A Higher Education Bubble?

                A Wall Street Journal Op Ed recently quoted Peter Thiel, a successful investor and Libertarian leaning thinker, as saying we’re in a “higher education bubble.”  “University administrators are the equivalent of subprime mortgage brokers,” he says, “selling you a story that you should go into debt massively, that it’s not a consumption decision, it’s an investment decision.  Actually, no, it’s a bad consumption decision.  Most colleges are four-year parties.”  It reminded me of some comments by Dr. Peter Morici in a recent CNBC Op Ed, in which he said:

Politicians have deluded themselves into believing an education system that encourages young people to “find themselves,” instead of “finding something productive” will give society enough scientists and engineers to solve the tough problems needed to perpetuate growth.

They have deluded themselves into thinking that professors spending six hours a week or less teaching and the rest thinking great thoughts, or verbally pistol whipping the society that supports them, is somehow wealth creating. . . .

Most national leaders have been educated in squeaky clean environs like Harvard, Oxford and the University of Tokyo believe anything created by hand, other than an exquisite meal or with a computer keystroke, is somehow unworthy of western post-industrial society.

                Ouch!  So are we in a higher education “bubble?”  Well, most people don’t see the bubble until it bursts.  And I’m not sure this one is going to burst (at least not quickly), because society has become more and more conditioned to sending young men and women to college.  Still, incurring the costs of a bachelor’s degree seems less and less worth it these days.  Our university system is churning out more and more college graduates per year, and the cost of educating those graduates continues to increase every year.  So the value of the degree is degraded as more and more people have it, yet the cost keeps going up.

                Have you heard that “30 is the new 20” and “40 is the new 30?”  Well that is, in part, because college is the new high school and graduate school is the new college.  “Getting ahead” no longer happens with a 4 year university degree.  The only problem is college costs a whole lot more than high school, not just in tuition but in the 4 (or 5) productive working years it subtracts from a career.  Politicians have long pushed higher education as a cure for our ills (President Obama—“A country that out-educates us will out compete us”), but we can’t be a nation of leaders with no followers.  Pushing everyone to get a college degree isn’t obviously a good idea.  After all, many young people choose to pay a six figure sum to party their way through college with a degree in Classics or Art History only to find their job prospects rather dim upon graduation.

                 Even if you assume that all students are hard working and dedicated, you have to question the wisdom of trying to send every breathing body into the university system.  As Judge Posner notes, “[t]here probably are diminishing returns to providing higher education, because IQ provides a ceiling beyond which educational effort is wasted on students. . . .  Many colleges offer what amounts to a remedial high school education, postponing the students’ entry into the work force. . . .  With ever-increasing specialization of the workforce, there is an argument for making education increasingly vocational.”

                It is considered blasphemy in some places to question the wisdom of higher education for all, but we don’t need to be armed with statistics to know that the rapidly rising cost of education cannot go on forever as its value continues to decrease (the more degrees, the less value those degrees have).  A university system run by and for professors, and a political class that is increasingly enamored by (and that caters to) the university elite, means we will not see this “bubble” burst for some time.  Still, it can’t go on indefinitely.  Pretty soon college tuition will simply be an entry tax on workers because there will be no decent jobs available to anyone without a college degree.  That’s white collar welfare for historians, sociologists, psychologists, and professors of ethnic studies, but it is a heavy burden to place on the human capital of an economy.  At some point the system will need to be reconfigured.

What a ClusterF*&K--Foreclosures and Robo-Signers

                Oh what a mess!  Apparently in the heyday of securitizations of “liars loans” and other investment grade instruments (later to be viewed, in 20-20 hindsight, as “toxic” rather than safe), banks were a little shoddy in how they handled the paperwork.  Loans were originally made the old fashioned way—by having a financial institution prepare the note, security instrument (mortgage or deed of trust), and related documents, a notary witness the signing and a title company or other agent record the security instrument—and then were converted into securities by pooling the loans into trusts or other vehicles.  The process of pooling the loans required assignments of the note and security instrument to an agent acting on behalf of the holders of the securities (like the trustee in a bond indenture).  Ideally the ultimate recipient of the note and security instrument (the agent) would record a transfer of the security instrument in the real property records of the borrower.

                I’m not an expert in real estate mortgage backed securities (MBSs), but I can only imagine how chaotic it must have been to be a professional in this area in recent years.  It is probable that various originators, servicers and agents had different practices when it came to their paperwork.  Some may have required the originators to hold the original notes and security instruments, while others may have required that paperwork to be transferred to the servicers or agents.  Given that these MBS pools included hundreds or thousands of mortgages and assembled and sold to investors in a matter of days or weeks (as opposed to months), it is also probable that many deals closed before each original note and security instrument was reviewed in its original form and properly filed away.  While this may seem shoddy, the originators, servicers and agents were all parties to very strict agreements requiring them to take further action to facilitate the MBS securitization.  Professionals in the industry probably relied heavily on the fact that, in the future, all of the participants would cooperate to locate paperwork and prosecute the foreclosure in compliance with those agreements.  What a difference a few years makes!

                Fast forward to the current crap (so-called “financial crisis” followed by “Great Recession” followed by “anemic recovery” followed by whatever we’re in now), and the system is in turmoil.  Many originators, servicers and agents have merged or gone out of business.  Banks and non-bank investors have purchased loans in bulk, and many of these loans have been assigned several times since they were made.  When it comes to foreclosure, relying on the cooperation of the original parties to securitization to locate paperwork is simply impossible in many cases.  After all some of those parties are gone.  So what to do?

                Well, clearly the banks were overwhelmed simply with the volume of foreclosures and were cutting corners to clear the decks.  They may have been backdating assignment documents and employing unsophisticated people sign in court records that they “reviewed” loan documents in many thousands of cases (the so-called “robo-signers”).  Some have opined that this is much ado about nothing, and they have a point.  After all, these loans are in foreclosure because the borrowers have defaulted on their payments.  It doesn’t appear that anyone who is actually current on their payments has been wrongly kicked out of their home.  That said, there should still be come integrity to the process.  Whether the lack of integrity warrants the political gnashing of teeth that has come as a response is debatable.  That said, the unjustified finger-pointing and exaggerated claims for political gain are only just beginning.  Welcome to democracy, particularly in election season.

                Who loses in all this?  Well, a lot of us, at least to the extent we are:

                Bank Shareholders.  The pension funds, mutual funds, and other investors who hold shares in lenders (including the US Treasury in some cases) will lose.  They will lose because it will take them longer to eliminate the bad loans from their balance sheets, which may force them to raise more capital (dilutive to shareholders) or simply delay their ability to make performing loans (delaying interest payments and resulting revenues from those loans).  And if someone decides to try to hold banks accountable to aggrieved buyers of homes for delays in closings, watch out.

                Homeowners.  The housing market is desperately searching for equilibrium.  To get there it needs to rid itself of the backlog of foreclosures.  While keeping people in “their” homes (as opposed to the banks’ homes) is good politically, it doesn’t come without a cost.  Sellers have no pricing power with banks having to dump this large volume of homes, so prices stay low.  This hurts people who are trying to move (perhaps for a new job) or refinance.  And a halt to foreclosures just prolongs the pain, because it leaves an overhang of inventory that is due to be dumped on the market.  Make no mistake, these homes will be seized and sold eventually.  Waiting for extended periods of time is not good.

                Buyers.  Buyers of homes in foreclosure are now forced to wait to close.  They’re going to have to live somewhere while they wait, and they may not even be able to wait.  Buyers who are relocating for a new job are not going to be able to postpone their start date (as if they’d even ask) due to this mess.

                Participants in the Larger Economy.  Obviously to the extent housing impacts the larger economy (not an insignificant impact), everyone suffers.  Refinancing slows, consumption is delayed, the velocity of money decreases.  Large scale delays of any type of business transaction will cause harm, and delays on such a large scale will cause a lot of pain.

                Not the borrowers.  Indeed they’re going to prove to be the winners, because they’ll undoubtedly live a few more months for free in their homes.  A lot of people are now living for free, either because they can no longer afford to pay their mortgage or because they no longer want to pay their mortgage.  We sympathize with the first group of people, although it is still difficult to justify forcing others to pay for their housing.  We can despise the second group of people, although they are simply acting in their self interest.  Either way, clearing the system of its dry brush is essential.  The defaulted borrowers who are living rent free are simply taking advantage of the inefficiencies built into the foreclosure system.  Increasing those inefficiencies just makes things worse.

                Who is at fault?  This is largely an irrelevant question.  Clearly some politicians will use this scandal as an opportunity to bash banks and businesses in an attempt to get a few ill informed votes in November.  In my mind this is a symptom of the larger problem, not really a problem in and of itself.  In a more normal circumstance the bank officers would be able to track down the foreclosure documents for each delinquent borrower, review them, sign off on that review, and then proceed with the foreclosure.  But these aren’t normal circumstances.  Banks are overwhelmed.  The system can’t handle the volume.  Now you can blame the banks if you like, but ultimately it is the responsibility of policymakers to work things out.  Let’s hope they’re up to the task.

Why Wall Street: Money Never Sleeps is a Truly Great Movie!

                While watching the much anticipated sequel to Oliver Stone’s original Wall Street, a truly great movie, I was struck by how truly painful that sequel is to watch.  I really wasn’t expecting much, yet Stone somehow couldn’t even rise to the diminished standard I had set for him.  Shia LeBoeuf’s Jake is unconvincing as a young Wall Street executive.  And Carey Mulligan’s Winnie is wholly unsympathetic, crying and whining throughout the movie for no legitimate reason, because she blames her father without any apparent justification for the death of her brother Rudy.  As a romantic couple they just looked tired, like high school sweethearts that have long since grown apart as their lives went in different directions.  So I found myself laughing when I was supposed to be crying, cheering when I was supposed to be groaning, and shaking my head when I was supposed to be appreciating the wisdom of some politically charged comment.  To be honest, I was disappointed when I left the theater, robbed of a couple hours of life that I’ll never get back.

                In the aftermath, however, while taking about the movie with a friend, I realized that Money Never Sleeps is in fact a truly great movie!  It didn’t suddenly make any sense.  It didn’t suddenly have a point.  It didn’t suddenly inspire.  To the contrary.  Money Never Sleeps is in fact a great movie because it illustrates just how confused and contradictory is the political left’s narrative on the financial crisis.  Oliver Stone, as committed a leftist as one can find in Hollywood, can’t decide if he loves or hates success, sympathizes with or loathes the fallen, or appreciates or detests the financial markets.  Consider the following (warning—some plot spoilers here):

Warmhearted failures are good, coldhearted successes are bad.  Perhaps the most bizarre character is Zabel, the leader of a Wall Street firm modeled after Bear Stearns which is struggling under the weight of its subprime securities portfolio.  Zabel is lamenting the market rumors (which we later learn to be true) that are killing his stock.  At a hastily called meeting of the New York Fed, Zabel is humiliated and forced to sell his firm for $3 per share to Bretton James’s (Josh Brolin’s) firm Churchill Schwartz.  For some reason we are supposed to sympathize with the hapless Zabel, who gives a 7 figure bonus to his protégé Jake (weren’t 7 figure bonuses to executives of failed companies supposed to be bad?) and later commits suicide.  We are also supposed to loathe the coldhearted James, who is clearly modeled after JP Morgan’s Jamie Dimon but whose firm is clearly modeled after Goldman Sachs, apparently because he is a little mean (or greedy!).  The fact that James (as did JP Morgan and Goldman Sachs) succeeded where Zabel failed is irrelevant to Mr. Stone.

Spreading truths to make money is bad, spreading lies to get even is good.  After poor Zabel kills himself, Jake (and Stone) place the blame squarely on Bretton James’s shoulders.  To get even, Jake decides to spread rumors about one of Churchill Schwartz’s clients in order to cause its stock to drop.  Jake doesn’t personally trade on these false rumors, however, as even Oliver Stone understands how silly it would look for his hero to behave with such hypocrisy.  Jake is then summoned to Bretton James’s lavish apartment for a dressing down, and the brave Jake confronts Mr. James and blames him for the death of his mentor Zabel.  Jake angrily notes that James spread rumors about Zabel’s firm and profited when the stock price fell, and James doesn’t deny it.  James points out, however, that the rumors were in fact true, and that Jake’s rumors were not.  Clearly that fact is not relevant to Stone.

To me this is one of the most telling contradictions in the story.  To the liberal left, asset bubbles aren’t a problem at all.  Bursting those bubbles, on the other hand, is terrible.  The people who fed the asset bubbles (Zabel for example) are largely let off the hook.  But the people who spot bubbles, spread truthful and insightful information about the bubbles and profit from the collapse are to be loathed.

                Greed must be stamped out!  It is bad, bad, bad.  Unless you’re the greedy one.  One of the most ridiculous lines in the movie, which is all the more laughable because Stone decided to put it in the trailer, is when Gekko says to an audience “[s]omeone reminded me I once said ‘greed is good’, well now it seems it’s legal!”  The line gets an appreciative laugh.  HELLO?  Since when has it NOT been legal?  Has anyone ever seriously proposed to outlaw greed?  Can you imagine Congress debating where to the draw the line between felonious greed and simple selfishness?

                But, if you’re Gordon Gekko and you just want to resurrect your Wall Street career, stealing $100M from your daughter is just fine.  Of course you have to turn it into $1.1B by the end of the movie so you can return it interest free and keep a cool billion.  That’s not greedy.  Now I’m sure Ollie Stone will tell us how he was exploring some human nuance, but we all know he tried really hard to make Gordon Gekko a villain in the real Wall Street only to have everyone fall in love with the bad guy.  So now he’s succumbing to Hollywood reality and making him the softer side of greedy.  Gordo gets a pass after all.

                Speculation is also bad, bad, bad, unless it is the good kind (helping the planet).  We have heard that money is the root of all evil, as is debt.  But to the newly prophetic Gekko, it is “speculation.”  Speculation is defined as “engagement in business transactions involving considerable risk but offering the chance of large gains. . .”.  So, like “greed,” “speculation” is very bad.  It is something similar to investing, only not as good.  I’ve been told that financing films is highly speculative, so perhaps Stone is backhanding his own industry.  In any event, taking chances are good as long as they’re not, you know, really big chances.  I sleep well knowing that the wildcatters who struck oil, the inventors who first took to flight and the Harvard dropouts who founded top technology companies didn’t do anything really crazy.

                This lesson is straight from the pages of the left’s political playbook.  It makes no sense, but “greed” and “speculation” are supposedly at the center of everything.  Clearly the Fed, the Treasury, the Congress and everyone else in positions of power in the World did nothing wrong.  This is just a case of healthy self-interest turning to evil greed and cautious investing turning into speculation.  Simple. 

                Green technology is good, as long as it is nothing more than a money-wasting fantasy.  One of the greatest subplots in our movie is our hero as the “green” financier.  His pet project is—I’m serious!—cold fusion!  That’s right.  Jake’s desperate client is trying to get a final $100M to complete a project that will revolutionize energy in the world.  And what does Jake advise a group of Chinese investors to forego in order to throw their $100M down the cold fusion drain?  Is it an oilfield?  Is it a natural gas pipeline?  Is it some mythical fossil fuel like unobtainium that can only be mined by abusing blue creatures from outer space?  No!  It is a solar project!  You see solar is a technology that actually works, while cold fusion is a hopeless dream of the far left.  So clearly an astute investor would be better off (and, ahem, the WORLD would be better off) if that investor’s $100M went into a cold fusion reactor than a solar project.  After all, solar is so corporate now.  It is run by guys in suits.  It can’t be any good.

                This is comical on so many levels it is hard to know where to begin.  First off, even if we’re to suspend our disbelief, the guy who needs this $100M is walking around a facility that must have cost about a billion dollars to build.  So if he only needs another $100M, why doesn’t he ask the idiots who already sunk a billion into his project for the money?  Come to think of it, given the fact that any green technology that is proven can get tons of money from investors and even the government, why can’t this guy raise a lousy $100M to finish it?  The answer (to Stone) is clear.  Sadly Wall Street is just greedy and speculative.  Or maybe they’re not speculative enough, because they can’t find it in their hearts to finance cold fusion.

                But, at some point, we’re all to blame.  Stone doesn’t let us off the hook though.  Phew!  He quickly nods to the notion that at some level we’re all to blame.  Jake’s mother, after all, is drinking the real estate Kool-Aid and trying desperately to flip house after house.  She continually runs to him for “bailouts” when she’s behind on her payments, and he keeps funding her even though he knows she is doomed to failure.  Corny, but actually not too bad a message given the rest of the film.

                Oh, but thankfully we have left wing websites to report the news.  Winnie Gekko, Gordon's daughter and Jake's love interest, has turned her back on her wealth (and her Swiss trust fund) in order to run a left wing website.  We have no idea exactly what she posts on her site, because apparently even Stone can't be bothered to explain what makes her tick.  But, in the end of the movie, Jake pens an explanatory narrative of everything that is wrong and is going wrong on Wall Street (presumably an epidemic of greed and speculation) and gives it to Winnie to post on her site.  Sure enough, Jake's article spreads around the world via the internet and causes everyone to wake up and understand the truth.  As you can see, we truly need some nameless left wing website to pass on this truth.  After all, we know that the regular news outlets completely dropped the ball on the financial crisis, failing completely to report on anything related to it.  Did you read about Bear Stearns in the Wall Street Journal?  Did you read about Lehman Brothers in the New York Times?  Did you hear about Goldman Sachs or Morgan Stanley on CNBC or CNN?  Of course not!  You had to turn to the Huffington Post for that big news, right?  OK, maybe not.  I guess left wing websites are useless after all.

                So now you see why Money Never Sleeps is really a great film.  A must see, in fact, for all who want to understand how truly misinformed people can be about the financial crisis.