We need student debt service data, for each university, so as to allow the market to help correct some education failures.

Sir, Dennis Gerson, in reference to a recent article by Sheila Bair on student debts writes: “What she fails to address is the repayment of the income share agreements by college graduates earning the minimum wage, service industry minimum wage plus tips, or those who fail to graduate from college. A substantial portion of student debt and defaulted debt falls into these categories.” “US universities need to fix cost problem they created”

For a starter if university students end up earning too little or do not graduate, then that could be as much or more the failure of the university than the student’s. By just putting out information of each university indicating the respective overall default rate of their students, the market would help to correct much of what is going on... not all.

PS. Higher education should be much more of a joint venture.

@PerKurowski

Yes, higher education must be much more of a joint venture, for all involved.

Sir, Sheila Bair is absolutely right that “proceeds from student debts go to colleges, while the risk of repayment falls on borrowers and, if they default, on taxpayers provides little incentive for schools to contain costs [which] provides little incentive for schools to contain costs.” As a solution she refers to “income share agreements” where universities provide some funding and students pay back a small share of their income over some years. “An investment model to put US students through college”, March 15. 

Since in a 2007 Op-Ed I asked whether higher education should not be more of a joint venture, I fully agree with the orientation of these proposals. 

That said I would not leave it solely as a student to college/university level. I believe that professors should also have skin in the game, and so perhaps their retirement plans should include a clear linkage to how their students did.

And why leave it at that? Why not think of securitizing those possible future participations in earnings so as to provide some upfront money to cover expenses? And what about insurance companies investing in these? And what about some students crowdfunding their tuition fees?

Where I do part though from Bair’s opinion, is on the concept that high earning students could/should subsidize the study costs of lower earning professions. That could cause some unexpected distortions, and it is much more a general societal responsibility, which the higher earning - higher tax paying already share.

PS. Sir, over the years I have written several letters to you on this subject... but 😒

@PerKurowski

FT, I have two questions and one observation to make about the securitisation and privatisation of student debt in UK.

Sir, Thomas Hale writes that after “the biggest privatisation of student loans…the first of a series of anticipated transactions that stand to create a market for graduate debt in the UK, the parliament’s spending watchdog concluded the government received too little in return for what it gave up”. “Spending watchdog criticises student loans privatisation” November 22.

The Department for Education, DfE, answered it was “confident that we achieved value for money for taxpayers… as Student loans are designed so that borrowers only repay when they can afford to [which] only means many students will never fully pay back their loans”

I have two questions and one observation to make

First question: Before a student has his debt packaged into a security to be sold off to investors, should he not have the right to make a preemptive offer for it? Not that it makes a real difference but, emotionally it might not be the same for some to owe their government than to owe Goldman Sachs  their student debt.

Second question: If taxpayer should receive value for money for all these student loans, should not those who are supposed to help students to repay their debts, the professors, the universities also have some skin in the game? I mean at this moment it would seem they get all the benefits from the students taking on debt, at no cost or risk for them.

I recently tweeted: Have you ever seen a university stating a normal investment disclosure like: “Warning, if you pay us for your studies by taking on debt, you might not earn enough to repay it.” 

Hale writes: “Securitisation, a process where assets are packaged together and sold on as bonds to investors, ranging from pension funds to alternative asset managers”

It is with respect to that I would like to make an observation, namely that of reminding that securitization is basically like making sausages, the worse the ingredients, the higher the profits. So pension funds, please beware!

@PerKurowski

Children, no matter what the redistributors promise, you cannot redistribute the future before it’s been created

Sir, Martin Wolf writes: “A case can be made for borrowing for high-quality investment, especially when real interest rates are so low… But the increased spending needs to be paid for by effective and efficient taxation… What is needed is honesty: the country can choose to raise spending. But, if it wants to run a sound fiscal policy, this will mean substantially higher taxes” “Austerity is dead. Long live austerity” June 16

Honesty? Are the low real interest rates on sovereign debt for true, or are these not much a function, an illusion, caused by the regulatory subsidies to sovereigns? Does a 0% risk weight for the sovereign, and a 100% for unrated citizens, which is what the Basel Committee’s standardized risk weights establish, really mean nothing when it comes to allocating bank credit to the real economy?

Yes, it would clearly have been better to launch different “high-quality” public investment programs, than that dumb kicking the crisis can down the road program financed with Tarps, QEs and what have you.

But, just like saying “risk-weighted” does not mean it has really been risk weighted, saying “high-quality” does not signify for one moment that it will be of “high-quality”. In fact, all around the world, what we continuously see is a reduction in the capacity of governments to deliver high-quality investments. Could that be because of their 0% risk weight, they are now less forced to do so?

Wolf also writes: “a quarter of Labour’s promised increase in spending goes to eliminate student debt, while leaving universities far worse off. This is an irresponsible and regressive benefit in favour of future winners.” Here again remember, mentioning “future winners”, does not guarantee one iota the students will be the future winners.

You young, please, don’t listen to siren songs. The future, no matter what the redistribution profiteers promise you, cannot be redistributed before it’s been created.

PS. Students, If you want universities to better help you be future winners, pay them 50% of what they actually charge you, with some basis points in you future earnings.

@PerKurowski

World Bank: How can we create decent and worthy unemployments to help face a worldwide structural lack of jobs?

Sir, Kristalina Georgieva, writes about the needs for jobs, the difficulties involved with creating these jobs, everywhere, and of how the World Bank is trying to help. “Job insecurity is a fact of life for young people” April 22.

That is all very commendable but what I truly miss, for instance during the 2017 Spring Meetings of the World Bank and IMF, is a discussion, long overdue, about what to do if sufficient jobs are nowhere to be found.

The very real possibility of hundred of millions of young people soon facing the prospects of a lifelong lack of employment, perhaps only eased by some few temporary gigs, is a monstrous social challenge, that must be tackled in time.

For instance if in order to create jobs, we invest so much that there is little left over for taking care of if we fail to do so, then perhaps our problems could compound.

And I am of course not talking about the normal set of social safety nets to take care of a temporary lack of jobs, but of much more fundamental measures… like perhaps the need of a well funded universal basic income paid out to all.

http://perkurowski.blogspot.com/2012/04/we-need-worthy-and-decent-unemployments.html

Education is of utmost importance for creating jobs, but business as usual will not suffice. For instance some of the remuneration of teachers and professors need to be contingent on how it goes for the students. The current way of loading up university students with debt, that has to be repaid no matter what, basically in order to pay professors great salaries up front, smells a lot like a scam… or like bankers’ bonuses based on short-term results.

http://perkurowski.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

PS. Had the issue of how robots and automation is impacting the job market been raised earlier, we would perhaps not have to be listening to useless Wall construction proposals.

http://perkurowski.blogspot.com/2017/02/here-some-disorderly-lose-cannon.html

@PerKurowski

How many university professors know they are educating kids for jobs not to be had?

Sir, Mo Ibrahim writes: “the more time young people in Africa spend in education, the more likely they are to be unemployed… It highlights the worrying mismatch between the skills our young people are taught and those needed by the contemporary job market. This is a recipe for frustration and anger” “Africa’s youth, frustrated and jobless, demand attention”, April 13.

Scary! But it is even scarier if we connect this to Rana Foroohar “Dangers of the college debt bubble”, April 10 and Alex Pollock’s letter of April 12, “Colleges are acting like subprime loan brokers”.

A question. In our universities how many of the professors might be aware of the slim chances of their students’ landing a job in the future that will allow them to service their student debt and have a life… and still say nothing?

In many occasions over the years I have written about the needs to better align the remuneration of professors, at least their pensions, with the future of their students.

It is amazing to see so many professors criticizing bankers for poaching their clients while they de facto behave just the same. Load up the kids with loans, so that we can collect (bonuses) today! 

It will not work, and it will come back and bite us all.

PS. If I owed a student loan I would ask for a debt to equity conversion, offering a percentage of my after tax earnings over a certain amount for a definite number of years.

http://teawithft.blogspot.com/2010/04/if-incentives-are-correctly-aligned-all.html

http://onechildonevote.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

PS. We need worthy and decent unemployments

@PerKurowski

Universities, especially tenured professors, sometimes neglect their vital social role as intellectual vigilantes.

Sir, I refer to Tim Harford's discussion of "Are universities worth it?" August 27.

I totally agree with Harford that universities generally produce a lot of local and global good vital for the welfare of society, though it behooves us never to ignore the possibility they could also generate some awful local and global bad.

But something Harford leaves out in his discussions, is that universities, most specially tenured professors, as intellectual vigilantes, have an important societal role to fulfill of alerting to stupid and dangerous ideas, like that of the credit risk weighted capital requirements for banks.

What are the causes of major bank crises?

1. Unexpected events, like major devaluations and natural disasters.

2. What was ex ante perceived as very safe turned out ex post to be very risky.

3. Shenanigans like unauthorized speculative trading or banks lending to their own directors or shareholders.

What did the regulators do?

They introduced credit-risk-weighted capital requirements: more ex ante perceived risk more capital - less risk less capital... re-clearing for basically the only risk that was already being cleared for, by means of size of exposure and interest rates.

For instance, they gave prime AAA to AA rated assets a 20% risk weight, while highly speculative almost broke below BB- rated, assets got a 150% risk weight...

As if banks would ever build up dangerous excessive exposures to what is below BB- rated.

And that has seriously distorted the allocation of bank credit to the real economy with disastrous consequences.

But have we heard sufficient finance professors protesting sufficiently against this the pillar of current bank regulations? Absolutely not! In fact their deafening silence on it, is one of the principal reasons why this issue is not even discussed.

Sir, it would be great if the undercover economist Harford would dare to do some research on the why of that silence. He could do that in his beloved Oxford or, if he feels more comfortable doing so, in some university of some other faraway town. (Cambridge?)

PS. Here is a more detailed aide memoire on the Basel Committee for Banking Supervision’s regulatory monstrosity.

PS. There are some academics who have protested these regulations but mostly in terms of the capital requirements being too low or in terms of the distortions these might cause of the balance sheets of banks. They are correct but my point is that the distortions produced in the allocation of bank credit by using different capital requirements, is even more important than these being too high or too low.

@PerKurowski ©

Is not graduation time a bit late to inform students: “There is more to university than money”?

Sir, Nancy Rothwell, the president and vice-chancellor of the University of Manchester, writes: “Each year I tell graduating students that if they leave university with only a degree and greater “earning power”, I consider we have failed them. A university experience should be about so much more than this.” “There is more to university than money” April 16.

Absolutely! But is not graduating time a bit late to disclose that? How much debt would students dare to take on in order to pay the tuition fees, if the request of admission papers contained a: “Warning, universities are more than about making money”.

By the way, has there recently been some academic research on the evolution of the remuneration of professors? These Piketty days, it would be interesting to see how that has evolved.

In 2007 I argued that higher education should be more of a joint venture between professors and students. Of course I did not mean all the professors’ salaries were to be based on the earning powers of students. As I said, I fully agree that universities are much more than that, but, some better alignment of incentives, seems to be much called for.

It would seem that just like easy house financing translates into higher house prices, easier education financing just translates into higher tuition fees. But, I may be wrong, so as I said research is needed… any papers coming up on this?

PS. Someone commented. "There must be a little sadism involved here, since graduation time is precisely when students most begin to think of money."

@PerKurowski ©

For credit we now might need shadow-banks. For intellectual capital free from network incest, do we need shadow-universities?

Sir, Martin Wolf writes: “In its origins and still today, a university is a special institution: a community of teachers and scholars. Its purpose is to generate and impart understanding, from generation to generation. The university is a glory of our civilization.” “Running a university is not like selling baked beans”, February 19

Indeed but from this perspective does it really follow that “Four of the 10 top-rated universities in the world, five of the top 20 and 10 of the top 50 are British” makes UK a “superpower” in higher education? Could not the truth be that in much all universities everywhere are failing and need to be rethought?

For instance, how much of our universities is being used not to promote understanding but to self-promote those who understand? Current research clearly seems to suffer from cronyism: “I Reference You and You Reference Me”? And, excessive cross-referencing within small mutual admiration networks cannot produce much good.

Also, what university in the UK, or anywhere else for that matter, have really debated something so fundamentally important as bank regulations that could be fatally distorting the allocation of bank credit to the real economy? And where is the university that has questioned the whole (nutty) concept of a zero risk weight for the sovereign and a 100 percent risk weight for the private sector?

The Department for Business, Innovation and Skills, in a discussion document titled “Fulfilling our Potential”, presents the idea to “open up the [university] sector to greater competition from new high-quality providers”. And Martin Wolf expresses some well-founded concerns about that.

Banks are currently, because of regulatory risk-aversion, kept away from fulfilling adequately their most fundamental role in the economy. In this respect I have often said that our next generations might find among some shadow-banks their best chance to finance the risky future.

And so, in the same vein, who knows if not our best chances “to generate and impart understanding, from generation to generation” could be found among some new formal university competitors, or even among some shadow-universities?

@PerKurowski ©

Could one sue one’s Alma Mater for a partial valueless education, in order to pay back part of one’s student debts?

Sir, it is hard to know what to do with the so astounding information that Lucy Kellaway provides us with: “Over the past 10 years the 17 valueless companies have outperformed the others in the FTSE 100 Index by about 70 per cent” “Hands up if you can list what your company’s values are” October 5.

First question would have to be to clarify whether those results means valueless as in absence of values, or, hopefully, valueless as in absence of declared values.

The second, if I may, would be to try to figure out how much debt MBA students around the world have taken on, in order to learn about the extreme importance of declaring corporate values. Maybe there is a valuable class action lawsuit against their Alma Maters coming down their way.

@PerKurowski ©  J

Universities, allow imperfect and perhaps even inadequate minds, to have a voice in your classrooms. That's diversity!

My daughter, an art fanatic, on hearing my explanation about the monstrous mistake of credit-risk weighted capital requirements for banks, pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Was she right!

In it Dolnick makes a reference to Francis Fukuyama having heard Daniel Moynihan opining: “There are some mistakes it takes a Ph.D. to make”. And Dolnick also speculates that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that of: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

That is why when now Della Bradshaw reports about “a growing recognition that the world’s intractable problems need business solutions means MBA directors are searching for students with a more diverse background to fill their classrooms” I say: “Way to Go!” “More variety is the spice of classroom life” October 5.

Of course we must inject some confident ordinary minds in the classes in order for these to pose the questions that must be made. My impression is that experts never really try sufficiently to convince other experts of why they are right and others wrong, but they do their utmost when it comes to convincing the non-experts that they are the best experts.

Oh if I only had been in those classes where the minds of sophisticated future bank regulators were trying to estimate unexpected losses in the same direction as those expected losses derived from perceived risks.

My ordinary mind would not have been able to hear such foolishness and keep silence. Don’t you know that out there, in the real world, what is really risky is that what we can wrongly perceive as absolutely safe? I have never heard of a substantial number of persons dying because of bungee jumping. Have you?

As an Executive Director in the World Bank I once stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.” So, universities, please allow for imperfect and even inadequate minds, to also have a voice in your classrooms.

That said, be careful though with what the calls for diversity really means. It could be modern Giuseppe di Lampedusa types wanting to diversify only in order to remain the same.

@PerKurowski ©