For the love of money is the root of all kinds of evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.
1 Timothy 6:10Another source of inspiration for this post came from the news headlines of today; consumer spending for the Holidays beat expected forecasts and that consumer confidence in the economy fell in December. The reports, as many in the media world highlighted on morning talk shows, paint a contradictory picture of the economic situation. Why would consumer spending expand during the holidays when most people's confidence fell in the economy over the past month? Some pointed out that the increased spending represented 'pent-up' demand, as consumers have deferred purchase of goods over the past months or years and used the holiday season to release tension denial of want often produces. I am not an economist, so I have no authority in pronouncing which view is correct or incorrect with regards to the outlook of the American economy in light of the above reports. However, I do believe the consumer spending and confidence reports (detailing, prima facie, two contradictory elements) reveal a disturbing trend in American conceptions of wealth creation and production of goods, with implications for, among other areas, higher education.
Here is another quote, this time from a Frank Rich editorial from the 25 December in the New York Times entitled, "Who Killed the Disneyland Dream?":
How many middle-class Americans now believe that the sky is the limit if they work hard enough? How many trust capitalism to give them a fair shake? Middle-class income started to flatten in the 1970s and has stagnated ever since. While 3M has continued to prosper, many other companies that actually make things (and at times innovative things) have been devalued, looted or destroyed by a financial industry whose biggest innovation in 20 years, in the verdict of the former Fed chairman Paul Volcker, has been the cash machine.
It’s a measure of how rapidly our economic order has shifted that nearly a quarter of the 400 wealthiest people in America on this year’s Forbes list make their fortunes from financial services, more than three times as many as in the first Forbes 400 in 1982. Many of America’s best young minds now invent derivatives, not Disneylands, because that’s where the action has been, and still is, two years after the crash. In 2010, our system incentivizes high-stakes gambling — “this business of securitizing things that didn’t even exist in the first place,” as Calvin Trillin memorably wrote last year — rather than the rebooting and rebuilding of America.The thrust of the argument displayed above is that America no longer produces real goods, we simply create wealth out of new financing models that produce value where there once was none. The result is that while our wealthiest generate, what many would term, ridiculous sums of money, they do so at the cost of growth based upon a solid foundation of an actual, tangible good. Of course, this is nothing new to the American financial scene. John Galbraith, noted economist who wrote two seminal works on the American perception of wealth, The Affluent Society and The Great Crash: 1929, observed in the latter of the two books that pursuit of ever higher returns of money, brought in by interest on loans made to fund the excess of stock purchases on margin, begat its own demise.
People were swarming to buy stocks on margin- in other words, to have the increase in price without the costs of ownership. This cost was being assumed, in the first instance, by the New York banks, but they, in turn, were rapidly becoming agents for lenders the country over and even the world around. There is no mystery as to why so many wished to lend so much to New York. One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of investments. They are protected by stocks which under all ordinary circumstances are instantly salable, and by a cash margin as well. The money, as noted, can be retrieved on demand. At the beginning of 1928 this admirably liquid and exceptionally secure outlet for non-risk capital was paying around 5 percent. While 5 percent is an excellent gilt-edged return, the rate rose steadily through 1928, and during the last week of the year it reached 12 percent. This was still with complete safety.
In Montreal, London, Shanghai and Hong-Kong there was talk of these rates. Everywhere men of means told themselves that 12 percent was 12 percent. A great river of gold began to converge on Wall Street, all of it to help Americans hold common stock on margin. Corporations also found these rates attractive. At 12 percent Wall Street might even provide a more profitable use for the working capital of a company than additional production. A few firms made this decision: instead of trying to produce goods with its manifold headaches and inconveniences, they confined themselves to financing speculation. Many more companies started lending their surplus funds on Wall Street. (21-22, emphasis is mine)He goes on to say, "it wasn't that 1928 was too good to last; it was only that it didn't last." We might very well say the same for our current situation in that it isn't too good to last, it just won't last, a sentiment echoed by the respondents to the consumer confidence survey. One only has to look at the financial sector and its dealings with collateralized debt obligations (the dreaded CDO's) to realize that the supposed growth these new instruments created was nothing more than smoke and mirrors. ProPublica has a wonderful series of articles tackling Wall Streets involvement in the 'Great Recession', and while I do not wish to review their entire argument here I feel it would be prudent if I brought one point of their findings to bear.
Around one-third of all CDO's displayed above were created by banks to buy their own product, thus raising the value of such CDO's to a point at which their existence fueled the creation of more and more CDO's. The very 'flow' of money increased a CDO's worth, in some cases many times over. Seeing ever higher rates of return, several men and women of means before the financial crisis told themselves, no doubt, that, "12 percent was 12 percent." As the above graphic demonstrates, a great river of gold did indeed flood Wall Street, the consequence of which is well known to a great many men and women of this nation who found themselves in the aftermath possessing little of any means at all. If we take Frank Rich's comment above to heart, realizing that those with capable skills are still utilizing their talents to create ever more complex debt instruments instead of groundbreaking discoveries, then the lessons given during 1929 might be repeated again and again.
Yet Wall Street is an easy avenue to peruse if one wants to finds signs of avarice. One might be less inclined to look towards the realms of higher education to find similar motivations, yet there, too, exists an inclination towards excessive profit margins. It exists in the practices of emerging and established for-profit colleges and universities.
Frontline produced an expose entitled 'College, Inc.', that delved into the world of for-profit colleges, best exemplified by the ubiquitous University of Phoenix. One issue many congressmen and watchdogs have with the for-profit education industry is their increasing use of Federal Aid funds. Whereas community college bills can often be paid for by small loans or grants, many for-profit schools charge very high rates per hour for classes, forcing students to take out large sums in order to pay tuition. As of the Frontline report of April 2010, while for-profit schools student populations comprise only 10% of the total college enrollment they account for almost 25% of Federal Aid funds distributed. Students leave these schools with a debt-load double that of traditional students. When you combine these figures with the fact that many for-profit schools spend up to a quarter of their revenue on advertising to attract new students, compared to the 10%-15% spent on faculty, it becomes clear that providing a quality education is not the paramount priority of these institutions; that goal is trumped by profit motive.
Even now as the for-profits face scrutiny for their recruitment practices and high loan-default rates among former students, they have found a new source of federal money; the new G.I. Bill. Here is a quote from a ProPublica story entitled, 'For Profit Colleges Rake in Millions from Post-9/11 G.I. Bill', one of several stories in the series focused on for-profit schools:
The Post-9/11 G.I. Bill provides funds to soldiers and veterans to pay for education or vocational training, and came into effect on Aug. 1, 2009. As of September 2010, the V.A. had issued nearly $5 billion in benefits to over 350,000 recipients, according to spokesman Drew Brookie.
More than 36 percent of Post-9/11 G.I. Bill tuition funding was spent at for-profit schools during that time, even though fewer than a quarter of G.I. Bill students attended those schools, according to the report.
Public universities and colleges received a similar amount from the program -- $697 million -- but the money went to more than twice as many students, the report says.
So over one-third of the total monies distributed to for-profit schools through the bill served less than half of the soldiers public institutions educated for just under 14% of the same funds. To put it another way, public institutions served twice the students at less than half the cost as compared to their for-profit counterparts. In a time when public universities and colleges are facing severe shortfalls in budgets and endowments, this fact should be a powerful reminder of the good these institutions bring to our general populace. Yet as for-profits continue to post profits, major universities like Albany face daunting cuts that already have claimed several humanities programs. It is as if, to borrow from Galbraith above, for-profit schools 'might even provide a more profitable use for the working capital' of a university, 'than additional production.' Students, like so much else in this world, are mere commodities whose educational value is no longer tied to aptitude or desire, but instead to profits and the maximum generation thereof. Much like the financiers of CDO's, administrators of for-profit schools seek to create value out of nothing, or at least create value out of as little as possible as evidenced by their lack of faculty funding and increasing criticism that they produce low-value students whose education credentials fail to secure better jobs.
If the Great Depression has taught us anything, it is that excessive flows of money often precipitate speculative crises. With the river of gold now flowing towards for-profit schools, one wonders if the same spectacular failure produced by 1929 and 2008 will find home in a future date for higher education, pierced through, as the Timothy quote says, with many sorrows.