Mish's Global Economic Trend Analysis

Dissolving Governments in Michigan; Detroit Moves Against Public Unions
Next Phase of Sovereign Debt Crisis; Greek 2-Year Yields Top 20%; Greece Denies Restructuring Plan; Why the Denial?
The "Education Bubble"; Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion

Dissolving Governments in Michigan; Detroit Moves Against Public Unions

Posted: 18 Apr 2011 07:34 PM PDT

Dissolving Governments in Michigan

New measures passed in Michigan will allow the state to dissolve governments, void union contracts, toss aside elected school-board members, close schools and authorize charter schools. Thankfully, those measures are being put to good use.

Please consider Using New Emergency Financial Manager Law, They Start Dissolving Governments in Michigan

In what is likely to be just the first of several dissolutions of democratically elected city governments and school boards in Michigan, the Emergency Financial Manager of Benton Harbor, Joseph Harris, just took away all authority from the city's elected government.

NOW, THEREFORE BE IT RESOLVED AS FOLLOWS:

1. Absent prior express written authorization and approval by the Emergency Manager, no City Board, Commission or Authority shall take any action for or on behalf of the City whatsoever other than:

i) Call a meeting to order.
ii) Approve of meeting minutes.
iii) Adjourn a meeting.

2. That all prior resolutions, or acts of any kind of the City in conflict herewith are and the same shall be, to the extent of such conflict, rescinded.

3. This order shall be effective immediately.

The author of that blog sees it differently than I do. "EmptyWheel" complains. I cheer.

When you are bankrupt you lose authority to a bankruptcy board. That bankruptcy board gets to make actions. As part of those actions, city officials who could not or did not do their job, lose their rights to govern.

How can that possibly be wrong?

In many instances elected officials cannot possibly do their jobs because of poor decisions made by their predecessors. For examples, many cities are cash-strapped because of untenable agreements on wages and benefits given to public unions.

Public unions typically will not negotiate, being the foolish entities they are. So bankruptcy and takeover is the solution.

Detroit Moves Against Public Unions

Benton Harbor is small-potatoes. Detroit is big-time. Moreover, Detroit is bankrupt and public unions are part of the reason. Thus, I am pleased to report Detroit Moves Against Unions

A new state law has emboldened the Detroit mayor and schools chief to take a more aggressive stance toward public unions as the city leaders try to mop up hundreds of millions of dollars in red ink.

Robert Bobb, the head of the Detroit Public Schools, late last week sent layoff notices to the district's 5,466 salaried employees, including all of its teachers, a preliminary step in seeking broad work-force cuts to deal with lower enrollment.

Mr. Bobb, already an emergency financial manager for the struggling and shrinking public school system, is getting further authority under a measure signed into law March 17 that broadens state powers to intervene in the finances and governance of struggling municipalities and school districts. This could enable Mr. Bobb to void union contracts, sideline elected school-board members, close schools and authorize charter schools.

Mr. Bobb, appointed in 2009 by Democratic Gov. Jennifer Granholm and retained by Republican Gov. Rick Snyder, pledged last week to use those powers to deal decisively with the district's $327 million shortfall and its educational deficiencies. Mr. Bobb raised the possibility of making unilateral changes to the collective-bargaining agreements signed with teachers less than two years ago.

He is also expected to target seniority rights that protect longtime teachers from layoffs and give them the ability to reject certain school placements.

Detroit Federation of Teachers officials called the initiative a poor idea, in part because nine of the schools slated for conversion to charter designation or closure were recently given new dispensation to relax work rules and haven't had enough time to demonstrate their progress, they said.

I cheer Rick Snyder and anyone else willing to take public unions head on. Those unions are part of the problem (not all of it), and zero part of the solution.

As part of the solution (not all of it), we need national right-to-work laws, the scrapping of Davis-Bacon and all prevailing wage laws, and a complete end to collective bargaining of public unions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Next Phase of Sovereign Debt Crisis; Greek 2-Year Yields Top 20%; Greece Denies Restructuring Plan; Why the Denial?

Posted: 18 Apr 2011 10:41 AM PDT

A Greek newspaper reported that Greece is in talks with the IMF regarding debt restructuring. However, Greek Finance Minister issued this denial "Restructuring is not an issue we're discussing".

Last week, the media went gaga over a no-news announcement from German officials that restructuring was on the table. It should not have caused a stir because anyone watching the market knows perfectly well a restructuring is coming. Denials from Greece cannot stop it.

Why the Denials from Greece?

Inquiring minds are likely asking "Why does Greece insist it will not restructure?"

The answer is simple: Greek public pension plans are loaded with Greek sovereign debt garbage. A restructuring would shatter the values of those plans and the expected payouts to the pensioners.

However, the market does not care what Greek or IMF officials think. Nor does the market care about those pension plans. A yield of 20.34% on the 2-year government bond is proof enough.

This is what happens when the market takes matters into its own hands.

Greek 2-Year Sovereign Debt Yield

Greece Denies Restructuring Plan

Bloomberg reports Greece Denies Restructuring Plan as Traders Raise Default Bet

Greece said it has no plans for a debt restructuring even as German officials openly discuss the possibility and investors charge a record amount to insure the country's obligations.

"Restructuring is not an issue we're discussing," Greek Finance Minister George Papaconstantinou said in an April 16 interview in Washington. "The pain and the cost" of doing so would be greater than repaying lenders, he told reporters the same day.

Traders are betting on a default. The cost of insuring Greek sovereign debt jumped 56 basis points today to a record 1,211 points, according to CMA prices for credit-default swaps. That indicates there's a 64.5 percent probability of default within five years.

Greece's aid program was designed on the assumption that the country would repay debt rather than restructure, and "nothing has changed," Strauss-Kahn said as he hosted the IMF's semi-annual meetings in the U.S. capital. Lagarde said April 14 at the same talks that "there is no discussion about debt restructuring, none whatsoever."

Greek newspaper Eleftherotypia reported today that Papaconstantinou brought a request to extend the maturities of all the country's debt to a meeting of European Union finance ministers in Hungary on April 8-9 and to representatives of the EU, European Central Bank and IMF who visited Athens in April. A Finance Ministry press officer in Athens, who declined to be identified citing government policy, denied the reports.

The Wall Street Journal reported that IMF officials believe Greece's debt burden is unsustainable and should be restructured. William Murray, an IMF spokesman, said yesterday that "there is absolutely no truth" to the report. German Finance Ministry spokesman Bertrand Benoit declined to comment today.

Next Phase of Sovereign Debt Crisis

MarketWatch reports Finland, Greece spark new Europe debt fears

In Finland, a strong showing by the anti-euro True Finns party in Sunday's national election raised fears that the country of 5.4 million could slow or even block a pending European Union–International Monetary Fund bailout package for Portugal.

Meanwhile, a Greek newspaper reported that Greece has asked the IMF and the EU to begin talks on restructuring its debt. A Finance Ministry spokesman subsequently told Reuters that the report wasn't true.

"We seem to be moving into the next phase of the sovereign-debt crisis in Europe where debt restructuring comes to the fore," said Kathleen Brooks, research director at Forex.com. "This is going to be the most painful part of the crisis, and although it will most likely be played out in the credit markets, it has the ability to disrupt the euro as we have seen in recent days."

Ireland Denies Default Concerns

In Ireland, Prime Minister Kenny Says Ireland Won't Default

Irish Prime Minister Enda Kenny said the nation won't default on its debt as he tries to rebuild confidence at a time when investors speculate Greece may struggle to pay back its borrowings.

"The Greek government will obviously deal with this problem in the best way it can," said Kenny, 59, in an interview with Andrea Catherwood on Bloomberg Television's "Last Word" in London today. "We have no intention of defaulting. We've made that perfectly clear. We want to continue to pay our way."

Kenny said Ireland's government has "plenty of time" before interest payments due in October or November "to demonstrate the seriousness of intent" about tackling the country's banking and fiscal problems.

"We believe that growth projections and initiatives that were taken will lead Ireland to a position where we fix what's been broken" and generate economic growth, he said.

Irish citizens voted overwhelmingly for change. Kenny has to be a huge disappointment. Once again the only country that handled matters correctly was Iceland. Voters rejected "Icesave" a second time. Please see Icelandic Voters Reject "Icesave" Again, Effectively Telling UK and Netherlands Banks "Go to Hell"; Iceland's Common Sense Stance

Icelandic voters want no part of "Icesave". Even the name "IceSave" is preposterous. Iceland was save by the fact voters rejected "Icesave". Icelanders would have been debt-slaves for decades had they accepted the original terms.

How many times do citizens have to say no? Hopefully voters give Prime Minister Johanna Sigurdardottir a well-deserved boot in the next election.

My ending statement in that piece was "Banks that make stupid loans should suffer for them, not taxpayers. So far, Iceland is the only country that has taken this common-sense stance."

The word "banks" might be better phrased as "people", although both statements are true.

Depositors chased high yields in Irish banks that went under. Deposits are loans to the bank. Those loans, as depositors found out are not risk-free.

It does not matter whether poor loans are made by banks, individuals, or governments. Those who chase yield or make loans in general, have default risk. In this case, the UK government foolishly decided to guarantee those deposits and now the UK government (UK taxpayers) are on the hook for the losses.

The citizens of Iceland did the right thing. I commend them for refusing to bailout private citizens and/or foreign governments for making poor loans.

This mess will undoubtedly be settled in international court.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The "Education Bubble"; Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion

Posted: 18 Apr 2011 01:12 AM PDT

Peter Thiel, co-founder of PayPal says We're in a Bubble and It's Not the Internet. It's Higher Education.

"A true bubble is when something is overvalued and intensely believed," he says. "Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It's like telling the world there's no Santa Claus."

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can't wriggle away from by declaring personal bankruptcy, says Thiel. "It's actually worse than a bad mortgage," he says. "You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future."

Thiel's solution to opening the minds of those who can't easily go to Harvard? Poke a small but solid hole in this Ivy League bubble by convincing some of the most talented kids to stop out of school and try another path. The idea of the successful drop out has been well documented in technology entrepreneurship circles. But Thiel and Founders Fund managing partner Luke Nosek wanted to fund something less one-off, so they came up with the idea of the "20 Under 20″ program last September, announcing it just days later at San Francisco Disrupt. The idea was simple: Pick the best twenty kids he could find under 20 years of age and pay them $100,000 over two years to leave school and start a company instead.

Two weeks ago, Thiel quietly invited 45 finalists to San Francisco for interviews. Everyone who was invited attended– no hysterical parents in sight. Thiel and crew have started to winnow the finalists down to the final 20. They'll be announced in the next few weeks.

While a controversial program for many in the press, plenty of students, their parents and people in tech have been wildly supportive. Thiel received more than 400 applications and most were from very high-end schools, including about seventeen applicants from Stanford. And more than 100 people in his network have signed up to be mentors to them.

Thiel thinks there's been a sea-change in the last three years, as debt has mounted and the economy has faltered. "This wouldn't have been feasible in 2007," he says. "Parents see kids moving back home after college and they're thinking, 'Something is not working. This was not part of the deal.' We got surprisingly little pushback from parents." Thiel notes a handful of students told him that whether they were selected or not, they were leaving school to start a company. Many more built tight relationships with competing applicants during the brief Silicon Valley retreat– a sort of support group of like-minded restless students.

Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion

The New York Times reports Burden of College Loans on Graduates Grows

Student loan debt outpaced credit card debt for the first time last year and is likely to top a trillion dollars this year as more students go to college and a growing share borrow money to do so.

"In the coming years, a lot of people will still be paying off their student loans when it's time for their kids to go to college," said Mark Kantrowitz, the publisher of FinAid.org and Fastweb.com, who has compiled the estimates of student debt, including federal and private loans.

Two-thirds of bachelor's degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt. Default rates are rising, especially among those who attended for-profit colleges.

Some education policy experts say the mounting debt has broad implications for the current generation of students.

"If you have a lot of people finishing or leaving school with a lot of debt, their choices may be very different than the generation before them," said Lauren Asher, president of the Institute for College Access and Success. "Things like buying a home, starting a family, starting a business, saving for their own kids' education may not be options for people who are paying off a lot of student debt."

In some circles, student debt is known as the anti-dowry. As the transition from adolescence to adulthood is being delayed, with young people taking longer to marry, buy a home and have children, large student loans can slow the process further.

In 2009, the Obama administration made it easier for low-earning student borrowers to get out of debt, with income-based repayment that forgives remaining federal student debt for those who pay 15 percent of their income for 25 years — or 10 years, if they work in public service.

Deanne Loonin, a lawyer at the National Consumer Law Center, said education debt was not good debt for the low-income borrowers she works with, most of whom are in default.

"About two-thirds of the people I see attended for-profits; most did not complete their program; and no one I have worked with has ever gotten a job in the field they were supposedly trained for," Ms. Loonin said.

"For them, the negative mark on their credit report is the No. 1 barrier to moving ahead in their lives," she added. "It doesn't just delay their ability to buy a house, it gets in the way of their employment prospects, their finding an apartment, almost anything they try to do."

Obama's Ridiculous Solution

Obama's solution is for kids to graduate from school deep in debt work 10 years in public service to get out of debt. At the end of 10 years, whatever education the kids got in school would be useless.

Moreover, most of those public service jobs will be very low paying, and taxpayers would get stuck with the bill.

Who are those praising the education system?

Why the educators of course. Here are a few quotes from the article.

"College is still a really good deal," said Cecilia Rouse, of Princeton, who served on Mr. Obama's Council of Economic Advisers.
Sandy Baum, a higher education policy analyst and senior fellow at George Washington University, a co-author of the report, said she was not concerned, from a broader perspective, that student debt was growing so fast.
Susan Dynarski, a professor of education and public policy at the University of Michigan, said student debt could generally be seen as a sensible investment in a lifetime of higher earnings.

School a "Good Deal"?

In Fall of 1971 when I started college it cost something like $250 a semester for an engineering degree at the University of Illinois. When I graduated it was something like $450 a semester.

That was a "good deal".

A college education is now a good deal for the administrators, the professors, and the football coaches who all make big salaries with enormous benefits, then have the gall to whine for more benefits.

The problem is made worse by throwing money at the problem. Every cent in education grants goes to higher fees and higher administration costs. Student loans have done four things, all of them bad.

Jack up the cost of education
Make students debt slaves for the rest of their lives
Unjustly hand over huge profits to schools like the University of Phoenix at taxpayer expense
Add to the national debt

The best thing to do with student loans would be scrap the program entirely.

Please consider

A Remarkable Comparison: Affordable Student Loans vs. Affordable Housing an email from Eugene Holloway, a Maryland Attorney, on the rising cost of college education.

Debt for Diploma Schemes: Debt for Diploma Schemes and the Cookie Monster Principle

Off-Balance-Sheet Budget Fraud: Budget Deficit Accounting Fraud and the Off-Balance-Sheet Student Loan Scam; Time to Scrap Entire Student Loan Program

Pell Grants Turn Students into Debt Zombies: For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program

Subprime College Loans, Who is to Blame?: Subprime Goes to College; Students Buried in Debt; Who is to Blame?

Expect More Student Riots: University of California Campus Erupts In Riots; Student Loan Scam Drives Up Cost Of Education; Expect More Riots

Schools compete on research and research drives up costs. So do outrageous salaries for football coaches and administrators. Ironically most of the professors involved in research do not even teach. The kids get little or no benefit from the "research". Instead the kids are taught by someone praying to get tenure.

Solutions - More Competition

Pell grants need to stop cold turkey, more online schools need to be accredited. Anything and everything that lowers education costs should be fair game. The goal should be the most education for the least cost, not the least education for the most cost.

Guaranteeing student loans while throwing taxpayer money at the problem virtually assures massive waste.

The biggest need is more competition. The free market would work and work well if there was not a monopoly on accreditation.

Except for lab work, most classes could easily be taught online, for a song. Let's accredit a wide variety of classes taught from India over the internet. Fraud would not be an issue if the mid-term and final exams are in person. Lab courses have to stay here, but I am quite sure there are numerous ways to drastically lower costs of those courses.

Student loans should not be guaranteed. That would settle the hash of places like the University of Phoenix right away.

If some kids or their parents want to pay outrageous sums of money for "prestige schools", let them. The vast majority of students would opt for something far less expensive if given the chance. I say give them a chance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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