Relevant and even prescient commentary on news, politics and the economy.

Backdoors all over the Internet–Goodbye Fourth Amendment

Nothing is safe: Your medical records, trade secrets, bank accounts, credit card passwords, presumably private email–anything that goes over the Internet or through a computer connected to the Internet, any and everything is now open to prying eyes. According to NSA documents examine by the Guardian,The New York Times, and ProPublica, the NSA

has circumvented or cracked much of the encryption, or digital scrambling, that guards global commerce and banking systems, protects sensitive data like trade secrets and medical records, and automatically secures the e-mails, Web searches, Internet chats and phone calls of Americans and others around the world, the documents show.

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The Republicans in Michigan Pout with the Passage of the Medicaid Expansion

“I think this expansion of government by 400,000 to 500,000 new people that are depending on the government for health care is more nauseating than probably just about any tax increase that we can put forth simply because it is an entitlement we are not going to be able to be rein in,” Republican Michigan State Senator Joe Hune.

State Sen. Joe Hune called the likely expansion of Medicaid to Michigan’s working poor “garbage” he “could not stomach” to support in Tuesday’s Senate vote that narrowly passed the measure.

First term State Senator Joe Hune voted ‘yea’ for life time healthcare insurance in 2012 without contribution for present Senators. 

“It’s kinda like we had this really big dinner. We got the dinner done and now some people are asking for dessert. We’re going to skip dessert on this one and move forward.” Senate Majority Leader Randy RICHARDVILLE (R-Monroe) on his chamber’s decision not to take a revote on immediate effect on the Medicaid expansion bill.

The delay in implementation will cost the State of Michigan ~$600 million in Federal Aid for the Medicaid Expansion. The Medicaid expansion will not happen till April 1, 2014 as a result of the Republicans sulking.

No IE On Medicaid Expansion, Bill Goes To Governor
“Legislation expanding Medicaid to more than 300,000 of the state’s working poor left the Senate chamber without receiving immediate effect. This means the program wouldn’t be available to those making between 100 and 133 percent of poverty until around April 1 as opposed to Jan. 1.”

Medicaid Takes Long Journey From ‘DOA’ To Gov.’s Desk
“Rep. Matt LORI (R-Constantine), the sponsor of the bill to reform and expand Medicaid, stands in the back of the House chamber on Tuesday and lets a few seconds tick by before he even tries to answer a question about his proposal’s complicated path to Governor’s desk. “

A guaranteed delay till April 1, 2014

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An Effective Demand look at the 1980 recession to envision the next recession

It is good to look back at the 1980 recession and analyze what happened. First, the recession officially started in July of 1980. Be that as it may, the business cycle had already topped off in the 3rd quarter of 1978 when the economy hit the effective demand limit.
Capacity utilization started falling the same time the effective demand limit was hit, 3rd quarter 1978. From there it was falling all the way to July of 1980. Unemployment started rising 2nd quarter 1979, more than a year before the start of the recession. Real GDP rose very slowly from 4th quarter 1978 thru 2nd quarter 1979.
Using a model for Aggregate supply & Effective Demand (AS-ED), instead of the commonly known Aggregate supply & Aggregate demand (AS-AD) model, I will show what happened from 1978 to 1980.
First let’s look at the current situation with the AS-ED model with data from 1st quarter 2012 to 2nd quarter 2013. (2009 real dollars.)
1980 recession 2
The blue dots along the bottom are real GDP on the aggregate supply curves increasing at an inflation rate around 2%. Real GDP will most likely continue this path over the next year, shown by lower dashed black line. The dashed black line above shows the effective demand limit coming steadily downward toward the LRAS zone. (LRAS is long-run aggregate supply). Real GDP and effective demand will meet at the LRAS zone.
What will happen when they meet? Well, let’s now go back to 1980 and see what happened back then. I am not saying that it will happen exactly the same way now, but let’s just see what happened back then.
Here is a graph where the red dots are real GDP on the aggregate supply curves.
1980 recession 1
Look at the dashed black lines in the lower left of graph #2. Real GDP was came in horizontally leading up to the 3rd quarter of 1978. The green dots are the first two quarters of 1978. The first red dot is the 3rd quarter of 1978. Now look at the dashed black line coming down. Before the 3rd quarter of 1978, effective demand had been tracking along that black dashed line since the 3rd quarter of 1975. Effective demand had been tracking steadily downward for 3 years toward the meeting place with real GDP. The same has been happening now since the end of 2010.
In graph #2, the first red dot is on the crossing point of two solid black lines. One solid black line is the aggregate supply curve for 3rd quarter 1978. The other solid black line is the effective demand curve for 3rd quarter 1978. When real GDP sits at the crossing point of effective demand and aggregate supply, the economy reaches the LRAS zone. The LRAS zone is more a zone than a vertical curve in the way the economy moves into it. Theory says that at the LRAS curve, inflation will start to develop and real growth will slow down. We see exactly that happen in the graph above, but in a zone and not directly on a vertical curve. The LRAS zone is marked by crossing lines of the same color before the recession started 2nd quarter 1980.
(note: Leading up to the LRAS zone, the Effective demand curves stay bunched together heading toward the meeting point with real GDP, while the Aggregate supply curve shift right. (see graph #1) Once real GDP enters the LRAS zone, the Aggregate supply curves bunch together and the real GDP starts to move upward on the aggregate supply curve. The Aggregate supply curve stops shifting, and the Effective demand curve starts shifting upward. (see graph #2))
As the red dots of real GDP progress into the red area of the LRAS zone, we see inflation start to develop and real GDP growth slow down. Inflation had been tracking between 6% and 7% since 4th quarter 1975. Real GDP was moving horizontally between 6% and 7% inflation. In the LRAS zone marked by the effective demand limit, inflation rose from 6% to eventually 12% right before the fall in real GDP. Real GDP stagnated through the LRAS zone during 1979.
So there was a cost-push inflation spiral taking place in 1979 within the LRAS zone. What was the solution? The Federal Reserve came to action.
The Fed rate was elevated to 10% during the 3rd quarter of 1978. Then it stayed there for a number of quarters but it was not high enough to suppress the cost-push inflation spiral. As inflation developed after that in 1979 within the LRAS zone, the Federal Reserve raised the Fed rate to over 13% by the start of the recession. Eventually the Fed rate cut the inflation spiral in the LRAS curve. and the dynamics of that spiral had to wind back down… as it wound down the recession started.
In graph #1, we see the same scenario happening again as it was playing out before 1978; Real GDP moving horizontally and effective demand heading downward straight to the point of contact. If real GDP keeps growing at around $100 billion per quarter as it did in 2nd quarter 2013, real GDP will enter the LRAS zone in mid 2014. If the same scenario plays out, inflation will start to develop next year, but with sluggish real growth after.
What is different now? Well, capacity utilization has backed down below 78% which is similar to what happened in 1978. Yet, unemployment is falling, instead of rising. I still think unemployment has a bit to fall before real GDP reaches the effective demand limit next year. But it will be interesting to see the speed with which the economy enters the LRAS zone.

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GA Gov. Nathan Deal Taking Payola To Obstruct Obamacare

Ralph Hudgens GA Obamacare Obstructionist

Last week Georgia’s Insurance Commissioner proudly came out as an Obamacare obstructionist, bragging that Georgia would require “navigators” – people hired to assist individuals sign up for Obamacare — to be licensed by the Georgia Department of Insurance.

That was bad enough, but now it gets really ugly. Via Raw Story:

Georgia Gov. Nathan Deal (R)’s family and business partner have been receiving payments from a secret Political Action Committee called Real PAC. Half a million dollars of the money donated to the PAC has come from corporate health care interests which — like the governor and Georgia state Insurance Commissioner Ralph Hudgens — oppose the implementation of the Affordable Care Act (ACA), also known as “Obamacare.”

According to investigative reporter Jim Walls of Atlanta Unfiltered, the PAC hasn’t filed taxes or the required financial disclosures in two years, and the information it did file for 2011 was incorrect.

Contributors to Real PAC include Aetna, Humana, Blue Cross, United Health care and other interests that want to keep health insurance premiums and other costs as high as possible. Bryan Long of activist group Better Georgia told Raw Story that the list of donors shows who Gov. Deal really works for.

While I’m certain Governor Deal will say there’s no quid pro quo, AtlantaUnfiltered proves that to be wrong:  

Major benefactors of the committee, Real PAC, include health-care interests seeking tens of millions — even billions — of dollars in business with state government. One donor, WellCare of Georgia, gave Real PAC $50,000 on the same day that state Medicaid officials said they planned to extend WellCare’s $1 billion-a-year contract for two years.

Let’s also pay attention to the Big Donors here: United Health, Aetna, Humana and Blue Cross. United Health and Aetna have declined to participate in state-based exchanges in states where they’re actually regulatedlike California and New York, opting instead to hand off some payola to a corrupt Georgia governor in order for him to behave like an obstructionist.


Hat Tip to Karoli at Crooks and Liars blog

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Kaiser Foundation Calculator Out of Date

Bill Clinton has become the The Secretary of Explaining Stuff for the PPACA. Maggie goes on to explain to one writer why the Kaiser Calculator is out of date as the Healthcare Exchanges come on line with real pricing.


The Kaiser Foundation Calculator is out of date. They created it before any of the states had announced rates. So they were not able to accurately calculate subsidies because subsidies are based on the actual cost of the 2nd least expensive Silver plan in any given market.

You have to know what that premium is to figure out the subsidy. In addition, they are using their estimates of “national averages” as to what a Bronze or Silver plan will cost a person of a certain age with a certain income. Now that many states have announced actual rates, we are finding that they are significantly lower than expected.

For instance, in L.A. if a 30 year-old earning $30,000 receives a subsidy of $507, he could buy a Bronze plan (which covers everything a Silver plan covers) for just $1341 a year–not the $1902 you suggest.

In New York City (the most expensive insurance market in the nation for young people because we don’t let insurers charge older people more), he would receive a subsidy of $2190 (because the benchmark silver plan that determines the subsidy is quite expensive. He could then take that $2190 subsidy and purchase a Bronze plan for $1506 a year. Can he afford $1506? Yes.

Bob, I think you’re out-of-touch with how well a 30-year-old who earns $30,000 a year is doing. He earns more than roughly 70% of Americans in his cohort ( 21-30) You’re looking at $30,000 a year from the perspective of a 40-something. A 30-year-old male with that income is likely to be single and living in an urban area where he spends far less on rent/mortgage than a 40-year old would (I know this because my kids are roughly that age, one in NYC). He probably lives in a small apt. in a part of the city that is not a middle-class family neighborhood. His neighborhood is more commercial, surrounded by bars and restaurants with a decent night life (this is where he wants to be and very likely he shares the apt with someone [a girlfriend]). That cuts his rent in half. Depending on the city he lives in and the public transportation, he may or may not need a car. (A 40-year old with kids does) The 30-year-old earning $30,000 spends much of his paycheck on eating out, ordering in, etc. He’s not yet worried about saving–he spends most of his paycheck every month. This is why he can afford to spend $100 to $132 a month for health insurance in two of the most expensive cities in the nation. He no doubt spends well more than that each month for beer, pizza, drinks with friends at local bars, and ordering in junk food. If he cooked dinner 1 or 2 nights a week, he could save enough to cover the premium (This is just one of many ways to economize–my point is only that he can afford $100 a month.) .

And when you look at the actual rates in most of the country, after his subsidy he is likely to be paying somewhere between $40 and $80 a month for insurance. . I have written a post looking at actual rates for young adults and will be posting here on HealthBeat this evening. PLEASE Stop using and quoting the KAISER CALCULATOR. You wind up spreading misinformation.  The Secretary of Explaining Stuff  Maggie Mahar, Healthbeat Blog

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Sumner: Has CPI Been Wildly Overstating Inflation?

Scott Sumner makes a very good point (though my interest here is somewhat peripheral to the main thrust of his post):

Government price indices don’t measure the prices that are of macroeconomic interest.  For instance in the 6 years after the housing bubble peaked the US, BLS data shows housing prices rising by about 10%, while Case-Shiller showed a 35% decline.  Housing is 39% of the core CPI.  That’s a big deal.

Here’s what that looks like:

Yow. (The important CPI sub-components of housing, i.e. owner equivalent rent, look similar.)

Contra the sky-is-falling inflationistas at ShadowStats, this suggests that CPI has greatly overstated inflation since the (Shiller) housing peak in April 2006. Just for illumination, here’s a rough-and-ready shot at replacing the 40% of housing movement in the CPI with the movement we see in Case-Shiller:

Screen shot 2013-09-04 at 5.29.48 PM

If this has any merit, we’re looking back at three to six years of deflation. It also suggest that inflation has been shooting up in the last year or so. Do with that what you will.

Paul Krugman often defends CPI against ShadowStats-style attacks by pointing to the Billion Price Index, which tracks closely with CPI over time. But the BPI is an index of retail prices. It doesn’t include housing, health care, education, and many other components that make up more than 50% of the Consumer Price Index. (Which makes you wonder why CPI and BPI track so closely…)

I notice that this Sumner item caught Karl Smith’s eye as well, and he points out rightly that constructing indexes is always a problematic venture:

basically anyone with MS Excel and a rudimentary knowledge of the subject matter in question can create a workable index

But, still, based on this quick look, at least since the housing peak in 2006, Scott’s right that CPI has been looking like an especially dicey measure.

Cross-posted at Asymptosis.

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How to calculate capital income’s consumption rate for recession forecasting

During the posts about the percentage rate of capital income used for consumption, it seemed readers were not sure how I calculated the number. Well, I want to show here how I calculate the percent of capital income used for consumption. The number is currently rising from quarter to quarter. When it begins to fall, a recession is appearing on the horizon. So the method below can be used by anyone for recession forecasting.

1.) I get a blank circular flow sheet ready for inputting data.

how to do CICR 1

Link to graph #1.

2.) I go to the BEA tables for the NIPA data. (National Income and Product Accounts) I get the following information. Table and line number given. (billions of 2009 dollars)

how to do CICR 2

Link to graph #2.

3.) Then I convert the last line for “Government net borrowing or net lending” from 2013 dollars into 2009 dollars by using a converter which uses the GDP deflator. Here is one. The $1185 in graph #2, now becomes $1116 in 2009 dollars.

how to do CICR 3

Link to graph #3.

4.) Next I input that data into the blank circular sheet. You will notice that the GDP at the end does not equal the real GDP in graph #3. There is always a residual from line 27 of table 1.1.6. So, consumption, Govt. spending, Investment and net exports add up to a different number than the real GDP given in line 1 of that table.

how to do CICR 4

Link to graph #4.

5.) Now using the data we can proceed to determine the consumption rate of capital income. It is a process of deduction getting one number, then another, until we get the number we want. In this step, let’s go ahead and complete the bottom section. There are 3 numbers to obtain.

  1. Total Net Taxes = Govt. spending – Govt. borrowing = $1791
  2. Lend(-)/borow = – Govt. borrowing – Exports = -$3077
  3. Gross $$ Saving = Investment – Lend(-)/borrow = $5547

how to do CICR 5

Link to graph #5.

6.) Now I start filling in the top. The first step is to put the real GDP from below into the out-going GDI at the top. Then I input the effective labor share percentage of national income, which in 1st quarter 2013 was 73.9%. The effective capital income share will also be filled in as labor share and capital share add up to 1. The incomes of labor and capital are calculated from their shares. The method of calculating effective labor share is to download the data for the labor share index from this graph at FRED. Then take the index for the quarter in question and multiply it by 0.766. For example, for 1st quarter 2013, the index 96.465 times 0.766 = 73.9%.

how to do CICR 6

Link to graph #6.

7.) The next step is to determine the effective net tax rates for both labor and capital. For capital’s effective tax rate before 2003, I use Jane Gravelle’s data. For data from 2003 to 2011, I use Wikimedia. For data after 2011, I can only estimate. The estimation looks for a balance of movement between the labor’s effective tax rate and the capital’s effective tax rate. In this case for 1st quarter 2013, I set the effective capital tax rate at 15.5%, which gives a capital net tax of $631 billion. I subtract $631 b. from $1791 b. of total net taxes to get labor’s net taxes of $1160 b. Then I can calculate labor’s net tax rate by dividing labor’s taxes, $1160 b., by labor’s income, $11,528 b. The result gives a labor tax rate of 10.1% of labor income. If the capital tax rate had produced a labor tax rate around 5%, I would assume the capital tax rate was too high. and if the capital tax rate had produced a labor tax rate of 20%, I would assume the capital tax rate was too low. Normally the labor tax rate is less than the capital tax rate, so in this case the estimation “seems” balanced.

how to do CICR 7

Link to graph #7.

8.) Now we take the personal savings rate from graph #2, which is 4.1%. I apply this to the labor’s disposable income income of $10,368 b. which is labor income, $11,528 b, minus labor’s net taxes, $1160 b. Thus labor is saving 4.1% of $10,368 b., which is $425 b. You can see the personal saving rate in the yellow box. The 3.7% is savings as a percentage of total income, not just disposable income.

how to do CICR 8

Link to graph #8.

9.) Now I determine labor’s consumption by subtracting savings and net taxes from labor income.Labor consumption = Labor income – labor net taxes – labor savings = $9943 b.

how to do CICR 9

Link to graph #9.

10.) Now that we have labor’s consumption and we know that total consumption is equal to labor’s consumption plus capital’s consumption, we can determine capital’s consumption.

Total consumption = labor’s consumption + capital’s consumption

Capital’s consumption = Total consumption – labor’s consumption = $10,644 – $9943 = $701 billion

Then we can easily determine capital income’s rate of consumption by dividing capital consumption by capital income, $701/$4071 = 17.2%.

how to do CICR 10

Link to graph #10.

There… we don’t need to do any more with the sheet.  I realize that the information for capital income is still not complete in graph #10, but we don’t even need to complete that information. You don’t have to fiddle with imports, exports or even capital savings. We already know the number we want for recession forecasting, which is 17.2% of capital income is being used for consumption. We can use the same calculation method for any quarterly or annual data. For future data, when you see the consumption rate of capital falling, think recession on the horizon.

For those who want or need total accuracy…

It does not matter if the consumption rate of capital is calibrated accurately or not, it will rise calibrated or not… and it will fall calibrated or not, just the same. It’s the relative rising and falling that is used for recession forecasting. (note: the plot of capital’s consumption could be calibrated by reducing the effective labor share by as little as 2%. source)

One person made a comment on a past post that capital gains taxes change wildly and would affect the calculation. However. if you keep a close balanced eye on labor’s net tax rate, you will spot noise in capital’s tax rate. The key is to hold a steady line with informed adjustments about tax revenues. Then what you end up with is a core rate, similar to core inflation that seeks to clean out the noise. The data used for capital income’s effective tax rates do not show noise from capital gains taxes anyway, so the method above is safe to use for recession forecasting.

Everyone needs to have the advantage to protect themselves well before a recession starts, not just those with their fingers on the pulse of capital. Everyone… Now with the above method, labor has its fingers on capital’s fingers. Everyone, including the stock market has a way to know quarters in advance that capitalists as a group are tightening their belts. There is no way to hide it.

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Students Screwed Again by Congress ? ? ?

Since I have worked with students filling out FAFSA forms for grant, subsidized and unsubsidized loan eligibility, etc. ; I have an interest in how the interest rate debate shook out. As you know, the Senate reached a bi-partisan agreement in the smoked filled backrooms to which the House agreed to in a follow-up vote. You would think there had never been any partisanship amongst either party from reading some of the remarks made by the Senate-buds. Anytime Cantor, Boehner, and Ryan get excited about a Senate decision, you know something is coming down the hill which is not going to be good for us.

If you have bothered to read some of the media comments and blog articles (more on these later), allegedly there really is not much difference in what results from minimal interest rates changes. There is some truth to this when looking at monthly payments as the difference is usually small. I always like to look at the amortization table and total cost of the loan to make a decision. Eventually though, a dollar here and a dollar there and pretty soon you are talking about $thousands which does make a difference for students and parents.

Undergraduate loan are now capped at 8.25% and Parent Plus Loans are capped at 10.5%. The agreement reached managed to save students some money in the beginning before it reverts to true rates agreed upon. The loans will be tied to a 10-year Treasury Bill rate with a 2.05% premium added to it. When they agreed to the new policy, the TB rate was 1.9%. I looked today to see it had gone to 2.4%, which means the next set of borrowers (if this stays there) will pay more than this year’s borrowers will for new and consecutive year loans.

Much of the argument leading up to this bill precipitated from a lack of agreement on how to value the loans going into the future. The Republicans were looking to use Fair Value Accounting Estimates to account for risk and the Democrats were resisting such a move preferring to stay with the historical data collected by the Department of Education (which it will not release) to ascertain risk. Student advocate Alan Collinge points out, the usage of historical data is a worthwhile approach since there are reams of accurate federal data for Federal Students Loans. For some reason, the CBO does not wish to use this data this year and instead turns to commercial bank data (Fair Value Accounting) for student loans. Loans granted by commercial banks typically have  higher interest rates, are riskier, and have fewer of the guarantees or collection powers associated with Federal loans. Resulting from this switch in data, the CBO’s estimates into the future changed dramatically, going from turning a surplus of $45 billion into a loss of $11 billion for federal student loans issued in 2013.

Over the time I have been involved with student loans, the commercial lenders have always whined about the government’s Direct Loan having an advantage over them in making student loans. Partially this is a true statement and I have found them easier in which to work.  with that being said I will stop here and let you read a part of the discussion between Alan Collinge of and Forbes contributor Peter J. Riley “Intervew with Student Loan Activist Allan Collinge – Fair Value in An Unfair System?”  on why not to use Fair Value Accounting for student loans.

AC: DC based think tanks including the Heritage Foundation (Jason Richwine), the New America Foundation (Jason Delisle), and others are expending significant efforts currently to legitimize the use of so-called “fair value accounting” for establishing budgetary costs of the federal student loan program. These efforts largely rely upon recent and compelling work by the Congressional Budget Office to compare historical accounting cost estimates for federal student loans with fair value estimates. While there are some questions about the appropriateness of FVA for valuing assets on the government books, for the purposes of this discussion, we’ll ignore them. As such, the method, which discounts the value of a lending instrument based on future risk projections, is a worthwhile approach in principle, and the CBO’s cost estimates change dramatically as a result of employing it-turning a surplus of $45 billion into a loss of $11 billion for federal student loans and guarantees that were issued in 2013.

One has to be impressed with the dramatic increase in cost that this model predicts for federal student loans. Equally impressive is the extent to which Delisle defends this method (See here, here, and here) and the passion Richwine exudes as he condemns big-government for using such an “accounting trick” to hide the true costs of the program.

Upon cursory examination, however, it becomes obvious that the method being championed by these two analysts-even by Fair Value Principles is blatantly inappropriate, uses grossly and demonstrably incorrect inputs on at least two fronts, and generates unbelievable results that even laymen with no particular accounting expertise would likely reject out of hand. Harsh characterizations, I realize, but certainly not thrown up lightly.

PR: How are FVA accounting principles being violated?

AC: In evaluating the value of a lending asset, Fair Value Accounting principles require, first, that actual, historical market data on sales of similar assets be used as a benchmark for determining the fair value assets if available. For federal student loans, such data exists, since federal loans have been securitized and traded for years, and except for a brief period following the financial crisis in 2008, the market has been active, healthy, and relatively stable. Therefore, any competent fair value accountant would and should use this data as the primary benchmark, and look no further. The CBO, however, does not do this! The CBO, Delisle, Richwine, et. al choose to ignore federal loan sales data, and instead choose private loans as their relevant benchmark. These loans have much higher interest rates, are far riskier, come with none of the guarantees or collection powers attached to federal loans, and the private student loan market is far smaller (less than a fifth the size of the federal market), more volatile, and far more difficult to find reliable data on generally (private lenders tend to consider data like default rates, collection costs, recovery rates, and so forth as proprietary). Based upon this, there should be no disagreement that private loans are ill suited for valuation of federal loans.

What is worse, however: The private loan market has always been highly dependent upon the federal loan system in many ways. One example: many if not most borrowers turn to private loans only as a last resort because they could not get federal loans. The lenders know this well, and raise their prices accordingly. There are other dependencies, but this alone should disqualify private loans from serious consideration as benchmarks for valuing federal loans.

For these reasons, it should be overwhelmingly clear that the private lending market is grossly inappropriate for use as a pricing benchmark for federal student loans. In fact, I cannot imagine that any competent analyst would attempt to use private loans as a stand in…even as a poor second choice.

PR: Don’t you agree that taking in the future cost of defaults is an appropriate thing to do? This seems to be the thrust of why fair value accounting is being promoted.

AC: Again, thanks for asking! Delisle points to the cost of defaults as a critical reason for using fair value, but years of presidential budget data show that for defaulted FFELP loans, the government’s recovery rate is 122%, a rate far higher than any loan, public or private could ever claim (this is directly attributable to unprecedented collection powers, and the removal of bankruptcy and other protections). For Direct loans, this rate has been about 110%, but I estimate that with FFELP ended, this rate is about 115% . Even discounting generously for collection costs (using cost data for generalized bank loans which typically involve seizure of property, significant court costs, etc.), and factoring in the government’s cost of money leaves a hefty profit on defaults, and in fact shows that the government makes more money on defaults than loans which remain in good stead (a defining hallmark of a predatory lending system).

But Delisle points to the same, flawed “fair value” costing reasoning to claim that in fact the government loses money on defaults. This is analogous to Exxon pointing to a guy selling biodiesel out of his garage for $8/gallon, and using this to justify writing off $4 for every gallon the corporation sells. The “costs” are not only completely fictitious, there is ZERO chance that they will ever occur based on all available data.

PR: So, what are the implications of all this, Alan?

AC: A governmental entity having a preference for its loans to default is something like the epitome of bad governance, and explains well the Department of Education’s reluctance to crack the whip on the schools to contain their costs, warn the public about the true risk they are taking, or advise congress to decrease federal lending limits. Certainly the Department’s institutional budget has soared under these conditions as well. This makes it both bad government, and big government.

The New America Foundation used to do meaningful work pushing for good government, yet here their expert is protecting just the opposite. Similarly, the Heritage foundation has historically championed smaller government, but their staff protects its growth here, whether wittingly or not. Delisle, if not Richwine, has published voluminously and in great detail on the general concept, but for all his analysis, has never explained or even acknowledged the departure from sound FVA principles. I think he really must in the public interest, and frankly, in the interest of preserving the integrity of his professional reputation, if nothing else.

There are serious policy considerations as well. For example: If this methodology is accepted and used by Congress in its decision making, then we’ll have a “tail wagging the dog” scenario where the private lending industry will be able to make the federal program “look” far, far more expensive by simply raising their interest rates! While this is something the private lenders like Sallie Mae clearly would like to do for a number of reasons, it threatens millions of borrowers, the federal lending system and the public interest generally.

PR: So, eventually, the real facts about default recovery should catch up to this method over time, right? Doesn’t this allay your concerns?

AC: We don’t have 3-4 years to let this sort of dishonest accounting fraud prove itself as such. Google “Enron” and “Fair Value Accounting”, and you will understand the urgency of my concern.



– “Interview With Student Loan Activist Alan Collinge – Fair Value In An Unfair System ?” Peter J. Reilly, Forbes, July 2013

– The CBO report lays out the reasoning behind the fair-value estimates, focusing on the premiums private investors would be required to take on the risk of that loan. The CBO focuses particularly on the “fact that investors demand additional compensation to accept the risk that losses may exceed those already reflected in the estimates of cash flows and that those losses may occur when resources are scarce and particularly valuable.”

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Regular coastal towns and cities and sea level rising

Seeing this piece by Andrew Revkin Can cities adjust to a retreating coastline? reminded me to also look closer to home. We all too readily forget that NYC is not a typical problem of a coastal communitiy…so what do planners in smaller towns face? How do they choose responses, for instance, if an engineering report proposes possible loss of 20% of your tax base by 2050 due to rise in sea level predictions and the particular configuration of your coastal areas? The towns of Scituate, Duxbury, and Marshfield in MA face real decision making in terms of planning. As Selectman Rick Murray of Scituate told a friend of mine, “They who keep their heads in the ground will drown.”

As an exercise in arguing sea level rise and consequences in or near your own neighborhood, walking the information and language through this lens might help to clarify some of the problems involved that are not at such a large scale point of view and beyond most of our imaginations and expertise, and could be in your own neighborhood or vacation home. (Or is your land sinking?) (Disclosure: I do not own any coastal property. Nertz.)

Sea level rise

Scituate news

Final South Shore Adaptation Planning Report

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Capital flows

Put all this together, and you have a classic recipe for vulnerability. Capital inflows (borrowing overseas plus foreigners coming into the local stock market) tend to keep the exchange rate more appreciated than it would be otherwise. This encourages imports and discourages exports, so it is easy to develop a current account deficit (meaning that the country buys more goods and services from the rest of the world than it sells).

This is sustainable as long as the capital continues to flow in – particularly as long as companies can issue debt in dollars. But as John C. Bluedorn, Rupa Duttagupta, Jaime Guajardo and Petia Topalova of the I.M.F. point out in a new working paper, “Capital Flows Are Fickle: Anytime, Anywhere,” at least since 1980 “private capital flows are typically volatile for all countries, advanced or emerging, across all points in time.”

No one is immune from the fickle nature of credit in the world economy. International banks love countries until about five minutes before they start trashing them to clients – for example, because they feel (as now) that growth in China and other emerging markets is definitely slowing.

Shifts in sentiment are unavoidable. The question is: how leveraged are you when this happens and how much debt do you need to refinance while markets are feeling negative about your prospects?

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