Student Debt: Forgiveness Is To Err Not Devine

Politics and government spending never end well for taxpayers.  Since January, Congress is on a deficit-busting spree, shoveling out trillions of dollars practically every two months in the name of economic recovery and stimulus.  Now Democrats are advancing the idea of student loan debt forgiveness.

Senate Majority Leader Charles Schumer and fellow Democrat Elizabeth Warren are torch carriers for the concept, a key plank in the platform of vanquished presidential candidate Bernie Sanders. Politically, the scheme makes sense: 44.7 million Americans owe college debt.

That's a lot of votes.  But loan forgiveness rewards fiscal irresponsibility.  Colleges, the federal government and private lenders are guilty of coaxing, or preying upon if you prefer, young people and their parents to pile up mountains of debt. Taxpayers are on the hook for most of the debt.

Here's a current snapshot of student loan debt from recent reports from the Federal Reserve and First Republic Bank:

• Current student loan debt: $1.71 trillion, projected to hit $2 trillion next year  
• Student loan debt is about $739 billion more than the total U.S. credit card debt
• 69% of college students took out loans in 2020
• Average student debt for the most recent graduating class: $39,351
• 91.8% of student loans are underwritten by the federal government

Those are scary numbers.  More frightening is the collusion between colleges and government. Colleges raise tuition and fees. These institutions of higher learning pitch students on the easy availability of loans. Then government raises borrowing limits to accommodate rising education costs.      

Students and their families are often willing accomplices, borrowing hundreds of thousands of dollars for an Ivy League degree.  No one bothers to ask students the difficult question: What job do you plan to seek that will allow you to pay off your loan?  Music and Art majors should think twice.

Ballooning costs of a college education are at the heart of the debt issue.  Since 1980, college tuition and fees have spiraled 1,200%, while the Consumer Price Index (CPI) has jumped 236%.  The average undergrad tuition and fees in 1980 for a public college was $1,856, compared to $9,403 in 2020.

Cost of an education at a private institution over the same period has skyrocketed from $10, 227 for tuition and fees to $34,059.  Tuition and fees are expressed in constant 2018-2019 dollars for a fair comparison. The data was published by the National Center for Education Statistics. 

Looking beyond the headline figures, a clearer picture emerges of student borrowers and the amount of debt.  Here are some eyeopening numbers, courtesy of The Brookings Institute:

• 6% of student borrowers owe more than $100,000 in debt, including 2% who owe more than $200,000.  They account for a third of all outstanding student debt.
• The vast majority of those students borrowed money for graduate school.  Loans for graduate school account for 50% of the total outstanding student debt.
• An estimated 75% of student loan borrowers assumed debt for two-or-four year colleges. These undergrads account for one-half of the outstanding debt. 

The data reveals an indisputable fact: Student borrowing averages are heavily skewed by graduate school debt.  The cost of an advanced degree is escalating at a rate faster than tuition and fees for undergrads.  The federal government and private lenders need to cap borrowing for grad school.

While it's difficult to pinpoint a single reason for the surge in college costs,  these factors are often cited by the education industry as a defense for the hikes: Decreases in state funding; increases in student enrollment; and, a boost in available federal aid.  Note: colleges admit federal aid is a factor.

A study by the New York Federal Reserve found that for every $1 in subsidized federal student loans colleges increase tuition 60-cents. The relationship could not be clearer: the federal government loan policy is providing the money and air cover for colleges to continually increase prices to students.

This insidious partnership between the federal government and colleges never attracts interest from Washington's pedantic lawmakers. Instead, they politicize the debt issue, labeling it a "social injustice" or "income inequality" problem to obscure the duplicity of colleges and the feds.  

A form of forgiveness already exists. During the pandemic all payments for certain federal student loans were suspended until September 30. Last week, the president extended the freeze on payments through January 31 of next year.  Interest will not accrue, thus providing students and parents an added benefit.

While clamoring for loan forgiveness, partisans fail to point out the majority of borrowers are repaying their debt. Only 15% of student loans are in default at any time. Arts and Humanities majors are the most likely to default on their student loans, according to EducationData.Org.

Under the Democrat loan forgiveness plan, the bulk of benefits would go to the top 40% of households because they hold the plurality of debt.  Borrowers with advanced degrees represent 20% of  borrowers but would receive 37% of the forgiveness benefits, according to Brookings estimates.

Loan forgiveness will not resolve the current dilemma: federal student loans incentivize colleges and universities to raise tuitions without fear of losing students.  Students can always borrow more money.  But is that in the best interests of already indebted students? The answer is unequivocally: NO. 

Washington lawmakers have a duty to scrutinize the cozy relationship between the federal government and colleges and demand changes. Under the status quo, Americans can expect a continuation of mounting colleges costs and mushrooming student debt underwritten by taxpayers. 

What's Up With Inflation? Everything!

Inflation is roaring in America's economy. This isn't news to consumers but the latest government data confirms prices for goods and services are spiraling at historic levels.  Costs for food, cars, fuel, construction materials, air travel, household furnishing, apparel and virtually everything else is soaring. 

The question on the minds of consumers, economists, bankers, investors and stock market analysts remains: Is this a transitional period of spiking prices that will end soon or will inflation continue for a year or more?   Answers depend on whom you ask and their stake in the outcome of the debate.

                                           The Data

Data not opinions are the appropriate starting point for a discussion about inflation.  The Consumer Price Index (CPI) surged one percent, in June.  But that monthly jump doesn't tell the whole story.  During the last 12 months, the index hiked 5.4%, the largest annual expansion since August 2008.  

Unpacking Bureau of Labor Statistics (BLS) reveals eyeopening numbers.  The price for all energy has leaped 24.5% in the last 12 months. Gasoline prices are up 45.1%; used cars and trucks skyrocketed 45.2%; transportation services rose 10.4%; and, commodities forged ahead 8.7% in the same period.

In 44 of the nation's 50 largest metro areas, rents have surpassed levels before the pandemic began, according to data from Realtor.com.  Nationwide, the median rent reached a record high of $1,575 in June, an increase of 8% from a year ago. Housing is not a discretionary cost for Americans.  

Food, which is not included in the CPI, increased 0.8% in June, a larger upsurge than May's 0.4%. Food prices are heavily impacted by the cost of fuel, because farmers, wholesalers and grocery chains use gasoline for harvesting and for fleets of trucks to ship food to local stores.  

Consumer wages have not kept pace with the inflation.  The Bureau of Labor Statistics measures the growth of weekly earnings, adjusted for inflation.  From May 2020 to May 2021, real earnings decreased 2.2%. This creates a perfect storm of rising prices and falling purchasing power. 

The flow of money into the economy acutely effects inflation. The Federal Reserve has shoved down interest rates while maintaining bond purchases. This usually triggers robust economic activity and business investment, but inflation lurks as a danger.

In 2007 during the financial crisis, the Fed cleaved the federal funds rate from 5.25% to zero. Later, the Fed raised rates slightly, then sliced the target in 2020 to near zero due to the pandemic. This creates a phenomenon known as "easy money," lowering lending rates for consumers and businesses.

However, lax money policy dampens interest rates paid on money markets, savings and bonds. As a result, investors chase returns in the riskier stock market, fueling bumper growth in the major market indices.  Caution: the stock market is not always a reliable indicator of underlying inflation.   

Today's economy is also awash in Biden bucks as the administration, backed by Congress, has pumped trillions into the economy, including direct payments to individuals.  Economist Larry Summers calls the current stimulus "excessive" because it risks overheating the economy, accelerating inflation.  

Another contributor to the inflationary pressure is the rising cost of hiring employees.  As businesses resume normal operations, it is becoming harder to find workers.  Some remain on the sidelines, content to collect beefed-up government unemployment checks and stimulus payments.  

To complicate matters, many employers are not recalling laid off workers as normal operations resume. Lost jobs and idle workers help explain why the national unemployment rate in June swung to 5.9% In pre-pandemic January 2020, unemployment stood at 3.6%.

At the end of May, there were 9.2 million job openings, according to the BLS.  Desperate businesses are being forced to pay hiring bonuses and other perks to fill jobs.  The cost of wages and bonuses are passed on to consumers in the form of higher prices for services and goods.  

                                Inflation: Transitory or Long Term?

In day-one testimony before Congress, Fed Chairman Jerome Powell repeatedly said his colleagues are focused on returning to full employment and less concerned about temporary hike in inflation.  In fact, the Fed made it clear that it would tolerate higher inflation than its target rate: a 2% annual increase.

It is obvious the chairman believes the current inflation will diminish soon. He blames supply chain issues, increased post-pandemic spending and higher oil prices for the uptick.  "As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal," Powell says.

But is he right?

JPMorgan Chase chief executive Jamie Dimon is solidly in the camp of dissenters.  He recently opined that there is "a very good chance inflation will be more than transitory."  His investment bank, the largest by assets, is stockpiling cash to buy treasures and other investments when interest rates climb. 

He's not alone.  Deutsche Bank economists and Morgan Stanley are sounding the alarm about long-term inflation. But there are still doubters who frankly are championing easy money for their own economic interests, especially those who market stocks and other financial instruments,

"While inflation has a negative connotation for many people, inflation itself isn't inherently good or bad," says Jill Fopiano, president and CEO of O'Brien Wealth Partners.  "Some level of inflation is a sign that the economy is healthy."  

Gus Faucher, chief economist at PNC Financial Services Group, points out recent sharp rises in prices are concentrated in parts of the economy that were whipsawed by the pandemic, including used cars, airfares and hotel stays.

"That suggests that this is part of the dislocation from the (economic) reopening and I would expect that...inflation will settle down later this year," Faucher forecasts.

Economists can find reasons to validate their views on alternative scenarios.  However, this writer doesn't consider wishy-washy perspectives to be a helpful guide to the future.  Uncertainty promotes more uncertainty.  Taking a stand always comes with risks of being wrong.  So be it.  

                                        An Inflation Prediction 

In day-two of his testimony, Powell modified his stance on "transitionary" inflation.  He told the Senate Banking Committee, "I think we're experiencing a big uptick in inflation.  Bigger than many expected.  Bigger than certainly I expected."  Analysts labeled the remarks a "softening" of his stance.

It is more like backpedaling or waffling.  Powell figures by hedging he protects his credibility regardless of the eventual outcome.  But a career economist and bank executive Howard Manning, who spent five years at the Federal Reserve Bank in Kansas City, isn't buying "transitory inflation."

"With the exception of the 1% money earners and the top 5% wealth holders, the rest of the U.S. economy is suffering from a runaway inflation spike that is dramatically effecting net disposable income," Manning notes.  Growing inflation is a drag on savings and investment, he adds.

To underscore his premise, Manning cites a rapid increase in commodity prices that have driven up food and clothing prices, which appear to be "running closer to 7% to 10% rather than the 2% to 5.5% the administration wants us to believe."

He acknowledges supply chain issues, but underscores the continuing outsourcing of production and manufacturing which effects capital formation.  American jobs are fleeing to China, India and other countries continuing to "rob the USA of middle class level wages," Manning reminds economists.

Manning's assessment of jobs: The COVID job losses are "permanent." "And the Green Energy jobs are not financially replacing former jobs. The future now is working for the military industrial complex--wages, healthcare (soft dollar) and government subsidy," he posits.  

In this writer's opinion, based on metrics, inflation will stick to the economy like Elmer's Super Glue for at least a year or more. Rising prices sometimes can be offset by efficiencies and productivity. However, the fastest way to mitigate exploding costs is by shaving payroll and jacking up prices.

Gasoline and fuel prices which effect food,  transportation and energy costs are blooming with no end in sight for at least the next 12 to 24 months.  Virtually every American, especially low income earners, will be forced to make purchase tradeoffs as inflation bubbles, threatening economic growth.

The Fed, economists, the administration and stock market pros will not be able to use the excuse they were blindsided by stubborn inflation.  The data is right in front of them.  They are choosing to adopt a rosy view.  The data indicates inflation will march steadily ahead without proactive Fed intervention. 

Why Stocks Are Riding Market Roller Coaster

Just when the US stock market appeared to be defying gravity, it tumbled back to Earth with a resounding thud. Jittery investors rubbernecking at the Dow and S&P market numbers gulped Alka Seltzer. Panic gripped Wall Street traders who triggered a massive sell off of stocks.

Even before the dust settled, everyone from small individual investors to institutional fund giants were asking the same question: “Is the Bull Market over?”

That question dangled over the market as stocks began a roller coaster ride recently, giving new meaning to the word volatility.  After the end of the bear market in March 2009, stocks have soared into record breaking territory, making this the second longest Bull Market in history.

But the recent gyrations have Wall Street analysts calling the downdraft a correction, a term reserved for a 10 percent drop in market averages. A  20% slide would have signaled the start of a Bear Market.  Last week the market rallied, but the gut-wrenching steep swings may not be over.

Despite the conventional market wisdom, the gyrations are a product of the Federal Reserve’s experimental policy over the last eight years. The Fed propped up the stock market during President Obama’s tenure by lowering interest rates while increasing the supply of money.

Under former Fed Chairman Ben Bernacke, the country embarked on an unprecedented monetary experiment.  The strategy was to repress  the bond market by lowering interest rates, nudging investors into riskier assets such as stocks.  The policy worked as assets prices rose.

Everything from real estate to junk bonds and stocks gained as the Fed drove interest rates to nearly zero while purchasing longer term securities issued by the federal government. At the same time, the Fed flooded financial institutions with capital to promote increased lending.

As a result of the the Fed’s unprecedented maneuvering, stocks leapfrogged to new highs.  However, the market was built on quicksand.  There was no underlying growth to support rising stock prices. Economical fundamentals were soft.  The result was overheated stock prices.

After Bernacke stepped down, new chair Janet Yellen followed Bernacke’s script endorsed by Mr. Obama.  In the twilight of Obama’s reign, when the economy began showing signs of a pulse, Yellen acquiesced and signaled a modest plan for raising interest rates.

Many leading economists were stumped by Yellen’s slow pace.  The experts believed it was time to unwind the Fed’s asset purchases and allow interest rates to move upward at a faster clip.  Despite the lack of economic evidence to continue to weigh down interest rates, Yellen clung to her policy.

The reason for her recalcitrance is the stock market was the one gem in an otherwise dismal economic performance under Mr. Obama. Fed chairs always insist their monetary decisions are unaffected by politics. Don’t believe it.  Everything in Washington is influenced by politics.

That’s why this recent market nosedive should be named the Obama Correction.  The Fed’s policy, which some claim saved the financial industry from collapse, resulted in the slowest recovery from a recession in U.S. history.  Stock traders became rich, but the average American saw far less benefit. 

The good news is the United States economy is shaking off its long malaise.  The Gross Domestic Product (GDP), a measurement of economic growth, hit 3.2 percent in the second quarter and finished the third at 2.6 percent.  GDP numbers for 2017 will be released February 28.

Unemployment has dipped to historic lows. Wages are showing signs of inching upward. Corporate profits are now energized by top line revenue growth.  And more firms are raising their profit estimates for future quarters, an indication there are better days ahead.

Of course, economic growth has a down side for the market.  Analysts are now hand-wringing about interest rates putting a damper on consumer borrowing and spending.  Wall Street is also spooked about fears of inflation as growth inevitably leads to a tight labor market and higher wages.

Even with an improving economy, no Bull Market lasts forever.  The longest Bull Market in history was from October, 1987 to March of 2,000, a period of 4,494 days when the Dow Jones Industrial Average reached 308 all-time highs and spiked 582%.

The current Bull run is approaching 3,000 days.  The average Bull Market lasts about nine years (3,282) days and adds 480%.  Looking at those numbers, the current Bull has room to grow, having added 260% in under eight years.  This Bull may yet become the longest in U.S. market history.

Ben Bernanke: Send In The Clowns

Federal Reserve Chairman Ben Bernanke is starting to sound like a circus barker.  Listen.  "Step right up and watch me create money out of thin air.  See the nation's daring central bank gobble up trillions of dollars in government bonds.  You'll be amazed as interest rates plunge to death-defying levels."

The bearded money magician with the Federal Reserve System has an array of dazzling tricks up his sleeve.  Quantitative Easing.  QE II. Operation Twist.  Son of Operation Twist.  His economic wonk jargon is enough to pull the wool over the eyes of an insomniac.

Most Americans have long ago tuned out Bernanke.  The Fed's actions seem incomprehensible because the media has made only a superficial attempt to explain the policy.  For the most part, reporters parrot the Fed's mind-numbing policy gibberish without adding an ounce of perspective.

Here is what every American needs to know about the Federal Reserve's efforts to boost economic recovery by flooding the country with easy money.

What is the Fed doing?  Since 2009, the Fed has shelled out nearly $3 trillion to purchase financial assets, primarily government bonds.  In most cases, the Fed acquires the securities from banks and other private sector businesses.  The Fed's action drives down interest rates by putting more money in circulation.  More dollars means credit is easier to get and its cheaper.  At least that's the theory.

What's the difference between Quantitative Easing and Operation Twist?  With QE, the Fed purchased mostly long-term bonds in hopes of lowering long-term interest rates.  Under Operation Twist, the Fed unloaded short-term bonds it owned and used the proceeds to purchase long-term bonds.

Where does the Fed get all that money?  The Obama Administration bristles when Republicans charge the Fed is printing money. Technically, they are correct.  There are no printing presses churning out greenbacks to fund the Fed's purchases.  It is more accurate to say money is created electronically with the click of a computer mouse. The Fed "credits" banks and other sellers with trillions of dollars as if real money had changed hands.  The Fed just invents money.  They are the only ones who can do that.

All that money floating around must be a good thing?  It depends. Wall Street loves it because when interest rates nosedive it makes stocks more attractive to investors.  The big banks are giddy because they have more money to lend to businesses and individuals. However, it hasn't proven a boon to small businesses and ordinary citizens. Banks have become stingy in lending to anyone except big businesses. The small fry borrowers are considered too risky.  Many banks also are parking the funds in their reserves to shore up their financial health instead of lending the money.  No one benefits from that except the banks.  Because many banks have hoarded the money, the economy remains lethargic despite the trillions injected into the financial system.

Who has been hurt by the Fed's buying binge?  Primarily, seniors and retired folks on fixed incomes.  When the supply of money increases, banks and other financial institutions pay lower rates on Certificates of Deposit, Money Market Accounts and passbook savings. Typically, seniors and retirees prefer these relative safe investments over the riskier stock market.  The returns today are minuscule because the Fed has intentionally driven down interest rates.  As a result, more seniors and retirees are being forced to take part-time or full-time jobs to supplement their income.

Is the Fed program working?  Bernanke's supporters claim the Fed has saved the economy from skidding off the cliff.  But with interest rates already at zero, the economy has not responded as optimists had forecast.  Job creation and unemployment remain moribund.  Japan tried a similar easy money blueprint without any significant uptick in their economy.  Normally, the U.S. recovers faster from a recession. The economic rebound hasn't happened.  By that yardstick, the Fed's scheme has failed.

Despite the sketchy track record of bond purchases, Bernanke is already sending up trial balloons for a third round of QE after June's disappointing employment numbers.  The chairman, a Republican first appointed by President George W. Bush, seems to have an eye on the November elections and his current boss' (President Obama) political future.

Americans should understand the Fed's money spigot has a catastrophic downside.  Those rolling waves of dollars eventually will trigger an inflation tsunami once the economy improves.  The result will be spikes in prices for goods and services along with runaway interest rates.

The menace of too much money oscillating in the economy is reason enough for Bernanke bring down the tent on the Fed's failed policy that makes a mockery out of fiscal responsibility.