Out Of Control Student Loans

Once the Federal credit card gets behind something, how far and fast can it blow up and explode?  The student loan programs give a good example.  This is a trillion dollar or so Federal problem that you may never have thought was a problem.

I have located here something called the Federal Student Loan Programs Data Book from 2000, that gives a good summary of the financial status of the student loan programs from inception through that year.  It's a pdf - I hope the link works.  According to this book, the first Federal student loan guarantee program began in 1966.  By 1989, cumulative loan volume had reached $102 billion.  By the end of FY 2000, an additional program had been added, and the cumulative volume of the two was about $330 billion. 

Now to today.  According to this site, total outstanding student loan debt is now over $1 trillion.  Zero to one trillion in about 36 years.

Any chance of getting the trillion back?  Well, we can check in on how it's going so far.  From the web site ZeroHedge, we find the chart below just put out by the Federal Reserve.  It seems that the 90 day delinquent rate on these loans had reached about 6% by 2003, and then gradually crept up to about 9% and leveled off there in 2010 - 2011.  Early in 2012 it seemed to drop to 8.5% (election coming up?), but now suddenly when they report the Q3 2012 numbers it shoots up to 11%.

Oh, wait a minute, do you have to read the footnotes?  Here's what they say in footnote 2:

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle.

This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

So the real delinquency rate is actually 22%, and rising like a rocket.  Get ready to lose half or so of the trillion.  Of course, that's only the equivalent of one year's Medicare spending.

More Convictions In The Long Island Rail Road Disability Pension Scam

Generally at the Manhattan Contrarian we try to limit our focus to the big scams of, say, a trillion dollars and up -- Federal financial statements, the "poverty" rate, and so on.  But if the conduct is egregious enough, we're willing to consider even small ones in the billion or so range.

The New York Post reports this morning on two additional convictions in the Long Island Rail Road disability pension scam.  That brings the total of guilty pleas in the scam to 6.  It's a start, but only a small one.  The number of participants in the scam seems to be well over 1000, and the amount stolen per person around $1 million and up each.  This is not small time.

The basic idea is that if you are honest, you can retire and get your already generous pension, but if you are in the know, you can get a "disability" pension, which means you can retire earlier, get a higher payout formula, and also exemption from at least state and local income taxes.  One small hitch -- you are supposed to be disabled. 

But the most amazing thing is how universal it was.  According to this report from the National Legal and Policy Center, the scam started in the 1990s, and by 2000 and after, the percent of LIRR workers retiring with disability pensions was in the range of 93 - 97%.  Is there any chance that this was not orchestrated by the labor unions?

My big question:  Who are the 3 - 7% who were actually honest?  I guess it's good to know that there are at least a few such people still out there.

According to the Post story, the Federal prosecutors have offered an amnesty program to the estimated 1600 remaining scammers, in which they can avoid prosecution by admitting wrongdoing and foregoing future disability payments.  In other words, even though you have been collecting fraudulently for 5 or 10 years or more, you don't even have to give back a dime.  Way too lenient in my view.  But the Post says that only 44 of the 1600 have taken it so far. 

How To Hit Up The Feds For The Big Bucks

From Bloomberg News:  The New York MTA has put a number on the cost of repairing its system post-Sandy, and it is $4.75 billion.  Initially they are going to borrow the money, but not to worry, because the Feds will pick up most of the tab:

FEMA should reimburse at least 75 percent of the agency’s losses, though the funds may take years to arrive, Chief Financial Officer Robert Foran said. He pegged the infrastructure damage at $4.75 billion .

I'm having a little trouble getting my head around a couple of things.  First, that $4.75 billion number.  The system is 90+% back up and running today, less than a month after the flooding. Could they really have spent that much money that fast?  If they paid everybody who worked on it $10,000 for the month, they would have had to have 475,000 people working on it to run up $4.75 billion.  I haven't seen those kinds of numbers of people working on it; have you?  This would be more people than live in the entire borough of Staten Island.  If anybody sees them, can you let me know where they are?

What might a real number look like?  How about 5000 people to work the first month on many parts of the system, and then 1000 people for another 3 months on the few remaining parts that need more substantial work (South Ferry station, causeway across Jamaica Bay), all at $10,000 per person month.  That comes to $80 million.  Add some for equipment like new cabling, and you are at around $100 million.  OK, that's $100 million versus $4.75 billion.  There's a difference of 47 times.  Not 47 percent, 47 times -- 4700 percent.  Something here is wildly, wildly off.  Meanwhile, the Bloomberg guy reports it totally straight, like, these guys are from the MTA, they're the experts, of course they know what they're talking about.

Well, maybe it makes sense if we take it in pieces.  There is all of one station in Manhattan still out of commission, the South Ferry station at the very southern tip of the island, which is right near the shore and got totally filled with water.  By the way, this is a brand new station, built as a boondoggle with fancy finishes using 9/11 funds after the World Trade Center bombing,  It just opened three years ago.  Anyway, how much to fix just that?

One subway station, South Ferry in Manhattan’s southern tip, was totally submerged and may alone cost $600 million to rebuild.

Wait a minute!  They may think we have short memories, but the Manhattan Contrarian never forgets.  What was the total cost of building this new South Ferry station from scratch within the past decade?  According to Wikipedia, it was originally budgeted at $400 million, and came in at $530 million.  Many people, myself included, thought that $500+ million for just one subway station was a completely ridiculous amount of money, but it did involve digging out a whole new chamber and hey it was Federal 9/11 money so it was free and let's build a Rolls Royce.

But could it possibly cost more just to repair the South Ferry station than it cost to build it from scratch just a few short years ago?  I don't believe it for a minute, but if it's true, shouldn't they scrap it entirely and build yet another new one next door?   Oh wait another minute, there already is another station right next door -- the old South Ferry station!  You don't think they filled it with old tires, do you?  In fact, the old station not only is still there, but it seems to have survived much better than the new one, because the tracks running through it work just fine.  How do I know?  Because here in a press release on what they are doing while they repair the new station, the MTA says that in the meantime the trains are using the "Old South Ferry Loop" to turn around.  The "Old South Ferry Loop" is secret code meaning the old station.

Oh, and then there's the other thing that I'm having trouble getting my head around:  The fact that it is totally taken as a given that the Feds will pony up 75% of whatever inflated number the MTA can make up.   Do the Feds now just pay 75% of whatever number you throw out as a matter of birthright?  Is there anybody out there whose job is to ask, how did this number get to be 47 times anything remotely reasonable?  I know I may be more skeptical than the average human being, but there is no possible way that the $4.75 billion is just the cost of repair of what was damaged.  They have to be using this as an opportunity to sneak in every upgrade they have hoped for for decades and get the Feds to pay for it. 

Don't we have any sense of responsibility at all to the taxpayers in the rest of the country?

How To Forget The Lessons Of History

Here is a report in today's Crain's New York Business on the Brooklyn renaissance, and supposedly giving reasons for it.  The author is John Sodaro, identified as a graduate student at CUNY.  He reports on comments made at a panel discussion on the topic.  Undoubtedly, Mr. Sodaro is not old enough to have personal memory of what brought Brooklyn so far down, or what enabled it to start getting back up.

A guy named Alan Fishman of Ladder Capital Finance offered this remark:

much of the recent progress in Brooklyn can be credited to reducing crime and concentrating development in “dead” and underutilized areas. Repairing blighted neighborhoods encouraged people to move into those areas, boosting the local economy, he said

Not to denigrate Mr. Fishman, but how did Brooklyn come to have vast "dead and underutilized areas"?  Easy:  In the 1960s and 70s New York's top state and local income tax rates pushed up to a combined total of nearly 20%, at a time when New Jersey and Connecticut had no income taxes at all.  That's the era when the Jersey City waterfront, right across from the Lower West Side of Manhattan, had one new skyscraper after another and the Brooklyn waterfront, right across from the Lower East Side of Manhattan (and with much better transportation access) had not one single new building built for decades.

E.J. McMahon of the Manhattan Institute here has the history of New York's income tax rates, up to a peak of 15.375% state and 4.3% city in the mid-70s.  Then came the declines:  at the state, from 15% to 10% under Governor Hugh Carey by 1982, then down to 7% under Governor Mario Cuomo by 1987, and finally under 7% under Governor George Pataki in the 1990s.  That brings us to the last decade, and voila! a renaissance.

I'm not saying that public safety and government support of infrastructure had nothing to do with it.  But were they really the major factors?  Is this really sinking into a memory hole?

And by the way, also in Mr. Sodaro's article we have Deborah Wright of Carver Bancorp at the same panel discussion citing some figures:

Our poverty rate is over 20%, highest since 2000. And in the Bronx, the poverty rate is the highest of any urban area in the entire country.

I hope that all readers of this blog can recognize this as ignorant parroting of the completely fraudulent Census Bureau figures.  There is undoubtedly some real poverty in Brooklyn and the Bronx, but the Census Bureau numbers contain no credible information on the subject, let alone any credible information on whether "poverty" in any sense has increased, decreased, or stayed the same over time.

The Poverty Scam Part III

The New York Post today has an op-ed by Robert Rector of the Heritage Foundation discussing flaws in the Census Bureau's new so-called measure of poverty.  He is one of the few guys out there who is on to the scam and he  is very knowledgeable.  By all means read his article to find out more details on how the government goes about the calculated deception of the people to get them to support endlessly more ineffectual spending. 

But Rector is way, way too nice.  There is nothing innocent about what the government does to create a wildly inflated measure of "poverty" that is completely detached from material deprivation and that can never go down no matter how much anti-poverty spending the government undertakes.  More here.

New Greek Debt Deal: Why Again Is This A Good Idea?

Big news:  the Euro parties have reached yet another kind of sort of semi bailout deal for Greece, enough to avoid immediate default and calm the markets for  -- how long this time?  A few months?

Here is a report from the Wall Street Journal on the terms of the deal and reaction from various quarters.  The details ($51.7 billion of new money unlikely ever to be repaid; new "austerity" measures that Greece "really, really" promises to put into effect this time; a discounted exchange offer for certain outstanding Greek debt) are unimportant.  Supposedly, it's all about meeting some debt-to-GDP target in 2020.  Does anyone believe that that is real?  (By the way, these debt-to-GDP numbers are of the fraudulent cash in cash out variety, when of course the government of Greece is mostly in the pension/insurance business and has real liability numbers that are a large multiple of the published numbers and almost impossible to find.  See the previous post.)

But why are they doing this?  Is anything about it a good idea?  This is another one of those issues on which the conventional wisdom is completely unanimous and my view is just 180 degrees different.  And I think that my view is just so obviously, glaringly right that I can't even think of the counterargument.

The conventional wisdom:  The various Euro parties (Eurozone countries, ECB, IMF) need to do what is necessary to bail out Greece sufficient to avoid crisis and save the Euro.

My view:  The worst possible thing that the Euro parties can do is continue to provide tide-over bailouts to Greece and other irresponsible Euro countries.  This course of action only prolongs the crisis and makes each round of it worse than the previous one, while multiplying the cost for the paying parties and rewarding the bad actors in the irresponsible countries.  The best thing that could possibly happen would be for the other Euro parties to make a clear statement to the irresponsible parties that bailouts of any sort are not on the table, and you are welcome to stay or leave as you choose.

My starting proposition:  A sovereign who issues fiat currency and has the ability to borrow and pay his debts in his own fiat currency, will eventually (and in all likelihood, quickly) debase and destroy that currency and steal substantially all the wealth of the population.

Discussions of the economic success of the United States rarely even notice an aspect of the design of our Federal system that was probably unintentional but I believe of tremendous importance.  Namely:  the large majority of the functions of government were to be carried out by the states, but the control of the currency rested with the Federal government.  Thus, the main functions of government were provided by entities with no ability to issue their own currency, or borrow in their own currency. 

It didn't take very long for the states to try to behave irresponsibly.  Many of them overborrowed in the 1830s, and defaulted in the early 1840s.  The Federal government did not bail them out; did not even seriously consider it.  The states could only extricate themselves by getting spending under control and doing consensual deals with creditors.  They learned their lessons; many passed restrictions on incurring debt and balanced budget amendments.  And thus we had a settlement that made largely impossible the great plague of human history, that the sovereign overborrows and then debases and destroys the currency and with it the accumulated wealth of the population. 

That has worked extremely well all the way into my lifetime.  Today, it appears that the lessons of history have been forgotten.  At the state level, many politicians have figured out that they can evade debt restrictions and incur very long term debts in the form of pensions that are not recorded on balance sheets, whose magnitude can be effectively hidden from most voters, and that can be used to buy votes and political contributions from concentrated blocs of public employees.  The promises are far along toward bankrupting many of the states, but the politicians who put the promises in place will be long gone when the promises come due.

Meanwhile at the Federal level, the Federal government is no longer a small part of total government spending, but more like two-thirds of the total.  Constraints on printing money, mainly the so-called gold standard, were gradually weakened and then finally eliminated by the 1970s.  The "independence" of the Federal Reserve, never strong to begin with, has diminished into nothing.  And, of course, spending is exploding at Ponzi scheme growth rates.  Watch out!

So Europe, again without even seeming to notice that this was the essential benefit of the structure, set up a U.S.-like monetary system with the currency-issuer not controlled by any sovereign, and the sovereign countries giving up the right to issue their own currency and thus likely to be forced quickly into default and spending constraints if they behaved irresponsibly.  Within not too many years, a number of the participants behave irresponsibly, and the structure works exactly as it should, backing the irresponsible spenders right into a corner.

And the conventional wisdom unanimously agrees on the right thing to do:  Bail them out, bail them out, and bail them out again.  In other words, give the lowest common denominator sovereigns the ability to force the debasement of everyone's currency for the benefit of their own favored cronies.

So the history is:  On the one hand example after example of sovereigns who debased their currencies and destroyed the wealth of their citizens.  On the other hand, the sole example, as far as I know, of the United States, where a structural inability of the sovereigns to borrow in their own currency led to an initial sharp contraction, then a quick recovery, followed by nearly two centuries of economic boom. unprecedented in human history.  Which do you choose?  Perhaps the first may  seem to make sense if you believe that it is the government's moral duty to take on all downside economic risk to all citizens.