This is a brief follow up on a previous post about how I believe the next great economic collapse will be brought about by the securitization of student loans into collateralized debt obligations, much like the CDO's backed by residential mortgages brought about the last collapse in 2007-2008.
There were three seemingly unrelated events that got my attention over the last couple of weeks that brought about a sense of foreboding and for me acted as a canary acted for coal miners in previous centuries - as a warning of imminent doom. These three were in no particular order, the stock market reaching 14,000, my main local bank collapsing and having to be bought out for peanuts by another regional bank, and the news that ratings agencies were threatening to lower the credit rating of colleges or universities who lowered their tuition.
Let's look at these in reverse order. First, the ratings agencies.
If you have followed the aftermath of the economic collapse five years ago, or have read my previous blog posts on the subject, you will know that the credit ratings agencies played an important part in the run-up to the collapse. The agencies, of which there a primarily three -- S & P, Moody's, and Fitch -- were either duped or knowingly participated in fraud by classifying mortgage backed securities made up of liars' loans and sub-prime mortgages as AAA investments. Since the agencies were paid by the very same banks that were selling the loans, the answer is probably a little bit of both. By labeling investments that were garbage as AAA, they allowed investors to buy up these assets believing they were safe, while the banks putting them together were actually betting against them.
Since the collapse, the ratings agencies have appeared to get tough on investments, whether it be by dropping entire countries' credit ratings (as S & P famously did to the U.S. following the debt ceiling debacle in 2011) or by issuing harsher more critical reviews of various investments. At least this gives the appearance of independence and freedom of thought within the ratings agencies themselves. This is simply a mirage.
Over the last couple of months, there were reports that several colleges and universities were bucking the trend of exponentially increasing tuition costs and were instead deciding to lower their tuition, in some cases drastically. One of those colleges was Belmont Abbey, a small Catholic college nearby to where I live. (See here) At first this seemed like great news to me, possibly that colleges and universities were responding to the market rather than to investors and speculators and that possibly this death spiral of debt caused by increasing tuition could be coming to an end.
Then I saw this. Less than a month after news came out that some colleges were thinking of lowering their tuition to meet the demands of students for low cost education, Moody's dropped their forecast for colleges and universities to negative based on a stagnant or diminishing tuition income. Although the news is couched in terms of lowering costs and increasing efficiency, the message to colleges and universities thinking about lowering their tuition was clear -- DON'T.
Why this is a signal to me of the impending doom to the economy is that is shows that the ratings agencies are still working as agents of the Wall Street banks that are dependent on ever-increasing amounts of student loans in order to have a constant stream of loans to securitize into investment products to sell to investors. Whereas the ratings agencies in the run-up to 2007-2008 acted simply as a rubber stamp for the investments they were being paid to approve, now they are acting as the enforcer for the banks in order to insure that the loans keep coming in as the tuition amounts keep increasing and increasing. There is really very little difference between the actions of Moody's on this occasion and a protection scheme by a two-bit mafia hood extorting money out of business owners to make sure that their business doesn't literally go up in smoke.
The next portent of doom was the fire sale of my local bank, First National Bank of Shelby, NC. First National, which had been in business since 1874 was sold to Bank of the Ozarks for the paltry sum of $67.8 million. This bank had previously seemed to be merger proof. They had survived multiple financial collapses intact and had refused bail-out money during the 2008 collapse. While other small banks were being gobbled up by larger and larger institutions following the deregulation of the banking industry in the late 1990s, First National was purchasing other regional banks. They seemed to continue practicing old fashioned painfully conservative banking which may have led to their downfall.
The reason this caused concern to me is that the failure of this bank shows that our economy is still far from robust. The term irrational exuberance has been thrown around over the past several years and appears to be applicable here. The bank simply couldn't overcome the long, drawn-out recession which produced still double digit unemployment in our area, along with the related business failures and unpaid mortgages, which made this pillar of solvency for well more than a century become basically bankrupt.
Throw this in with the Dow reaching 14,000 late last week and you have my third canary. The celebrations surrounding the "milestone" seemed almost crazy when looking at the continuing high unemployment, fiscal malaise, and stumbling recovery. The last time the Dow was this high it was repeated over and over was in the Fall of 2007. The implication was that at least in terms of the stock market, our recovery was complete and we had climbed all the way back from the collapse of late 2008. Of course, it also could signal that we are right back where we were in the Fall of 2007, on the precipice of a financial cliff which would throw us into the the greatest economic disaster since the 1930s.
By failing to act to curb the excesses and lawlessness that led to the economic collapse of 2007-2008, we have insured that it will repeat. We have failed on all levels. We have failed to enact laws that would prevent or at least contain a collapse in any one area of the financial world. The Dodd-Frank act was at best window dressing to give the public the appearance that Congress was doing something while allowing Wall Street to continue the excess that led to the last bubble. We have failed judicially by refusing to enforce our criminal laws to hold accountable the people who benefited most from the collapse and subsequent bailout, namely the executives and CEO's of the large Wall Street banks. We have failed financially by continuing to prop up failed financial institutions through policies by the Federal Reserve and Treasury such as Quantitative Easing and Zero Interest Rate Policy which have led to the propping up of failed financial institutions while at the same time encouraging the continued investment in exotic securities to receive anything near a reasonable return on investment, destroying savings and looting pension funds and state treasuries.
Recently, Assistant Attorney General for the Criminal Division Lanny Breuer resigned the day after a hard hitting expose by the PBS show Frontline exposed his agency's unwillingness to hold executives and CEO's of Wall Street banks accountable for the fraud that was perpetrated both on investors and the public leading to the economic collapse of 2007-2008. I sure hope that President Obama nominates someone with courage and tenacity to take his place, because the same fraud is happening today, and they will surely soon get the same opportunity to hold these same executives responsible when their same actions cause the next impending economic collapse. I'm, of course, not holding my breath on this.
All the signals are there. Is anybody paying attention?
