Wednesday, October 29, 2008

Could independent colleges be the next bubble?

Discovered on PhiBetaCons from MSNBC:

By Maurna R. Desmond
updated 3:54
p.m. PT, Fri., Oct. 24, 2008

In June, 157-year-old Antioch College
decided to "suspend operations" at its flagship campus despite a push from
alumni to rescue the flailing institution. At that point, only 60 students were
enrolled, and their $40,000 per year tuition was being heavily subsidized by
Antioch's five newer campuses...

...The crunch will be particularly bitter for the institutions that drained
coffers to build "country club colleges" complete with
luxury dormitories, spas and top of the line sports
complexes to lure choice students, hoping that a sharper crowd would lead to
more accretive diplomas, entering a profitable cycle of more successful alumni
and increased donations...

Obama Accepting Untraceable Donations

From WaPo:

Contributions Reviewed After Deposits

By Matthew MoskWashington Post
Staff WriterWednesday, October 29, 2008; A02

Sen. Barack Obama's presidential campaign is allowing donors to
use largely untraceable prepaid credit cards that could potentially be used to
evade limits on how much an individual is legally allowed to give or to mask a
contributor's identity, campaign officials confirmed.

Monday, October 27, 2008

America's Most Overrated Product: the Bachelor's Degree

From the Chronicle of Higher Education.

...Among my saddest moments as a career counselor is when I hear a story like this: "I wasn't a good student in high school, but I wanted to prove that I can get a college diploma. I'd be the first one in my family to do it. But it's been five years and $80,000, and I still have 45 credits to go."...

...Even worse, most of those college dropouts leave the campus having learned little of value, and with a mountain of debt and devastated self-esteem from their unsuccessful struggles. Perhaps worst of all, even those who do manage to graduate too rarely end up in careers that require a college education. So it's not surprising that when you hop into a cab or walk into a restaurant, you're likely to meet workers who spent years and their family's life savings on college, only to end up with a job they could have done as a high-school dropout....

McCain for President

As only Charles Krauthammer can explain. From WaPo.

Embarrassed to tell people he's a journalist

Via Betsy's Page.

Foreclosures Rocket Into Outer Space

Via Bubble Markets Inventory Tracking blog.

The Age of Prosperity Is Over

From Arthur B. Laffer via WSJ.

Sunday, October 19, 2008

Equal Opportunities = Equal Outcomes?

In this discussion of Fannie/Freddie and why standards for loans were lowered there is this monster in the closet called racism. This is racism. However can we expect equal outcomes when people are given equal opportunities (EO=EO)? That seems to be the bedrock of post-modern thought. Male/female ratios must be 50/50 in all endeavors, black representation must be proportional (or even greater) than their fraction of the population (about 11%). However, what happens when numbers describing behavior defy the EO=EO principle? The cry of racism rings, subtle white male power structure is at work (implying the improbable proposition that men don't compete but hand out goodies to each other) , the test is unfair and is based on cultural biases, ....

So what happens when the 3 major races in America are compared on equal terms, in this case FICO scores? Here's a Freddie Mac publication on that. In the following figure we see that for the same FICO score the black/Hispanic rate is about twice as high as the white rate.

Is this racism? This is EO without the EO. The Fannie/Freddie GSE's obssesed about this. Besides the lack of EO=EO on the FICO scores. More blacks have low FICO scores:
June 20, 2008 Louisiana Weekly
Fannie Mae moves to exclude: Bad credit scores could forever deny borrowers home loans
...Adams says that on the VantageScore credit scoring system, which runs from 501 to 990, 84 percent of African Americans had credit scores at the lower half of the spectrum, below 745, according to a report by the Federal Reserve Board. Such scores would require home-buyers to pay 40 percent of a home’s purchase price as the down payment....
The conversion of VantageScore to FICO (*0.86) has the 745 as 641 FICO. That puts the average black score of 641 FICO is in the 15th percentile and a probability of loan default between 15-30%. The average FICO score is 723 and most lenders won't consider a score below 700. Above FICO 700 puts the probability of default at about 2%. This means that blacks default at a rate that is about 10 times greater than the population as a whole. Zillow Blog has more data.

Why do blacks and Hispanics default at greater rates on loans? Perhaps the savings rates give a clue. From a column from the October 21, 2007 WaPo:
This year's Ariel-Schwab Black Investor Survey found that blacks had median investments of $48,000, compared with $100,000 for whites. The survey looks at blacks and whites who earn more than $50,000 annually.
Now does racism play a part in all of this? Consider that the USA savings rate as a whole is far below other nations. Who's discriminating against us?

Thursday, October 16, 2008

Limbaugh and Hanity & Colmes listeners better informed than NPR

Via Redcounty. A Pew Research study on politics of various news outlets. Limbaugh and Hanity & Colmes listeners bested NPR & New Yorker/Atlantic patrons. No surprise to me:

Here's a detailed breakdown of the percentage of individuals answering each of the three questions correctly from the different news audiences:

  • The New Yorker/Atlantic: 71 percent (correctly identified Democrats as the majority in the House), 71 percent (correctly identified Condeleeza Rice), 59 percent (correctly identified Gordon Brown)
  • NPR: 73 percent, 72 percent, 57percent
  • Hannity & Colmes: 84 percent, 73 percent, 49 percent
  • Rush Limbaugh: 83 percent, 71 percent, 41 percent
  • Colbert Report: 73 percent, 65 percent, 49 percent
  • Daily Show: 65 percent, 48 percent, 36 percent
  • NewsHour: 66 percent, 52 percent, 47 percent
  • O'Reilly Factor: 70 percent, 60 percent, 41 percent
  • C-SPAN: 63 percent, 59 percent, 35 percent
  • Letterman/Leno: 51 percent, 42 percent, 31 percent
  • CNN: 59 percent, 48 percent, 29 percent
  • National Enquirer: 44 percent, 32 percent, 22 percent

Education factor

In general, well-educated news audiences scored high on political knowledge. For instance, 54 percent of the regular readers of publications such as The New Yorker, The Atlantic and Harper's Magazine are college graduates, as are 54 percent of regular NPR listeners.

However, several news audiences with relatively low proportions of college graduates also scored well on the news quiz. Just 31 percent of regular "Hannity & Colmes" viewers are college graduates. Even still, 42 percent Hannity viewers got perfect scores on the political knowledge quiz, compared with 44 percent of NPR listeners.

Real Estate Market

Check out your local market.

Shuttle driver reflects on Nobel snub

From the Cape Cod Times. If I had the grant money I'd give him a call.

Twenty years ago, Douglas Prasher was one of the driving forces behind research that earned a Nobel Prize in chemistry this week. But today, he's just driving.

Prasher, 57, works as a courtesy shuttle operator at a Huntsville, Ala., Toyota dealership. While his former colleagues will fly to Stockholm in December to accept the Nobel Prize and a $1.4 million check, the former Woods Hole Oceanographic Institution scientist will be earning $10 an hour while trying to put two of his children through college.


After stints at a U.S. Department of Agriculture laboratory and working for NASA in Huntsville, Prasher was out of work for a year before he took a job at the car dealership.

Prasher said he has suffered from health problems and depression, some of which stems from being out of science for so long. But his sense of humor remains intact.

This year's physics and medicine prizes went to non-Americans. I think it's a trend.

More on Chris Dodd

The man should be in prison pinstripes not on the Senate Banking Committee. From the WSJ.

In February 2004, while Republican colleagues warned of the systemic risks posed by Fannie Mae and Freddie Mac, Mr. Dodd pronounced the mortgage market "one of the great success stories of all time." A year later, the Connecticut Democrat voted against a reform that would have limited the size of Fan and Fred's mortgage portfolios. Now that Fan and Fred have collapsed at a cost to taxpayers that could run to $200 billion or more, Mr. Dodd is also under fire for accepting sweetheart loans from Countrywide Financial, the subprime mortgage factory.

More from the WSJ on Sen. Dodd:

Dodd Bedfellows

Next up on the bubble horizon Medicare and Social Secruity

A Washington Times Op Ed Piece.

The potential taxpayer bailout for Medicare alone is 50 times greater than the recently passed bailout bill. For all entitlements, the potential tab totals 80 times today's bailout.

It's highly unlikely that an Obama Administration will face this down. More likely scenario - he adds to the entitlement pig.

Tuesday, October 14, 2008

2 studies on the role of subprime mortgages and the current crisis

Two recent papers have appeared on the causes of this the mortgage crisis. Gary Gorton of Yale has a very detailed one that describes the role of derivatives and Stan Liebowitz of UT-Dallas has another. They both pin the cause on the growth of subprime lending. Liebowitz attributes the disaster specifically on ARM's.

Gorton's paper is rich in data. For example on page 72 he shows the mind-boggling loss of $3.2 trillion in the sub-prime market. On page 52 he tracks the increases in defaults from 2003 to late 2007. For the prime market it went from 2.62 to 3.24%. For the subprime one it went from 13.04 to 17.31%.

ARM's, Alt-A, Prime Mortgages and Delinquency Rates

Delinquency rates by mortgage types and FICO scores at the Zillow blog.

China goes for methanol from coal

Now if we could also do the same. But we're sold on global warming, so no coal for us.

The production of methanol from coal gasification is a mature technology. In the United States, Eastman Chemical produces methanol from coal gasification at a plant in Kingsport, Tennessee that was built with support from the U.S. Department of Energy (DoE). Based on this experience, the U.S. DoE estimates that methanol can be produced from coal for as little as 50¢ per gallon. In China, production costs from coal are generally RMB$800-1,200 per metric ton of methanol (US$110-165/metric ton, or 33¢ to 50¢ per gallon). In addition, coke furnaces in China generate 80 billion cubic meters of waste gas each year, enough to produce 40 million metric tons of methanol, and significantly reduce pollution in the coal-producing regions. Coal-bed methane deposits of 30,000-35,000 billion cubic meters in China represent another significant energy resource as well as a hidden danger that claims miner’s lives each year. Just 1000 cubic meters of coal-bed methanol can produce one metric ton of methanol.

Fannie/Freddie, Regulations and Perpetual Motion Machines

From the Main Street Column of the WSJ:

On Capitol Hill, he notes, we had just the opposite. In terms of accountability, Fannie Mae and Freddie Mac were the worst of both worlds. On the one hand, they lacked the congressional oversight that would have come had there been an explicit and acknowledged taxpayer guarantee. On the other hand, the privileged position represented by this implicit guarantee removed the discipline that market competition forces on other private enterprises.

Mr. Baker goes further. He points out that it wasn't the unregulated part of the financial markets that got us here. It was the regulated part. In his own industry, he notes, the lack of a government guarantee means folks do a lot more due diligence before they part with their money.

That regulated part being Fannie/Freddie with its supposed congressional oversight.

A recent comment on this blog said that the GOP was in charge when F&F were starting to show signs of trouble. True enough but the past blog posts here show that the Democrats blocked all oversight attempts, effectively killing it in committee. Remember that this is a democracy where the minority party gets a say. And I must add the GOP is a afraid of the racist label, so let the idiotic schemes go along their merry way. Not much leadership in either party. We have the stupid and egalitarian party or the let's not be known as the nasty party of racists.

With the polls the way they are you Democrats may just get the presidency with a congressional supermajority. You can start implementing your grand societal schemes - schemes that you'll find that work about as well as perpetual motion machines. Next up Social Security, then Medicare.

Wednesday, October 08, 2008

More on Fannie/Freddie

The Fannie/Freddie debacle from

In 1938, Fannie Mae was established by an act of Congress to provide liquidity to the mortgage market during an economic crisis known as the Great Depression. (Fannie history)

In 1970, over three decades later, Freddie Mac was established by an act of Congress to counteract Fannie Mae's growing monopoly of the secondary mortgage market. (Freddie history)

In 1977, the Carter Administration passed the Community Reinvestment Act (CRA) that required banks to offer an even disbursement of credit throughout the financial market in an attempt to curb past lending practices that targeted more desirable markets. At the time, republican critics charged that such an act would impose unnecessary regulatory burdens on lending institutions and distort credit markets by forcing banks to offer loans to under-qualified applicants.

In 1995, the Clinton Administration pushed even harder to increase the supply of affordable housing to low-income families by offering performance-based incentives (Lowered Standards) . According to economist Stan Liebowitz, these developments led to a loosening of lending standards that required no verification of income or assets, little consideration of the applicant's ability to make payments, and no down payment payments. The net effect was an inevitable collapse of Fannie Mae and Freddie Mac at the cost of its investors.

In April of 2001, the Bush Administration first red flagged Fannie and Freddie stating that "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."

On September 10th of 2003, Treasury Secretary John Snow recommended to the House Financial Services Committee that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.

In October of 2003, less than a month later, Fannie Mae disclosed 1.2 billion dollars in accounting errors.

In November of 2003, the Bush Administration upgraded their warning to a "systemic risk" that could very well extend beyond the confines of the housing market. In a July report, written by external investigators, it concluded that Freddie Mac manipulated its accounting to mislead investors. And other critics pointed out that Fannie Mae did not adequately hedge against rising interest rates.

In November of 2003, Council of the Economic Advisers, Chairman Greg Mankiw, argued that "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." And in order to do such, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (Remarks of Dr. N. Gregory Mankiw Chairman Council of Economic Advisers at the Annual Meeting of the National Association of Business Economists)

Saturday, October 04, 2008

Where are we headed? From the WSJ.

The Wall Street Journal comments on the state of the housing bubble.

... Experts say that an additional 10% to 15% decline in house prices is needed to get back to the prebubble level. That decline would double the number of homes with negative equity, raising the total to 40% of all homes with mortgages. The mortgages of five million homeowners would then exceed the value of their homes by 30% or more, which could prompt millions of defaults...

NY Times on Fannie

A fairly good description of the debacle.

...Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way...

...Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations....

...Whenever competitors asked Congress to rein in the companies, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”....