Topic: Finance, Banking & Monetary Policy

The Other For-Profit College Scandal

Because the evidence of wrongdoing and evasion is so clear, and the effect has been so damaging, I have devoted a lot of pixels to the GAO’s horrendous ”secret shopper” report on for-profit colleges, as well as the stonewalling about what caused the initial report to be so biased. A potentially even bigger story, though, is what appears to be the machinations of an unholy alliance of Department of Education officials, Senate HELP Committee chairman Tom Harkin (D-IA), and Wall Street short-sellers hoping to make big bucks off the demise of for-profit schools. This Daily Caller article, and the connected video of Senator Tom Coburn (R-OK), are good places to start learning more about this, as is the website of Citizens for Responsibility and Ethics in Washington.

The problems with understanding scandals like this, of course, are trying to get the truth about things that have gone on almost entirely in real or virtual back rooms; knowing what is legal and what isn’t; and just figuring out who’s who. Such scandals also reveal little about whether for-profit schools are actually more or less effective than other higher ed sectors, arguably the main public policy concern.

What this sort of thing does start to reveal, though, is just how far out of public view policy is often made, as well as how people try to profit directly from government action. In other words, it’s a great case study in public-choice theory, and just how un-Schoolhouse Rock Washington really is.

So I can’t tell you everything about who said what to whom. However, at the very least it is clear, for instance, that famed short seller Steve Eisman had a huge amount to gain by testifying that for-profits are bad and there is a “bubble” in proprietary higher ed about to burst. After all, were either the Education Department or Senator Harkin – or both – to use his testimony to attack for profits, as indeed they have, Eisman would have a highly profitable self-fulfilling prophecy on his hands.

No matter how you feel about for-profit colleges – and my feelings are decidedly mixed– learning about how policy is really made can be a very unsettling thing. In fact, it can make you feel more than just a little sick.

Deflation Dread Disorder

A recent piece in the Economists’ Voice by Ed Leamer, who runs the Anderson Forecast Center at UCLA (one of the better forecast shops), diagnoses a new mental illness: Deflation Dread Disorder.  Deflation Dread Disorder is characterized by an almost irrational concern over the almost zero chance of actual deflation — that is, falling prices.

Professor Leamer briefly addresses each of the usual reasons given for fearing deflation:  impact of falling prices on business profits, impact on nominal debt burdens, and concerns that consumers will delay spending due to an expectation of lower future prices.  The piece demonstrates why each of these concerns is misplaced in the current environment, and it does so in a manner easily accessible to non-economists.   As it is a very brief piece, you’re better off reading it for yourself

Correction: Charles Mahtesian at Politico Did NOT Agree with Chris Matthews

In my recent Wall Street Journal article, “The Myth of Corporate Cash Hoarding,” I quoted Chris Matthews of MSNBC’s Hardball asking Politico’s Charles Mahtesian an apoplectic question about businesses “sitting on their money” just to keep the economy weak and hurt Obama’s reelection chance in 2012.   Then I carelessly added an erroneous superfluity −writing that “Mr. Mahtesian concurred.”

My apologies to Charles Mahtesian (and congratulations for having had the good sense to disagree with Chris Matthews).

In reality, Mahtesian wisely dodged Chris Matthews’ bizarre interrogation about corporations willfully refusing to spend idle cash until after 2012 election.  Mahtesian instead switched to talking about business going “whole hog” during the 2010 congressional election (this show aired September 27).

Here is the transcript:

MATTHEWS:  You know, a great question, Charles, that wasn‘t on my list to ask, but I‘m going to ask you because you seem like a sophisticated guy of many parts.  Do you think business can sit on those billions and trillions of dollars for two more years after they screw Obama this time?  Are they going to keep sitting on their money so they don’t invest and help the economy for two long years just to get Mr. Excitement, Mitt Romney, elected president?  Would they do that to the country?

MAHTESIAN:  Well, I won’t touch the first question, Chris, but…

MATTHEWS:  That was all one question, bro!

MAHTESIAN:  Oh!  I prefer splitting the two.  I’d say that I think what you’re going to see the business community do is really go whole hog at this election right now because either way, you know, I think they can envision a scenario in which they lose … because, for example, number one, if the president has a Republican House, that’s probably going to be a rough scenario for them anyway because that’s what the White House wants if they want to get elected in 2012 — re-elected.  So, probably the best-case scenario for them.

MATTHEWS:  Yes.

MAHTESIAN:  So you know, either way, I mean, I think they — they weigh the equities, and you know, see it as a 50-50 endeavor.

MATTHEWS:  Anyway, I just hope business starts spending.

Bernanke’s Soft-Core Keynesianism Is Even Worse than the Nonsensical Analysis of Hard-Core Keynesians

Earlier this week, the Washington Post predictably gave some publicity to the Keynesian analysis of Mark Zandi, even though his track record is worse than a sports analyst who every year predicts a Super Bowl for the Detroit Lions. The story also cited similar predictions by the politically connected folks at Goldman Sachs.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year. His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Republicans understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like asking Alex Rodriguez to comment on Derek Jeter’s prediction that the Yankees will win the World Series.

Not surprisingly, as reported by McClatchy, Bernanke endorsed the notion that spending cuts (actually, just tiny reductions in planned increases) would be “contractionary.”

Bernanke was asked repeatedly about GOP proposals to trim anywhere from $60 billion to $100 billion in government spending during the current fiscal year, which ends Sept. 30. These cuts would do little to bring down long-term budget deficits but would slow the economic recovery, he cautioned. “That would be ‘contractionary’ to some extent,” Bernanke said, projecting that “several tenths” of a percentage point would be shaved off of growth, and it would mean fewer jobs. …While Democrats got what they wanted out of Bernanke with that answer, he frowned on some of their projections that the spending cuts that are being debated could reduce growth by a full 2 percentage points.

Since he is not a fool, Bernanke was careful not to embrace the absurd predictions made by Zandi and Goldman Sachs. But that’s merely a difference of degree. Bernanke’s embrace of Keynesian economics is disgraceful because he should know better. And his endorsement of deficit reduction (at least in the long run) is stained by crocodile tears since Bernanke supported bailouts and endorsed Obama’s failed stimulus.

But while Bernanke is not a fool, I can’t say the same thing about Republicans. Bernanke has made clear that he either believes in the perpetual-motion machine of Keynesianism, or he’s willing to endorse Keynesian policies to curry favor with the White House. Republicans should be exposing these flaws, not treating Bernanke likes he’s some sort of Oracle.

Is Buying a House with Cash Bad?

The Washington Post reported today that the increase in January home sales was driven mainly by an increase in all-cash sales.  Whereas I would have thought increasing sales, especially driven by cash buyers, was a sign of market strength; the Post and the National Association of Realtors portrayed this as a bad thing.  NAR chief economist Lawrence Yun went so far as to call this portion of the market “unhealthy.”

Of course, what NAR and the rest of the real estate lobby were complaining about was that home sales and prices were not being driven by easy credit.  For the housing industry, it would seem that the “correct” house price is the price that is propped up by loose credit. 

Yun goes on to say that ”investors are taking the advantage of conditions to purchase undervalued homes.”  I used to work with Yun, he’s a smart guy, but I don’t think anyone is smart enough to say that the homes being sold are ”undervalued.”  Consider that most non-industry forecasters are projecting further price declines.

More cash sales actually means less future foreclosures, because the cash buyers start out with 100% equity from day one.  They are very unlikely to walk away, regardless of the future path of prices.  Cash buyers also pay prices that are closer to reflecting the fundamentals of supply and demand, which are ultimately driven by income and demographics. 

What the high percentage of cash borrowers, at 37 percent, says to me, is that there is a significant demand for housing that isn’t dependent upon massive taxpayer subsidies to the mortgage industry.

Homeownership Before the New Deal

The latest canard offered for keeping taxpayers on the hook for mortgage risk is that, without such, homeownership would limited to the wealthy.  Sarah Rosen Wartell of the Center for American Progress stated before the House Subcommittee on Capital Markets, “The high cost, limited availability, and high volatility of pre-New Deal mortgage finance meant that homeownership was effectively limited to the wealthy.”  Congressman Al Green repeated the point.  As I’ve generally found Sarah to be one of the more reasonable CAP employees, and that this is fundamentally an empirical question, I would have expected her to offer some evidence to support such a claim.  Alas, she did not.  So I will.

According to the US Census Bureau, at the turn of the century in 1900, the US homeownership rate was 46.5%.  I’m pretty sure that even Sarah wouldn’t claim that close to half of US households in 1900 were “wealthy.”  Interestingly enough, homeownership after the first 10 years of the New Deal was lower than before the New Deal.

While 46.5% is about 20 percentage points below the current rate, the population in 1900 was considerably younger, and one thing we do know is that homeownership is positively correlated with age.  In 1900, 54% of the US population was under the age of 25, a reasonable cut-off for homeownership.  Today, that number is 35%.  I don’t think it would be a stretch to say the greatest driver behind the homeownership rate over the last 100 years has been the aging of the US population, probably followed by the increase in household incomes (homeownership and income are also closely correlated).

Hopefully this will put to rest the myth that FDR and the New Deal gave homeownership to the masses.  The fact is that homeownership was fairly widespread long before the New Deal.  I await the next myth from the Fannie Mae apologists.   If they are wise, they will try one that isn’t so easily falsified.

Administration Playing Both Sides on Fannie Mae

On Friday the Obama Administration released its report on “reforming America’s Housing Finance Market.”  The report claimed that the Administration would work toward “winding down Fannie Mae and Freddie Mac on a responsible timeline.” 

While the report was silent on what a responsible timeline would be (surprise, no details); I assumed, perhaps naively, that a reasonable timeline would be 5 to 6 years.  So you can imagine my surprise while reading the Administration’s budget proposal (see Table S-12 of the summary tables), released Monday, that the Administration is projecting that the government will be receiving, between 2012 and 2021, $89 billion in dividend payments from Fannie Mae and Freddie Mac.  In 2021 alone the White House projects $8 billion in dividend payments.  But here’s the rub, for Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.

So would the Administration please be straight with us for just a minute: are you or are you not proposing that Fannie Mae and Freddie Mac disappear; and if so, when?

Another odd thing from the budget, again Table s-12 lists the net equity position of Fannie and Freddie as negative.  Well that’s obviously true, but it also raises the question of why they are still in conservatorship, as the law requires them to be taken into receivership once they’ve reached negative equity.  Then perhaps OMB and Treasury have different definitions of net equity.