Offshore Inn for International Real Estate, Overseas Jobs, Asset Protection, Expatriate Resources and Overseas Retirement
It is a peculiar irony. A year ago, the the UK’s Inland Revenue began a crackdown on offshore savings. Banks operating out of the Channel Islands and the Isle of Man had to hand over details of British customers, and depositors who confessed were rewarded with an amnesty. Thousands did and many must have given up on offshore savings. Inadvertently, the taxman’s crackdown must have saved some depositors from the collapse of the offshore subsidaries of Icelandic banks.
Thousands were not so lucky and could now lose most of their savings …
Consider if you will be a sole proprietorship, partnership or corporation.
‘You’re so lucky, being able to work abroad.’ I’ve forgotten how many times I’ve heard that statement.
If you have assets, you are most likely a target. When your assets are visible, you are the bullseye.
Do you need a job? Just got a question? Pop it in here and you’ll get an answer from our Inn Team.
Tip the scales in your favour, protect your home and family with asset protection programmes for partnerships, corporations and individuals.
In a scene that I expect to play out in every city across the country, Unions won’t reopen talks in Moorestown New Jersey.
Township officials expressed frustration that several unions representing Moorestown government workers have not agreed to reopen contract negotiations.Last month, township council asked the unions to consider making wage and health benefit concessions this year even though they have contracts that continue through 2012 and guarantee annual pay raises of 3.75 percent.
At Monday night’s council meeting, Township Manager Christopher Schultz disclosed to the public the specifics of council proposals to the unions — a wage freeze and a payroll contribution to health care benefits to help cut costs to the township.
As of Monday night’s deadline to respond, township officials said none of the unions had agreed to reopen negotiations.
“It’s more than frustrating,” said Councilman Greg Gallo. “It’s irresponsible and it shows tremendous shortsightedness and, frankly, I think it shows a disrespect to the taxpayers and to council to not even enter into a conversation. We respect the fact that they have existing contracts, but the world has changed and we are living in extraordinary times.”
“The membership has decided not to open up the contract at this time, but we understand the township is facing economic pressure,” said CWA local President Adam Leibtag.
For the current contract reached in August 2008, he said the union made concessions that included an increase from $10 to $15 in doctor’s visit co-pays.
Blatant Union Arrogance
It is the height of arrogance and stupidity to brag about concessions like a $5 increase in copays made in 2008. Councilman Greg Gallo hits the nail on the head with “It’s irresponsible and it shows tremendous shortsightedness and, frankly, I think it shows a disrespect to the taxpayers and to council to not even enter into a conversation.”
I am thankful for that shortsightedness actually. Cities will be forced to realize what leaches unions are.
The correct solution, and the only solution is to get rid of union pestilence. That is easy to accomplish by privatizing every job, including the fire and police departments, the latter to the sheriffs association.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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In a headline trumpeting the wrong thing, Bloomberg is reporting Unemployment Decreased in Nine U.S. States in January.
The unemployment rate decreased in nine U.S. states in January and climbed in 30, signaling the thawing of the labor market is not broad-based.The jobless rate in Michigan showed the biggest drop, falling to 14.3 percent, still the highest in the nation, from 14.5 percent in December, according to figures issued today by the Labor Department in Washington. New York and New Jersey were among eight states where unemployment decreased by a tenth of a point.
A national unemployment projected to average 9.8 percent this year signals state budgets will be strained by decreases in tax revenue and rising jobless insurance payments. The loss of 8.4 million jobs since the recession began in December 2007 means the labor market in the world’s largest economy will take years to rebound.
“This is a recovery that’s really kind of concentrated,” said Steven Cochrane, director of regional economics at Moody’s Economy.com in West Chester, Pennsylvania. “It still portends weakness in income-tax revenue and sales-tax revenue into fiscal year 2011.”
Unemployment in the Detroit area, home to General Motors Co. and Ford Motor Co., dropped to 15.3 percent from 16 percent in December, contributing to the decrease in Michigan’s jobless rate.
States showing the most improvement in coming months will probably be those with a large manufacturing base, said Moody’s Economy.com’s Cochrane. The need to rebuild inventories and growing exports is propelling a factory rebound that will help some parts of the country over others, he said.
Unemployment in California, Florida, Georgia, North and South Carolina and the District of Columbia climbed to the highest levels since records began in 1976.
Regional and State Report
With that backdrop let’s take a look at the actual data from the BLS Regional and State Employment and Unemployment Report for January 2010.
Thirty states and the District of Columbia recorded over-the-month unemployment rate increases, 9 states registered rate decreases, and 11 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia. The national unemployment rate fell from 10.0 percent in December to 9.7 percent in January, but was up from 7.7 percent a year earlier.In January, nonfarm payroll employment increased in 31 states and the District of Columbia, decreased in 18 states, and remained unchanged in 1 state. The largest over-the-month increase in employment occurred in California (+32,500), followed by Illinois (+26,000), New York (+25,500), Washington (+18,900), and Minnesota (+15,600).
State Unemployment (Seasonally Adjusted)
Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high.
Six states reported statistically significant over-the-month unemployment rate increases in January. New Mexico experienced the largest of these (+0.3 percentage point), followed by California, Florida, Idaho, and Utah (+0.2 point each) and Maryland (+0.1 point). The remaining 44 states and the District of Columbia registered jobless rates that were not appreciably different from those of a month earlier, though some had changes that were at least as large numerically as the significant changes.
West Virginia and Nevada recorded the largest jobless rate increases from January 2009 (+3.5 and +3.4 percentage points, respectively). Six other states reported rate increases of 3.0 percentage points or more: Florida, Illinois, and Wyoming (+3.2 points each), Rhode Island (+3.1 points), and Alabama and Michigan (+3.0 points each). The District of Columbia also registered a large over-the-year unemployment rate increase (+3.6 percentage points). Thirty-five additional states had smaller, but also statistically significant, rate increases. The remaining seven states reported jobless rates that were not appreciably different from those of a year earlier.
Unemployment Rates By State
click on chart for sharper image
Percentage Change Year Over Year
click on chart for sharper image
Things are improving a bit in Michigan while climbing to new highs in California, Florida, Georgia, North and South Carolina and the District of Columbia.
Note that California was the state adding the most jobs. Employment just did not increase by enough relative to those seeking jobs.
These numbers show how shaky the “recovery” is, especially with huge budget concerns and layoffs coming in most states.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Instead of fighting jihad in Somalia by supporting the weak transitional government, the United States would have more success focusing on humanitarian aid and development, says democracy and governance expert Bronwyn Bruton.
Israeli Ministry of Defense adviser Uri Lubrani’s opinion that supporting Iranian opposition is a better policy than considering a nuclear strike has gained momentum in Israeli policy cirlces, the Wall Street Journal reports.
Please consider this one sentence video clip from House Speaker Nancy Pelosi.
http://www.youtube.com/watch?v=KoE1R-xH5To
“We have to pass the health care bill so that you can find out what is in it.” That unfortunately is the sad state of affairs, not just with healthcare, but with virtually any bill passed by Congress.
The only people who know what is in these bills are the lobbyists who write them.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Fresh on the heels of a snow job where Bernanke warned economists to disregard effects that did not happen (and anyone doing any semblance of research should have known would not happen) we now see media trumpeting up census hiring as if it was not temporary.
In case you missed the snow job analysis please see …
Having expected to see job losses up to 220,000 in last Friday’s report, economists have now gone the other direction trumpeting part-time census jobs that will vanish by June or July.
Census Hiring Hype
Please consider this unthinking headline Obama Job Losses May Turn on 300,000 March Payrolls.
The U.S. may add as many as 300,000 jobs in March, the most in four years, setting the stage for what some economists say will be sustained employment gains.Better weather, hiring of temporary government workers and a growing economy may bring the biggest job increases since March 2006, said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The rise would be the second since President Barack Obama took office in January 2009.
February payrolls dropped by 36,000, the Labor Department reported last week, depressed in part by East Coast snowstorms that closed many businesses. Excluding the effects of the weather and the hiring of government workers to conduct the 2010 Census, payrolls would have climbed by about 100,000, Greenlaw said today in a Bloomberg Radio interview.
“If you get a plus 100,000 number again in March, then you’d be talking about a headline reading of a little bit better than 300,000 when you factor in the weather bounce-back and the census effect,” he said.
Mish Comment: Hello Greenlaw - Is the headline all this is important? Does the fact that all of these jobs will vanish by June mean anything?
The February drop in payrolls was smaller than the 68,000 median decline forecast by economists surveyed by Bloomberg News before the March 5 report. The jobless rate, which hasn’t increased since October, held at 9.7 percent, even as more people entered the workforce.
Mish Comment: Go figure. Bernanke trumped up the affect of snow and economists upped their job loss estimates to ridiculous levels, some over 200,000. I called this in advance, as the above links show.
“We expect a sharp snapback in March payrolls as well,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, the most accurate forecaster in a Bloomberg News survey in December. He didn’t give a specific estimate.Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said in a March 6 e-mail to customers that he anticipates payrolls this month will climb by about 275,000. About 50,000 of that represents the “underlying trend” in employment, he said, with about 100,000 attributable to the weather and another 125,000 to the census.
Mish Comment: Even after analysis shows that snow had no effect, economists are attributing 100,000 jobs to snow.
Joseph LaVorgna is more upbeat about the employment outlook, anticipating payroll gains averaging about 300,000 for the next three to four months.“We have overcut inventories, we have overcut capital spending and we have overcut jobs,” said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. A March payroll gain of as much as 450,000 “can’t be ruled out,” he said, and further increases are “going to convince people of the sustainability and durability of the recovery.”
“We could easily see” 300,000 jobs added this month, Brian Wesbury, chief economist at First Trust Portfolios in Wheaton, Illinois, said today in a Bloomberg Radio interview. “I don’t expect to see consistent gains of that size, but clearly March could be that number.”
I’ll Take The Under
“We have overcut inventories, we have overcut capital spending and we have overcut jobs,” said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. A March payroll gain of as much as 450,000 “can’t be ruled out,” he said, and further increases are “going to convince people of the sustainability and durability of the recovery.”
Even if by some miracle we see 450,000 jobs in March, they will all vanish by June. Not one of those quoted in the article above mentioned either of these points
1. These jobs are part-time
2. They will be gone by June or July
Economist clowns were wrong about snow last month, and now they are massively wrong in the other direction, confusing part time, temporary hiring with a sustainable recovery.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
This timeline looks at the history of U.S.-Russia arms control milestones from 1949 to present.
In my post San Francisco Infested with Union Parasites and Pestilence; Outrage Over Transit Worker Pay I noted how greedy public unions finally overplayed their hand by rejecting an 8% pay raise with a contract that guarantees they get the second highest pay in the nation.
In a followup story, Supervisor Sean Elsbernd is now going ahead with his initiative to address Muni pay, because the city council wimps did not have the courage or the decency to take on the unions. Please consider Proposed initiative aims at Muni drivers’ pay
A San Francisco supervisor is following through on his plan to curb Muni’s labor costs and on Monday submitted a proposed initiative for the November ballot.The plan takes direct aim at a controversial salary formula enshrined in the city charter that for more than four decades has guaranteed Muni drivers their spot as the second highest-paid transit operators in the nation.
It also would eliminate a trust fund for Muni operators that has resulted in yearly payouts of up to $3,000 for full-time operators. The fund originally was established to help defray health care costs for dependents, but operators can use that money any way they choose.
Elsbernd turned his proposal over to the city attorney for official review Monday and hopes to start collecting signatures by month’s end to qualify it for the fall ballot.
He has until July 6 to collect the valid signatures of nearly 47,000 voters registered in the city.
Elsbernd has the backing of the San Francisco Chamber of Commerce and the San Francisco Planning and Urban Research Association, a civic think tank, but many at City Hall and in the transit-advocacy community are taking a much more cautious approach.
If enough valid signatures are gathered, the proposed amendment would be on the Nov. 2 ballot.
What Took So Long?
That’s all it takes? So, what took so long? If voters approve this, expect to see more such initiatives.
Irwin Lum, president of Transport Workers Union Local 250-A, responded by saying “To just focus on operators isn’t right and isn’t fair.”
Yes, indeed, San Francisco needs to do something about all union termites and parasites, not just the union termites and parasites at Muni. Moreover, it is sad to gather all those signatures only to do a wimpy job on an initiative that does not go far enough.
“What this will do is divide people instead of dealing with the bigger issue of funding” said, Irwin Lum.
No. What will do is unite voters against city hall and unions. When this passes, and I expect this to easily pass because the proposal is so modest, citizens will be even more encouraged by such measures. It’s the perfect out for council wimps who do not have to challenge unions directly yet, it offers what seems to be a relatively easy process for citizens to take matters into their own hands.
Although Elsbernd did not go far enough (perhaps on purpose to make sure this passes), he must be commended for having the courage to start the city on the road to curbing union termites and pestilence.
Expect this initiative to pass, and emboldened citizens to follow up with more termite ridding measures.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Iraq’s security forces performed especially well during parliamentary elections but a big test looms in the months ahead as votes are counted and Iraqi factions try to form a government, says CFR’s Brett McGurk.
We’ve now come full circle. Instead of trying to get people to stay in their homes, Obama is willing to pay them to leave. Please consider Program Will Pay Homeowners to Sell at a Loss.
In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.
Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”
Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.
Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
Big Shell Game
Diana Olick describes the situation perfectly in Mortgage Principal Writedown Won’t Save Housing.
And so it begins. Big gun lawmakers are making the move toward principal writedowns as the last resort to save the housing market.The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.
That’s why the Obama Administration has created this kind of shell game in the first place.
I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.
F.R.A.U.D.
Let’s take real estate agents who might not have had any sales for 6 months or even a year, and agents who have a vested interest (a commission) in selling a home, and let’s put them in charge of figuring out what a home is worth. Good idea.
Oh…there’s no chance real estate agents will sell homes to their friends for cheap or to total strangers for that matter, just to get a commission. Indeed, real estate agents have been the paragon of virtue throughout the crisis so this is the culmination of a perfect idea.
Even appraisers working directly for the bank might be tempted to make special arrangements with favored real estate agents. A final approval process at the bank would make fraud harder, but that is contrary the idea the lender must take an offer if it hits the established minimum bid. A secondary review would also slow things down.
That aside, even with the chance for fraud, lenders are losing money by doing nothing, and in many cases by letting people live in homes rent free for 18 months or longer. Perhaps dealing with fraud issues is the lesser of two evils, assuming of course the banks can afford the loan losses. Then again, what alternative is there besides pretending loans on the books are worth full value?
This is what our affordable housing program has become: Giving tax credits to new home buyers, spending taxpayer money to keep people in their homes, paying people to move out of their homes, and bankrolling Fannie Mae and Freddie Mac with tax dollars for unlimited losses.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
In what can best be described as a contrarian indicator with an uncertain timing trigger, Mutual Fund Cash Depletion Highest Since 1991.
Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.
Stocks will rally this year as the prospect of higher interest rates lures cash from fixed-income securities to equity accounts, says Mark Bronzo at Security Global Investors. Data from ICI, the Washington-based lobbying group for professional money managers, show investors have pumped $369 billion into bond funds since March 2009 versus $23.4 billion for equities.
“There’s so much money in the fixed-income market and there’s so much money in money-market instruments paying almost nothing,” said Bronzo, whose firm oversees $21 billion, in an interview from Irvington, New York. “If that money shifts to stock funds, it’s going to be very bullish.”
Equities may be boosted by investors deploying some of the $3.17 trillion held in money-market funds tracked by ICI. While $754.3 billion has moved from the accounts in 14 months for the fastest decline on record, Bronzo says more cash will be withdrawn as investors gain confidence in the economy.
It gets tiring pointing this out, but the only time money can move into the equity market is at IPO time or other offerings. Otherwise it is impossible for sideline cash to move into equities. For every buyer there is a seller. At the end of any normal equity transaction, there is as much cash on the sidelines as before.
So many misunderstand the simple mathematical function of buying and selling, that I feel obliged to make corrections.
Sentiment, Not Sideline Cash, Is The Driving Force
Share prices do not move up because sideline cash comes in (as noted above it cannot happen in the first place). Share prices rise or fall because buyers or sellers are more aggressive in what they are willing to do. In other words shares are repriced and sentiment is the driving force.
For those who want a second opinion, John Hussman has written about sideline cash on several occasions. Please consider There’s No Such Thing as Idle Cash on the Sidelines.
Moreover, it’s important not to confuse money with debt. Sideline cash is really sideline credit. There is actually very little real cash available relative to total debt and what is needed to service that debt.
Suggestions to “Buy the Dip” based on sideline cash not only shows a lack of understanding about how markets work, they also show a lack of understanding about how extreme sentiment is among fund managers.
Please note that Insider Selling Hits New 2010 High in March. So while mutual funds are loading up, insiders who likely know much more about business fundamentals are selling hand over fist.
Risk is not high, it is extreme. When it all matters is anyone’s guess.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Thailand’s housing market is unlikely to be affected by the government’s decision not to renew its property tax breaks, it has been claimed.
According to a report by Overseas Property Professional (OPP), property developer CB Richard Ellis is confident that the removal of the incentive is not going to affect international sales within the country.
The developer believes that the housing market is now strong enough to stand alone without needing to attract investors.
CB Richard Ellis’s executive director for Thailand, James Pitchon, explained to OPP that the incentives did not include projects due to be finished after March 2010.
He continued: "In the Bangkok market, Thai buyers dominate the market and the removal of incentives will have little affect on foreign demand because it is already limited.
"In the resort markets, many projects are sold on a leasehold basis and leasehold sales did not benefit from tax incentives so again we see little impact on foreign demand from the removal of incentives."
Some developers within the country have claimed that the tax rises could result in a reduction in profits.
The International Valuation Standards Council recently introduced new guidelines aimed at making Thailand’s property market more transparent.
Portugal’s property market is attracting an increasing amount of interest from potential investors, it has been claimed.
Overseas housing news website Property Community has reported that property portal Infinito Real has seen a 17 per cent month-on-month rise in the number of enquires about the country within the last quarter.
The website reports that this growth can be attributed to the fact the country is not overcrowded like some of its close competitors and also to its recent positive press coverage surrounding its economy.
Stephen Anderson, managing director of Infinito Real, told the news provider that a number of factors had contributed towards Portugal’s growing popularity.
He continued: "We have seen that a number of buyers who postponed their plans in 2009 are now ready to move which has created a backlog of buyers wanting to move as soon as possible.
"The small increase in the exchange rate from almost £1 to €1 throughout most of 2009 … has had a profound effect."
Earlier this year, the European Commission predicted that Portugal’s economy would fare better in 2010 than previously expected, potentially growing by 0.3 per cent.
French property is likely to be at the forefront of the minds of many investors this year, with foreign buyers looking to capitalise on the popularity of eurozone destinations.
According to a survey conducted by HomeAway.co.uk and Savills, there will be a resurgence in wealthy lifestyle buyers, purchasing property with cash.
Established markets such as France are likely to be the beneficiaries of the property buyers as many shy away from more risky markets in light of the economic climate.
Courtney Wylie, general manager at HomeAway Holiday-Rentals, commented: "Traditional holiday hotspots are among the top-performing destinations … with places like the Cote d’Azur, Malaga Province, the Balearics and the Algarve all being great options for reliable rental returns.
"For anyone hoping to rent, it is essential to research the tourist market first, particularly when considering emerging markets. Access to the destination should also be considered."
International Property Magazine recently placed France at the top of its Quality of Life Index for the fifth year in a row.
Watch Desmond Tutu, archbishop emeritus and Nobel peace laureate, discuss faith and foreign policy.
This meeting was the annual David A. Morse Lecture and was cosponsored with the CFR Religion and Foreign Policy Initiative.
Inquiring minds are investigating a 44 page PDF by the Center for College Affordability on why financial aid is ineffective. Please consider Financial Aid in Theory and Practice.
Executive SummaryFinancial aid programs are supposed to improve access and affordability in higher education. The effectiveness of these programs is increasingly being questioned as college attainment figures stagnate and the financial burden on students and families continues to climb year after year. This report identifies the main culprit for this unsatisfactory state of affairs as a misunderstanding of the effect of financial aid on schools.
Currently, financial aid programs take costs per student as a given, and attempt to offset some of those costs. However, costs are not given. In fact, it is widely acknowledged that colleges and universities are engaged in an academic arms race. Thus, when financial aid programs make more money available to schools, this money is spent and results in higher costs per student. The end result is more costly higher education, generally accompanied by higher tuition, which has negative implications for access and affordability.
Figure 5: Financial Aid, Enrollment, Spending and Tuition, 1986-2007
The original theory of financial aid would predict that the increases in federal aid and state appropriations over the last twenty years should primarily affect enrollments and affordability. Figure 5 shows the trends over time for a number of variables (inflation adjusted where appropriate), each of which is indexed using 1986 as the base year. Since 1986, federal aid has nearly tripled, while state
appropriations (total, not per student) have increased by slightly more than 40 percent. But enrollments at both two and four year schools have only increased by about 40 percent. If one looks at graduates, rather than enrollments, the figures are even worse. Moreover, the financial burden on students, as measured by the level of tuition and required fees, has almost doubled, as has spending per student.Unintended Consequences: Ravenous Cookie Monsters Engaged in an Arms Race
Fundamentally, there are unintended consequences of the current financial aid system because from the perspective of competing schools, it does not make sense to take their costs, subtract the state subsidy per student, and charge the remainder in tuition (some of the money for which comes from grants and loans to students). Schools have an incentive to spend as much as possible, because spending is useful in building a better school (or at least what appears to be a better school).
The ravenous need of schools for money was originally described as “Bowen’s Rule - All universities, and in particular major institutions with or seeking elite status, will use any and all funds they receive for the pursuit of perceived excellence and improvement.”17 Bowen’s Rule has been confirmed by others such as Charles Clotfelter, who, as Rupert Wilkinson noted, showed that colleges “increased their prices and general spending because they could get away with it – not to make money in itself but to buy the best of nearly everything.” (Emphasis original)18
While spending money in the pursuit of excellence by universities sounds great—who doesn’t like excellence—there is the downside that whatever they spend has to come from somewhere. Indeed, the expenditure of additional resources is the same thing as raising the cost per student. Thus, if the financial aid system allows for schools to acquire additional resources, it will have the effect of raising costs per student.
Thus, the original theory is in need of revision. Instead of taking costs per student as given, the revised theory notes that financial aid can be expected, under certain circumstances, to lead to an increase in costs per student. Specifically, whenever aid is made available to students who are already paying existing costs, it will increase their ability to pay, which is noted by colleges who in turn increase the price they charge these students. The revenue is spent to improve the school, with the consequence that costs per student increase. This increase in costs is typically accompanied by an increase in tuition, which has negative consequences for affordability and access.
Before moving on, I should point out that I am not the first to put forward a critique of the financial aid system. In fact, quite a few people precede me:
- “If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”28
- “One result of the federal government’s student financial aid programs is higher tuition costs at our nation’s colleges and universities.”29
- “Ironically, federal programs in totality give incentive for institutions to increase tuition and to set high sticker prices.”30
- “Each institution faces the choice of maintaining tuition at the lowest possible level or of raising tuitions to ‘harvest’ the federal student aid as an indirect institutional subsidy.”31
The first statement is all the more remarkable because it was coming from the Secretary of Education at the time, and later came to be known as the Bennett Hypothesis. It is perhaps the most widely known critique of the financial aid system. The argument is that financial aid would increase the ability of students to pay, but that schools would see this and either (1) raise tuition; or (2) cut back
on their own aid.How Schools Spend Money
- The University of Illinois spent $6 million on the Irwin Academic Services Center which “helps only about 550 of the school’s 37,000 students” because it is restricted to athletes. But, “at least four other schools have multimillion-dollar tutoring centers just for their athletes” including the $12 million facility at the University of Michigan.54
- Princeton built a $136 million, 500-bed dorm ($272,000 per bed, much more than the median home costs).55 MIT’s Simmons Hall cost $194,000 per bed.56
- “Framingham State College will spend more than $191,000 building a two-car garage and
- stone patio for its state-owned president’s house …even as the college’s budget faces a potential $2 million cut”57
- The University of Medicine and Dentistry of New Jersey “spent more than $80,000 in 2005 to shuttle the head of a volunteer advisory board from her home in Pennsylvania’s Poconos to the school’s Newark campus.”58
- Ohio State University spent $140 million60 “to build what its peers enviously refer to as the Taj Mahal, a 657,000-square-foot complex featuring kayaks and canoes, indoor batting cages and ropes courses, massages and a climbing wall big enough for 50 students to scale simultaneously”61
- The University of California gave 16 employees severance checks, and then rehired them. In the most egregious example, one person “left her old job on April 30 and began her new one on May 1.” She was given the same salary, but managed to collect a $100,202 severance payment anyway. And prior to this she was given “a $44,000 relocation allowance and a low interest $832,500 home loan, for which she was not otherwise entitled.”62
- In 2006-2007, 293 employees at private schools made more than $500,000. “[T]he highest paid college employee in the country was Pete Carroll, head football coach at the University of Southern California, with $4.4-million in total compensation (pay plus benefits).”63
Amazingly, the article outlines all of those problems and yet ends up with ridiculous solutions such as tailoring a program of grants based on need in conjunction with some sort of preconceived notion as to what an education should cost.
Returning to the executive summary, the author, Andrew Gillen states “The only large program that does not contribute to the arms race is the means-tested Pell grant program.“
Really?!
Email Regarding Pell Grants
In response to University of California Campus Erupts In Riots; Student Loan Scam Drives Up Cost Of Education; Expect More Riots I received several emails regarding Pell Grants.
“Matt” Writes:
Hey MishI live in Phoenix and have many friends working for the University of Phoenix. there. The big joke there is the Pell Grant. Most first time students call to get it but never finish one day of class. Because it’s a grant, they keep the cash and never pay it back.
“Art” writes:
Thank you once again for exposing the corrupt government policies involving student loans. I also largely worked my way through undergraduate and three graduate programs. When I was in my doctoral program we were able to borrow tuition-level amounts from Pell grants. Those proved quite difficult to repay actually. Just after I finished these programs the loan mavens raised the available amounts, made the loans immune to bankruptcy, and people began borrowing tuition and lifestyle support monies.The part that you may not be aware of is that financial vampirism has now come full circle with many Universities FORBIDDING graduate students to have any part time employment. They now MUST borrow a full ride. At our hospital we have medical and other advanced students in trainee status. The medical students tell me that they will graduate with over $300,000 in student loans and the Psychology students (depending on their schools) as much as $200,000+ in student loan debt. This means that these professionals must find the most lucrative practice subspecialties to enter or they will never be able to repay these mountains of debt. Many will fail.
The social stupidity of all this is unbelievable. We have a generation of financially crippled professionals coming on. We need these people in the areas of their training, particularly general practices, clinics etc. and yet many will not be functional because they will be fleeing from debt collectors or competing for scarce positions. Many will simply become disillusioned and quit. They will not be able to afford the amenities of life, having families etc. if they play by the rules. On the government-public policy side we have malinvested gigantic quantities of money and degraded the resource, health professionals, that we were attempting to improve.
Sincerely
Art
Pell Grant Money Goes To For-Profit Colleges
Let’s wrap this up with For-profit colleges haul in gov’t aid.
Students aren’t the only ones benefiting from the billions of new dollars Washington is spending on college aid for the poor.An Associated Press analysis shows surging proportions of both low-income students and the recently boosted government money that follows them are ending up at for-profit schools, from local career colleges to giant publicly traded chains such as the University of Phoenix, Kaplan and Devry.
Last year, the five institutions that received the most federal Pell Grant dollars were all for-profit colleges, collecting more than $1 billion among them. That was two and a half times what those schools hauled in just two years prior, the AP found, analyzing Department of Education data on disbursements from the Pell program, Washington’s main form of college aid to the poor.
This year, the trend is accelerating: In the first quarter after the maximum Pell Grant was increased last July 1, Washington paid out 45 percent more through the program than during the same period a year ago, the AP found. But the amount of dollars heading to for-profit, or “proprietary,” schools is up even more — about 67 percent.
For-profits are also grabbing a growing share of loans subsidized by the government to help low-income students. They collected about $7 billion in subsidized Stafford loans in 2008-2009, up from $4.7 billion two years before. Taxpayers subsidize the interest rate and take the hit when students default. Nearly one-quarter of students at for-profit schools default within four years, more than double the rate of other schools.
Overall, the sector enrolled about 2.7 million students in 2007-2008, the latest year with complete federal data available. That was only about 10 percent of total enrollment in higher education, but it’s about 2 million more than a decade before.
The numbers are even more striking for low-income students: The number of Pell recipients enrolled in for-profit schools is 50 percent higher than two years ago.
A Real Solution
Notice the opening gambit in the previous article: “Students aren’t the only ones benefiting from the billions of new dollars Washington is spending on college aid for the poor.“
The reality is students are not benefiting at all, and taxpayers are taken to the cleaners by non-students who take the grant money and run.
The whole scheme of Pell Grants, and government supplied financial aid in general is fallacious.
The best solution is to stop all financial aid for college at both the state and federal level. In addition, it’s time for schools to look at administrative costs, teacher salaries, pensions and the even the idea that everyone is suited for college.
Once that is done, costs will come down and more people will be able to afford higher education.
Of course, colleges are free to provide grants based on individual need, academic achievement, and school contributions. Indeed, that is the way it should work. Moreover, if forced by the free market to allocate money wisely, schools will have no choice but to do so. In turn that will keep costs as low as possible rather than as high as government funding allows.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Four experts debate whether the Obama administration’s proposal to legalize immigrants would help or harm U.S. workers and economic growth.
When all else fails blame the speculators and the shorts. That is the action the Greek Prime Minister George Papandreou, French President Nicolas Sarkozy, and German Chancellor Angela Merkel took today.
Let’s kick the discussion off with a rant from the Greek Prime Minister. Please consider Papandreou Warns Crisis Could Spread Unless Speculation Curbed.
Greek Prime Minister George Papandreou said his country’s fiscal crisis could spread beyond Europe unless “unprincipled speculators” and “ill- regulated” financial markets are reined in.“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” he said in a speech text today in Washington. “An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”
Papandreou called the market for credit-default swaps a “scourge” that “haunts Greece and all of us.” U.S. and European regulators need to bolster regulations to curtain such activities, he said, or “a small problem could be the tipping point in an already volatile system.”
Without identifying any firms, Papandreou said “the same financial institutions that were bailed out with taxpayers’ money are now making a fortune from Greece’s misfortune” and “unprincipled speculators are making billions every day by betting on a Greek default.’
“If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago,” he said.
French President Sarkozy Says EU Must Support Greece
Please consider Sarkozy Says EU Must Back Greece or Jeopardize Euro.
French President Nicolas Sarkozy said the European Union must support Greece or risk destroying the euro as Prime Minister George Papandreou heads for Paris to lobby support for the debt-laden country.“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”
German Chancellor Angela Merkel is rebuffing any talk of a rescue even as EU nations are said to be working on a contingency bailout plan for Greece to be funded by member governments. Her finance minister, Wolfgang Schaeuble, told Welt am Sonntag today that officials should work on creating a European organization similar to the International Monetary Fund to prevent a repeat of the crisis.
Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.
That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.
“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”
As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits.
The Greek prime minister said he will fight to ensure speculators don’t undermine his push to restore order to the country’s economy. It’s unjust and undemocratic that his efforts are being undermined “by some ‘kids’ in New York and elsewhere sitting in front of a computer,” he said yesterday.
Euro Zone Ready to Help Greece If Needed
In what is surely news to Germany, Sarkozy Says Euro Zone Ready to Help Greece If Needed.
French President Nicolas Sarkozy said the euro region is ready to rescue Greece should the government struggle to fund its budget deficit, arguing that the country is “under attack” from so-called speculators.“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said in Paris yesterday after a meeting with Greek Prime Minister George Papandreou. “There can be no doubt in this regard.” While Greece doesn’t need assistance now, “we have measures, we are ready, we are determined,” he said.
“Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” said Sarkozy. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.”
Sarkozy wouldn’t say what steps the EU would take and German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package. Merkel said after meeting Papandreou on March 5 that the question of a bailout “‘absolutely doesn’t arise.” Her coalition partner, Guido Westerwelle, said he won’t sign a “blank check” for Greece.
German Finance Minister Wolfgang Schaeuble indicated his government is already thinking about how another Greek crisis can be avoided, saying the euro region should consider creating an institution similar to the International Monetary Fund.
Flaws in the euro region’s governance were also indentified by former Federal Reserve Chairman Paul Volcker, who said in an interview on March 6 that the lack of a political union to back up the European Central Bank is a “structural crack.”
Did You Catch The Bazooka Theory?
In case you missed it here it is: “Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” said Sarkozy. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.”
Supposedly yapping at speculators and threatening speculators means you won’t have to take action.
Bazooka Theory vs. Actual Results
“If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” Paulson said at a July 15, 2008 Senate Banking Committee hearing. The reference was in regards to Fannie Mae and Freddie Mac.
Paulson believed that if he had the power to bailout Fannie Mae, the market would react to that possibility and no bailout would be necessary. Was that a blatant lie to get Congress to commit funds or was Paulson simply stupid?
Since then both Paulson and Bernanke have tried various bazooka ploys. The results have been less than spectacular except for spectacular failures.
IMF Scorecard
That’s quite a collection of diverging views.
Greece, EU Need To Look In Mirror
What hurt Greece was Greece, yet the Goldman Sachs witch hunt is on. Bear in mind I have many issues with Goldman Sachs, but arranging credit default swaps for Greece so that Greece could hide its debts and get into the EU is not one of them.
Moreover, one should not just blame Greece, but the EU itself for not looking into the finances of Greece better. Indeed it is highly likely the EU purposely overlooked problems in Greece in order to expand the EU. The EU is also responsible for structural problems as Volcker pointed out.
Now, as bear markets expose and magnify structural issues, Greece and the EU are blaming everyone else for problems they caused.
Finally, when the finger point starts and denial sets in, what’s simmering below the surface is usually messier than appears in public. The EU desperately wants to contain this crisis to Greece, but as with subprime rot in the US, I think problems are highly likely to spread to Portugal, Italy, and especially Spain, given the structural problems in the EU.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
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