Opinion

Felix Salmon

The costs and benefits of grad school

Felix Salmon
Jan 7, 2010 20:43 UTC

I’m a great believer in the benefits of an undergraduate education when it’s done right (which is rarely). But grad school is a different matter entirely: the opportunity costs are much higher, the amount of debt involved rises substantially, and the range of jobs you can do at the end of it in many ways goes down rather than up.

Thomas Benton has a great column about grad school in the humanities: no one should do it, he says, unless they’re independently wealthy or otherwise being paid for somehow.

But what about more vocational graduate degrees, like law school? Anybody thinking about it should read not only Elie Mystal’s post at Above the Law but also the long comment stream attached, filled with people like Elie who graduated from law school with six-figure debts and found themselves either stuck in Biglaw jobs they hated, or else just simply overwhelmed by impossible finances.

It’s also worth noting the bimodal distribution of law-graduate salaries:

salaries.gif

In order to make law school work (assuming you’re not paying cash for your tuition and living expenses), you basically need to end up in that second hump, over to the right: Biglaw, as it’s known. But a glance at the chart shows that most law students won’t make it there.

Here’s Benton, talking about humanities students, but with a lot of applicability to other fields too:

The letters I receive from prospective Ph.D.’s are often quite angry and incoherent; they’ve been praised their whole lives, and no one has ever told them that they may not become what they want to be, that higher education is a business that does not necessarily have their best interests at heart. Sometimes they accuse me of being threatened by their obvious talent. I assume they go on to find someone who will tell them what they want to hear.

Right now, a lot of people are thinking of going back to school, just because unemployment is high and well-paying jobs are hard to find. But anybody doing that should be very careful indeed about the debts they’re racking up. They could end up hurting much more than any degree will help.

(HT: O’Dell)

Update: Just found this astonishing chart, from Mike Mandel. It speaks for itself, I think:

educationalattainment.png

COMMENT

I am currently considering attending grad school. I have a bachelors degree, I was working for a large company but left in order to open my own business. Unfortunately due to issues with our investors 2 years after I opened the business I had to close it down. Now I am back trying to look for work but I have been unable to find any management, assistant manager or even admin positions. The feedback I keep getting back is that I don’t have enough experience. I am about to be 29 and having my own business thought me a lot, but I am very worried that my current employment options are entry level call center type of job. I am looking for advice on if I should get an MBA, enroll in law school or just go into the call center and see if I can grow from there.
Any advice would be appreciated Thanks

Posted by mwinters | Report as abusive

The Fed’s culture of secrecy

Felix Salmon
Jan 7, 2010 15:35 UTC

If and when the Fed embarks upon its soul-searching project, it shouldn’t just look at its regulatory failures and its inability to spot or care about the housing bubble. It must also think long and hard about its culture of secrecy, which seems generally designed to further the interests of its big-bank shareholders while keeping the public as ignorant as possible.

Hugh Son has the story of the lengths to which the Fed and its Davis Polk lawyers were consistently telling AIG to disclose as little as possible, even as the SEC was asking for more transparency from the publicly-listed corporation.

Was the Fed demanding secrecy because, as Henry Blodget says, it wanted to keep the “outrageous” details of the government bailout a secret? Yes, that’s probably part of it. And maybe there was an element of worry that public disclosure would make it more obvious what the Fed’s Maiden Lane funds comprised, making it easier for the market to try to trade against them.

But mostly I suspect that this was just a knee-jerk thing, with Fed officials (yes, Tim Geithner, that means you) and their lawyers always wanting to tell the public only what they wanted the public to know, and to keep everything else secret. If you read Sorkin’s Too Big To Fail, one of the themes running through it is that public-sector officials were in serious panic mode for months, and were convinced that things were much worse than the markets and the press were indicating. It seems they thought that if they just kept things secret, maybe the markets wouldn’t find out, and could keep on running in thin air indefinitely. A bit like in the Road Runner cartoons: it’s only when you look down and see how bad things are that you actually plunge.

Michael Corkery also points out that all of this secrecy coincided with Geithner’s nomination to be Treasury secretary, which makes the whole thing stink much more: was Geithner deliberately trying to keep anything potentially damaging secret for the sake of his own personal career progression?

Both Geithner and the Fed need to come up with much better answers to all these questions than the ones they gave Bloomberg:

“Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”

Well, maybe it’s appropriate for the Fed to comment on disclosure. But that’s not the question. The question is why the Fed made the comments that it did: why was it always agitating for secrecy? That’s the big question, and unless and until the Fed can provide a reasonable explanation, the rest of us are naturally liable to assume the worst.

COMMENT

What is truly amazing is how the Republicans are managing to slosh this whole fiasco off on Obama and deservedly so.

Posted by williambanazi7 | Report as abusive

The value of hedge-fund experience

Felix Salmon
Jan 7, 2010 14:23 UTC

A lot of asset-management professionals dream of one day running a hedge fund. But in the case of Maxime Carmignac, it looks more like it’s the other way around: the heir apparent to the $48 billion Carmignac Gestion fund-management empire is now running an internal $100 million hedge fund as part of her preparations for taking over from her father as CEO, CIO, or both.

Hedge fund managers have more freedom and are paid more money than fund managers generally, so one can see why many buy-siders (and sell-siders, for that matter) want to move into the world of hedge funds. At the same time, as the likes of Bill Gross and Carmignac’s own father have shown, you can become a buy-side billionaire without running any hedge-fund assets at all.

As consolidation in the hedge-fund industry increases — the number of funds is falling, while average AUM is rising fast — there is an increasing number of former hedgies looking for work in the more boring areas of the buy side. Is hedge-fund experience something that big asset-management firms like to see on a resume? And does this mean that the performance of asset managers generally might see a bit of an uptick as employees who have done a round-trip through hedge funds return to their fold? The Carmignacs certainly seem to think that way.

Counterparties

Felix Salmon
Jan 7, 2010 05:52 UTC

The official declaration of Iceland’s president which caused the current crisis. Very well put. — Calculated Risk

The dreams of avarice are coming back — Cartoonbank

What would be the consequences of a US technical default? Anything to worry about? — Zero Hedge

“What Lady Gaga’s music would sound like if it were sung by somebody who is both tone-deaf and completely dead inside” — HuffPo

Loan sharking datapoints of the day

Felix Salmon
Jan 7, 2010 00:37 UTC

Are legal payday lenders a superior alternative to the loan sharks of old? Or are they they loan sharks of old? Just look at what happened in New Mexico, which tried to crack down on payday lenders by limiting the amount of money a company could charge in interest on a short-maturity loan. No problem, said the lenders, and just started selling a new product — an even worse product — which got around the law by having a maturity of over 120 days. They even provided their borrowers with Truth-in-Lending Act disclosures! Like this one:

b-&-b11.jpg

In case you can’t see clearly, this shows a $100 loan which is due to be repaid with 26 bi-weekly installments of $40.16 each, plus a final installment of $55.34. In total, the borrower, Oscar Wellito, has to pay not only his $100 principal back, but also $999.71 in interest, for a total APR of 1,147%.

The New Mexico attorney general is trying to get this kind of thing made illegal, but it’s still going on — and not only in New Mexico, either.

Wellito ended up making four payments on this loan, for a total of $160.64, before he complained to the New Mexico attorney general’s office and they told him to stopped making payments. If those payments had constituted payment in full on the $100 loan, they would have amounted to an APR of something over 460%. In fact, however, after paying back $160.64 on his $100 loan, Wellito had managed to reduce the principal amount outstanding by a whopping 2 cents.

Which is more than this loan would be reduced by after four payments:

loan2.tiff

Here, the APR is a mere 521%, but somehow the first half-dozen payments don’t pay down the principal at all: after paying $1,169.52 — 25% more than the total amount borrowed — the principal is completely unchanged. Eventually, on payment #7, it finally gets reduced by the princely sum of $3.32.

The first loan, here, was issued by a lender called Cash Loans Now; the second comes from Fastbucks. If both borrowers paid back twice what they originally borrowed and then defaulted, they would still owe hundreds of dollars to each lender. It’s possible that if Cash Loans Now tried to take Mr Wellito to court, the judge would just throw out the case, since the loan was so unconscionable. But if Cash Loans Now just sold its defaulted loan to Fastbucks, while Fastbucks sold its defaulted loan to Cash Loans Now, then both would have bought legitimate debts of over a thousand dollars and wouldn’t have been paid a penny on them: indeed, they would both be out of pocket. It would be very hard for a judge to throw out that kind of case.

I hope that the New Mexico attorney general does manage to get these loans deemed illegal. But in any case one look at them is enough to prove that they’re not in any way being priced off of credit risk — the lenders are likely to make a massive profit even in most cases where the borrower defaults. This is loan sharking, pure and simple — and, for the time being, it’s legal. Isn’t it about time that we have a Consumer Financial Protection Agency which could put an end to this kind of thing?

Update: The New Mexico AG clarifies that although Wellito stopped making payments on his loan after complaining to their office, they did not advise him to do so. Karen Meyers, assistant AG, writes:

Many of the consumers who submit complaints to our office stop paying on their loans because they cannot extricate themselves from the debt trap that has been set for them by the lender. The New Mexico Attorney General’s Office does not provide individual legal advice to consumers regarding their individual loans. The New Mexico Attorney General’s role is to enforce the Unfair Practices Act as we seek to do in these cases.

COMMENT

Absolutely amazing. Thanks for the information. Morgan at TheDebtDance.com

Posted by TheDebtDance | Report as abusive

Does predatory lending rise when other credit contracts?

Felix Salmon
Jan 6, 2010 21:11 UTC

Megan McArdle writes that access to credit is good for the poor:

Damon Runyon didn’t just make up the crowded living conditions, the loan sharks, the reliance on pawnbrokers. Those are relics of that golden bygone era when bankers didn’t extend credit to people without solid incomes, substantial assets, or affluent relations. Fewer people got themselves into trouble with a bank, it is true. But there are a lot of worse ways to get into trouble. And as with the War on Drugs, I’m pretty strongly averse to more paternalistic policies which improve the lives of the middle class while making poorer people worse off.

Megan won’t be surprised to learn that I too am averse to policies which make poorer people worse off. But I’m not at all convinced that tightening rules on credit has that effect. Indeed, it seems to me that payday lenders and the like positively thrived during the credit boom — much as India’s moneylenders have thrived and grown even as microfinance institutions in the country have done likewise.

So is there less predatory lending now, from loan sharks and payday lenders and the like, than there was in Damon Runyon’s day? I’d love to see some numbers on that — as opposed to anecdotes from an author who specialized in chronicling the criminal underclass.

COMMENT

Advocate, I don’t think I’ve even posted on payday predators before, and I would certainly never defend them. See for example my reply to the post just before/after this one, with Felix’s two examples of loan terms by these organizations. What I was wishing was that legitimate banks would offer a better range of services for people who don’t have much money.

In regards to that, it is good to see najdorf’s post; I had not know that BofA a no-minimum no-fee account — although, poking around their site, the only such account I found requires that you open the account on-line, which may not be possible for some people. And, although I agree in principle that a person living from paycheck to paycheck should not be borrowing money, there really are times (medical problems or car breakdowns, for example) when they need to borrow short-term, simply so they can get to that next pay check.

Posted by KenInIL | Report as abusive

Iceland stands up to bullies

Felix Salmon
Jan 6, 2010 15:33 UTC

There’s a reason why people are often reluctant to stand up to bullies, especially when those bullies have an enormous size and strength advantage and are credibly threatening to hurt you very badly. And so it’s going to be very interesting to see what happens now that Iceland’s figurehead president, Olafur Grimsson, has suddenly decided to cause a major international incident by vetoing a bill which would have put his country’s citizens into billions of dollars in debt to bail out the UK and Dutch governments.

In principle, I’m with Mish on this one: if you’re the president of a country where 70% of the population opposes the bill and 20% have signed a petition urging you to veto it, the noble course of action is clear.

But the UK, especially, is playing hardball, threatening Iceland with financial isolation. And as Dan Drezner says, “total isolation from the global financial system is not a fun experience, Great Recession or not”.

The threat of Iceland dropping off the face of the financial world is a real one, and the country’s bonds have been downgraded to junk status as a result. It’s really that bad: the ratings agencies have downgraded Iceland for not taking on an extra 40% of GDP in new debts.

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits. If you thought the cod wars were bad, this is much worse.

If the UK were picking on a country its own size, here, I wouldn’t feel so bad. But Iceland is tiny, and has no real means to fight back, other than essentially saying “OK, then, hit me.” Which is what it’s just done. I hope that the UK doesn’t follow through on its threats — even if that means damaging its own credibility going forwards.

COMMENT

Bravo Iceland. AT least your policticians didn’t cower and acquiesce likee the United STates. Our Congressional leaders surrendered faster and gave the Fed Trillions of dollars (why not, it’s not like they have to pay the bill). Wake up world. The IMF, the World Bank, and the Fed are a criminal mafia, stretching their teneatacles around the world. I’m embarrassed, that we in the United States did’t put up a valiant fight. I support Iceland all the way. Jail time, not Bail time is what is needed.

Posted by chronic | Report as abusive

Looking for a Fed apology

Felix Salmon
Jan 6, 2010 14:54 UTC

The Fed is profoundly flawed, and there’s a good chance it will fail at doing the job we’re tasking it with. But it’s the best chance we’ve got. That’s the consensus I’m beginning to feel on the subject of Ben Bernanke’s status as Fed chairman specifically, and the wisdom of confirming and expanding the powers of the Fed more generally.

David Leonhardt today has a great column along those lines, explaining that even a Fed with much more teeth than it has today would have done nothing to prevent the housing bubble — not under Greenspan, certainly, and probably not under pre-crisis Bernanke either. It’s worth reading John Carney on the subject too: far from being worried about the housing market in the bubble years, regulators were actually being asked to help inflate it.

So it’s clear that the Fed needs to renounce its former worldview and move to a state of permanent worry about the risks that markets pose to the economy as a whole. And as Leonhardt says, even if it’s doing the latter, it’s doing a bad job on the former:

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power…

Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble… He never acknowledged that the Fed simply missed the bubble…

He and his colleagues fell victim to the same weakness that bedeviled the engineers of the Challenger space shuttle, the planners of the Vietnam and Iraq Wars, and the airline pilots who have made tragic cockpit errors. They didn’t adequately question their own assumptions. It’s an entirely human mistake.

Which is why it is likely to happen again…

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail.

Leonhardt talks about setting up a permanent board to go back over past mistakes and try to ensure they don’t happen again. I’m not sure how useful that would be — my guess it would issue carefully-parsed and extremely long reports and would change very little. At the same time, however, Leonhardt is surely right that we need much more transparent self-criticism at the Fed, especially when it comes to its underdeveloped regulatory role. If you don’t know exactly where you went wrong in the past, the chances are you’ll continue to go wrong in the future.

COMMENT

Our country has yet to place into affect any measures whether it be policy, regulation or legislation that would prevent another systemic failure. We are passively burying our heads in the sand and saving incompetent industry leaders who made foolish decisions by PROVIDING them with more funds to speculate with the goal of making them solvent again. These institutions could not withstand the last onslaught of market discipline when they had hoards of cash, the next tidal wave will end their existence.

When an event occurs that was given 0 to infitesimal probability of occurence so as to not be reflected in financial analysts regression models or whatever failed statistical methodology used, there are but a few choices to protect ourselves from future narrowmindedness. I’ve listed two: One: institute fundamental measures that prevent the repeat of the outlier event so your model now reflects a new normal as best as you can foresee or Two: do nothing (as we are doing) but adjust your expected rate of returns by discounting the previously unknown risk that you are NOW aware of and which now has a higher probability of occurence(or as in the last meltdown, known but dismissed).

Our country has failed to do either which is now in evidence by: One) zero legislation and continued government support of incompetent financial managers and more sadly, our elected officials; Two) the level of stocks.

This can only mean that the frequency and severity of meltdowns will increase until we adapt.

Posted by csodak | Report as abusive

Counterparties

Felix Salmon
Jan 6, 2010 05:01 UTC

If the poor can’t get credit from banks, they’ll end up in more trouble elsewhere? Empirics please! — McArdle

Nobody has a million followers on Twitter — Dash

If you asked a blue-suit solution provider to quote you on building Twitter — Tbray

The Polycentric Parking System — Reason

Denton moves from pageviews to uniques. Guess he’s maxed out the juice he can wrong from those commenters — Awl

Gorgeous photos of a visit to Sprial Jetty — Art Fag City

Michael Corkery’s list of buck-passers who refuse to take any blame for the financial crisis. Could be much longer — WSJ

The $177,000 tuna. That’s $345/pound — Yahoo

Brett Arends holds me up as an exemplar of deplorable financial blogging, and implies that I don’t do “real thinking” — Marketwatch

Edmund Andrews, who took a Times buyout, is now a blogger for Capital Gains and Games; is also joining the Fiscal Times — CG&G, Politico

COMMENT

It’s certainly possible to do this sort of emergency assistance as a charitable operation. I’d be skeptical of any attempt to make a profit or return deposits while doing so, given the difficulties that allegedly highly-skilled bankers have had in turning a profit from lending to subprime borrowers at high rates with very cheap funding. I don’t think any church or other local group of charitably-minded individuals wants to be in the business of trying to collect delinquent debts or having to tell well-intentioned depositors that their money is gone. There also are significant legal obstacles and costs to setting up a small depository/lending operation.

Posted by najdorf | Report as abusive
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