.

 

 

A much bigger issue is and has been as I have repeated in these forums...over regulation/rules/laws...little enforcement.

 

----------------

 

 

banks by their very nature must gamble ...always...they borrow short term and lend long term....a mismatch of assets and liabilities. You can never I repeat never have banksnot take on risk..lots and lots of risk.

This is step one to understand.

Step two is to have a system that accepts indeed wants failure as an important part of the banking system.

 

If you keep demanding stability you will just keep introducing long term fragility.

 

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!

[Winstonm]

Yes *I just want to remind many of you that FDIC banks will still be lending billions and billions and billions to investment b anks after you separate with new laws.

 

 

FDIC banks will still be as you put it gambling.

 

btw any commodity trading fdic banks do today have thousands of pages of regulations.

 

 

There is much to be worried about.....zero regulation is not the issue.

 

 

A much bigger issue is and has been as I have repeated in these forums...over regulation/rules/laws...little enforcement.

 

----------------

 

 

banks by their very nature must gamble ...always...they borrow short term and lend long term....a mismatch of assets and liabilities. You can never I repeat never have banksnot take on risk..lots and lots of risk.

This is step one to understand.

Step two is to have a system that accepts indeed wants failure as an important part of the banking system.

 

If you keep demanding stability you will just keep introducing long term fragility.

 

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!

 

Wikipedia says:

The Commodity Futures Modernization Act of 2000 (CFMA) is United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. It was signed into law on December 21, 2000 by President Bill Clinton. It clarified the law so that most over-the-counter (OTC) derivatives transactions between “sophisticated parties” would not be regulated as “futures” under the Commodity Exchange Act of 1936 (CEA) or as “securities” under the federal securities laws. Instead, the major dealers of those products (banks and securities firms) would continue to have their dealings in OTC derivatives supervised by their federal regulators under general “safety and soundness” standards. The Commodity Futures Trading Commission's (CFTC) desire to have “Functional regulation” of the market was also rejected. Instead, the CFTC would continue to do “entity-based supervision of OTC derivatives dealers.” [1] These derivatives, including the credit default swap, are a few of the many causes of the financial crisis of 2008 and the subsequent 2008–2012 global recession.

[mike777]

Wikipedia says:

 

 

"There is much to be worried about.....zero regulation is not the issue."

 

I refer you back to my main point:

 

"If you keep demanding stability you will just keep introducing long term fragility.

 

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!"