Twenty years ago today, former Fed Chief Alan Greenspan gave the now-infamous “irrational exuberance” speech.
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberancehas unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
Greenspan said he came up with the phrase “irrational exuberance” in the bathtub. And he later said, “I was acutely aware of the fact that that particular phrase was put in that speech to spook the market.”
It did, too. Japan sold off 3% that day. The next day, the Dow Industrials dropped as much as 2.2% during trading.
Of course, the Dow was also trading around 6,400 at the time…
People love to say that Greenspan was basically right, that the stock market was a bubble at the time, and that he was just a little early with his “irrational exuberance” line. Yeah, I guess if you want to call three years and 5,000 points early, you’re welcome to do so. But it’s a pretty lame excuse…
For one, the Dow got creamed when the Asian Tiger economies imploded in late 1997. Between July and September 1997, the Dow fell as much as 16%. That’s a solid correction, enough to temper any irrational exuberance. And if that didn’t do it, the Russian default and subsequent $4.6 billion failure of the Long-Term Capital Management (LTCM) hedge fund in 1998 should have helped. The Dow fell 19.5% in just two months, to around 7,500.
I was just starting to learn about economics and the stock market at that time. And I can tell you, it was a bit scary. I sure wouldn’t describe the action as irrationally exuberant. A Rational Market?
Here’s the thing I’ve learned about the stock market: it’s pretty much always irrational. I know, you were probably hoping for something better than that. But how else can you explain the way companies will add or lose billion of dollars in valuation every single day the stock market is open?
Rationally, we know that Apple isn’t really worth $17 billion less today than it was on Friday. And we can easily take it a step further and say that Apple’s $584 billion market capitalization isn’t really a rational number, either. And yet we have no problem seeing Apple’s stock trade $0.35 lower and think, “Yeah, that makes sense.”
Or how about the fact that Bank of America (NYSE: BAC) is worth $50 billion more just because Trump won the election? Does that make sense?
The fact is, the stock market is a human construct, and humans are a little nutso sometimes. Personally, I think the craziest thing you can do as an investor is try to pretend that you’re not crazy. The minute you think you have it all figured out, the market will make a fool of you, guaranteed. Just like it did with Greenspan.
My biggest knock on Greenspan is that he always believed his own BS. He always thought he knew. And he still does. That’s why he made some of the biggest mistakes a Fed Chief has ever made. And yes, I firmly believe we can lay the blame for the 2008–9 financial crisis squarely on Greenspan.
After all, it was Greenspan who said that derivatives actually lowered overall economic risk of higher housing prices because of the way derivatives spread risk around the globe. He thought things like credit-default swaps meant no one entity would be left holding the bag if it all went south. He had it completely, absolutely backwards. Derivatives made sure that everyone was a counterparty, so everyone was left holding the bag.
And perhaps worse than that, Fed governors were talking about a housing bubble in 2004, about a year before real estate prices peaked. Transcripts from 2004 meetings show they said things like:
“…buyers freely admitting that they have no intention of occupying the units… but rather are counting on ‘flipping’ the properties—selling them quickly at higher prices.” “A second concern is that policy accommodation — and the expectation that it will persist — is distorting asset prices.” “The high price of housing worries many in the region who find that hiring the skilled workers they need in health care, for example, is made even more difficult by high housing costs.”
But the minutes from those meetings, which are released shortly after a meeting concludes, do not mention any of these concerns. All discussion of a housing bubble were stricken from the record and show up only in transcripts, which are released a decade later. In one case, a chart that was viewed by the Fed members was left out of the official record because, as the transcripts show, one member said, “I don’t want to leave the impression that we think there’s a huge housing bubble.”
Personally, I find these revelations shocking. Greenspan’s Fed basically lied about what they were seeing. In the official minutes, they deliberately understate their concerns, concluding that “a slowdown might be likely later in the year.”
If that doesn’t tick you off, maybe this Greenspan quote from March 2004 transcripts will:
We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.
That quote right there tells you all you need to know about Greenspan… Keep Your Head in the Game
It is absolutely critical that you be on the lookout for know-it-alls like Alan Greenspan. Anybody who says they have it all figured out is lying to you.
I’ve been watching, trading, and learning the markets for nearly 20 years. And every single day, I find more things that I don’t know. I get taken to school every day, and I love it. And I won’t ever tell you I have it all figured out…
But sometimes I do get a few things figured out. Like, I’ve been trading Bank of America a whole lot since the election. And the stock has donated generously to my bottom line.
I hope you took my advice over the last couple of years to buy shares of BofA. If you didn’t, you can probably wait and get them around $19 in the next few months.
Until next time,
The Barack Obama/Hillary Clinton-instigated war on Syria leaned way over the precipice toward World War III earlier this week when Turkish President Recep Tayyip Erdogan let slip the real reason behind the NATO assault on Syria is the removal of Bashar Assad. Erdogan said, “We entered [Syria] to end the rule of the tyrant al-Assad who terrorizes with state terror. [We didn’t enter] for any other reason.”
Of course, removing Assad to be replaced by an American puppet regime that would allow a natural gas pipeline across Syria into Turkey was the goal of the Obama/Clinton operation from the beginning. It was the exercise of “soft power” (Clinton’s terminology) as we saw in Libya.
Obama has tried to walk a fine line on Syria ever since the American people rose up and pressured Congress to deny Obama’s request for a military strike on Syria in August of 2013. Obama tried to use the false flag chemical attack on the so-called moderate opposition forces – blamed on Assad but carried out by another group of so-called “moderate” rebels – to pressure Congress to grant him military attack authority. That chemical attack crossed the “red line” Obama had set as a precursor to direct U.S. intervention (as opposed to the then-secret CIA intervention that was ongoing and now continues openly).
Erdogan’s slip of the tongue – if that’s what it was – has been largely ignored by the American media. But it brought a swift response from the Kremlin – Assad’s biggest partner.
RT reported that Erdogan’s statement “caused consternation in the Kremlin.” From RT:
“The statement was indeed news, this is a very serious statement. [It] is in discord with the previous [statements] in general and with our understanding of the situation,”Russian presidential spokesman Dmitry Peskov told reporters on Wednesday.
“We hope that in the near future there will be explanations on this from our Turkish partners,”he said, adding that Russia is the only country whose armed forces are in Syria on a legitimate basis – at the direct request of the Syrian authorities.
Answering a question as to whether Erdogan’s comments would affect the relations between Moscow and Ankara, Peskov stressed that Turkey is Moscow’s partner and therefore will have to explain its stance before the Russian authorities make any judgments.
“Before making any judgments, we expect that this position will be clarified,” Peskov said.
President Erdogan and his Russian counterpart, Vladimir Putin, discussed the situation in Syria in a telephone call on Wednesday, the Kremlin’s press service reported.
Erdogan backtracked Thursday. Or in the words of Al Masdar News, he “retracted his statement” after the conversation with Putin.
“The aim of the Euphrates Shield Operation is not against any country or person but only terror organizations. No one should doubt this issue that we have uttered over and over, and no one should comment on it in another fashion or try to derail it,” Erdogan said at his 30th gathering with village chiefs at the Presidential Palace in Ankara.
Middle Eastern governments friendly to the U.S. – Saudi Arabia, Kuwait, UAE, Bahrain, Turkey, etc. – financed the operation to overthrow Assad with U.S. assistance. This led to the creation of ISIS, which continues to be funded by those governments with an assist from Israel.
Erdogan’s “slip” may or may not have been intentional. There is evidence that the coup to take him out was a CIA operation to topple him for cozying up to Putin. Both the Turkish lira and the Turkish stock market are tanking. So Erdogan may have been playing games in order to show his allegiance to Washington and/or create a sense of nationalism in order to reverse those negative trends. That’s a ploy that has been used by governments many times.
But with Turkey (NATO member) at the point of the spear in Syria and Erdogan prodding the Russian bear, a Russian response to Turkey’s saber rattling would put the U.S. directly at odds with Russia and bound (by NATO treaty) to assist if Turkey is attacked.
The neocon war machine seems bound and determined to provoke Russia into war. Obama’s neocon-backed and ham-handed Middle East meddling needs to end sooner rather later, lest we fall over the precipice and into full-scale war.
Let’s hope Erdogan can keep his mouth shut until we get some sanity in U.S. foreign policy and the neocon war hawks removed from places of influence.
From coast-to-coast, sanctuary city mayors are united in their resolve to harbor criminal aliens. Their shared commitment comes despite the Trump administration’s pledge to remove most of the 2 million to 3 million convicted felons who remain in the U.S. and pose a threat to local communities.
The mayors’ defiance is, on several levels, puzzling. To begin with, illegal entry is a misdemeanor crime, and the law calls for deportation. But beyond that, the mayors’ assurances to the aliens are even more bewildering. Just days after Donald Trump’s election, Chicago Mayor Rahm Emanuel, surrounded by immigration activists, held a news conference during which he said about the illegal immigrants, “You are safe [from deportation] in Chicago.”
Chicago’s violent crime rate is higher than the national average and, to date in 2016, accounts for more than half the nation’s homicide increases. Reducing it should be Emanuel’s top priority, not criminal aliens’ safety. Violent crime in Chicago has been on the rise since the 1960s. During the Thanksgiving weekend in Chicago, 61 were shot, eight fatally, which brought the annual total of shootings in the city to more than 3,950.
What the mayors refuse to acknowledge is that they’ve already lost, and that they’re better advised to drop the posturing and instead line up with the new Trump administration’s reality. The criminal alien aiders and abettors are on the way out – President Barack Obama, Attorney General Loretta Lynch, Department of Homeland Security Secretary Jeh Johnson, and his underling Immigration Customs and Enforcement Director Sarah Saldana. On the way in are Trump, who campaigned on removing criminal aliens, and his AG pick Senator Jeff Sessions who is committed to immigration enforcement.
Banning sanctuary cities should be a slam-dunk. Such cities violate then-President Bill Clinton’s 1996 immigration law which states that “no local government entity or official” can deny providing to or interfering with the federal government’s immigration information sharing requests. Failure to cooperate can result in the loss of federal funding provided through Justice Assistance Grants and the State Criminal Assistance Program. Lynch didn’t pursue prosecution of uncooperative municipalities, but Sessions, if forced, will.
The mechanism for withholding monies is already in place. Early this year, U.S. Representative John Culberson (R-TX), an Appropriations Committee subcommittee chairman responsible for funding the Department of Justice, got Lynch to officially designate the top ten sanctuaries, including Chicago, New York and the entire state of California, as noncompliant with federal law.
Culberson’s quiet, unpublicized victory makes sanctuaries immediately vulnerable to the loss of congressional money. Lynch has notified every city and state about the DOJ understanding with Culberson. In a post-election interview, Culberson said that if President Trump wants to, he could cut off funding to those cities and California the instant he’s sworn in at noon, January 20, 2017. Not only would future funding be cut off, the administration could demand the return of previously distributed monies. In California’s case, the grant totals paid out over the last ten years exceed $3 billion.
If the mayors think they can prevail, they’re clueless. Not only is Trump committed to ending sanctuaries, the public is fed up too. A November Rasmussen poll found that 81 percent of probable voters favor mandatory deportation for aliens convicted of felonies. In light of those statistics and in view of his own determination to enforce immigration laws, Trump won’t back down on his campaign promises. The mayors’ choice: give up, or proceed at their own risk. — Joe Guzzardi
Garry McCarthy, Former Chicago Police Superintendent, joined Dan Proft & Amy Jacobson to discuss the 737 murders and 4,000 shootings in Chicago so far this year. He reminded Proft & Jacobson that murders and shootings were at an all time low between 2013-2014 when the police department followed best practices and were able to police. Now, in the wake of #BlackLivesMatter, the police have been politicized and blamed for larger societal problems with limited support behind all the good that they do. Watch now and tell us what you think on Facebook and Twitter using #UpstreamIdeas.
SB2814 – An Overhaul of Illinois Energy Policy and a Bailout for Largest Nuclear Power Company in the US
By Jeanne Ives 12/5/2016
Merry Christmas from the Illinois General Assembly who could not focus on the task at hand – putting a balanced budget together – but had time to bailout a multi-billion dollar company.Sitting in the Governor’s office, is a rate hike bill wrapped up in ComEd red and white paper, an Exelon blue bow on top, and placed appropriately under the artificial green energy Christmas tree.It will be a good Christmas for millionaire CEOs, certain highly skilled workers and renewable energy advocates.
HB 2814 contemplates significantly rewriting energy policy and returning our market-based energy policy instituted in 1998 back to a more regulated, government directed production and consumption model in a protectionist appeal from large energy companies.Various energy proposals have surfaced over the last 18 months with the primary driver of the legislation coming from Exelon.Exelon is a major supplier of power to both Illinois and the PJM base load capacity market through their operation of six nuclear power plants.
Ignores the Free Market:The policy proposals in HB2814 are not market driven solutions to energy production and are instead costly to all classes of rate payers and should be rejected.
This bill requires ratepayers to fund huge profitable companies and favored green energy companies. Exelon’s net income was $2.25 billion in 2015.Hypocritically, prior to beginning the discussion of this subsidy bill, Crain’s reported in late December 2014 that Exelon argued in Ohio against subsidies for its competitors.Crain’s stated,
“Exelon isn’t the only power generator trying to cope with low wholesale electricity prices by asking for financial help from its home state.But the company doesn’t like it when peers ask for similar aid…Chicago-based Exelon, which has said it will lobby Illinois lawmakers next year for legislation to boost revenues at its six nuclear plants in the state has petitioned utility regulators in Ohio to block attempts by generators based in that state to prop up their plants courtesy of ratepayers there.Exelon on Dec 22. issued a strongly worded filing with the Ohio Public Utilities Commission in opposition to the FirstEnergy proposal to require electricity consumers at its Ohio utilities to pay extra for power generated by a 900-megawatt nuclear plant and a 2,200- megawatt coal-fired plant owned by a separate FirstEnergy unit.”
I recognize that nuclear power is essential.In 2014 during the polar vortex, Exelon’s nuclear power plants maintained 96% production reliability — when other sources of energy could not ramp up production due to severe weather, nuclear kept producing.This capability should be preserved through the base load capacity power market and spread to all users of Illinois produced energy including those in other states – not only Illinoisans.Compared to natural gas, nuclear power already receives 4 times more subsidies at the federal level and wind is subsidized 18 times more than nuclear power.Subsidizing anything leads to inefficiencies in the market.Wind and solar have been around since the beginning of man – and wind has been subsidized in modern times since 1992 – more than long enough to stand on its own. Exelon should be arguing, as they did in Ohio for no state energy subsidies.
Costly Efficiency for some, but not for all:This bill is BIG Government saying all ratepayers must pay millions more so ComEd can buy insulation and light bulbs for folks in the name of energy efficiency – and earn a 9.5% return rate while doing so.
Disregards Coal:This bill rejects Illinois’ competitive advantage in coal.Coal accounts for over 40% of Illinois energy production.You need 600 square miles of wind power to equal the same amount of energy from one coal plant.
Crony Capitalism: This bill protects certain classes of workers in Illinois when all industries should receive the same treatment. The most important thing to address is the idea that ratepayers should subsidize a specific industry just to save specific jobs for a specific timeframe.Illinois cannot get into the habit of saving specific industries with tax credits or legislation that skews the free market and picks winners and losers.Going down this road is similar to the very controversial Edge Credits and Special Edge Credits which carved out tax credits for not just specific industries but actually specific companies.It’s wrong and taxpayers continually shepherd these costs with little direct benefit.It should be noted that we did not bail out US Steel Co. when they laid off 2080 employees in Granite City in 2015.Last year we lost 6200 manufacturing jobs who were not saved with a subsidy. So far in 2016, 7900 manufacturing jobs have left Illinois – no subsidy for those workers either.And this legislature took no action when coal lost significant jobs, about 6500 in 2003 and we did nothing for the 1200 coal mining employees who lost their jobs in the last 18 months.
Rejects trend away from RPS:This bill disregards the movement away from wind and solar that is happening in Europe because you cannot run a modern economy on dilute and intermittent energy like wind and solar. Steve Goreham, author of numerous books and articles on this topic (visit stevegoreham.com), stated, “Denmark erected over 5,000 wind turbine towers, one for every thousand Danish citizens. Turbines blanket the nation, providing a beautiful view of a 300- to 500-foot tall tower from almost every house, farm, field, forest, and beach. But in total, the turbines produce only 1.3 gigawatts of electricity on average. All could be replaced by a single large conventional power plant. Today, Denmark has the highest electricity prices of the developed nations.” Here in Springfield where a 500-megawatt power plant operates, you would need about 1000 wind turbines to replace that power and disperse those in such a way as to guarantee that 30% of them were turning at any given time.
This bill buys into climate change alarmism despite the debunking of the IPCC findings, 18 years of no global warming from 1997-2015, and carbon dioxide being a trace element that promotes plant growth not a pollutant as the EPA thinks.The bill even uses President Obama’s EPA language of the social cost of carbon without accounting for the beneficial effects of increased carbon dioxide has by increasing biomass in a farm state like Illinois.
Solar and wind power mandates are strengthened in this bill.This bill, in direct contravention of its intentions, will require more fossil fuel not less as back up energy sources if wind and solar are forced to become a larger portion of our energy mix.Stephen Moore, author of Fueling Freedom, states,” Germany and England are already learning that the more renewable fuels they dispatch to their electric grids, the more coal they must burn to back up the intermittent generation from wind and solar sources.”The goal of 25% renewable use in Illinois by 2025 is unachievable without large and aggressive rate increases. Goreham, in response to this bill when I shared it with him, said this about solar power in Illinois, “Solar in Illinois is like growing pineapples.We’re not the sunbelt.Recent analysis shows that over a 25-year life, the amount of energy produced by a solar system at Illinois latitudes does not rise to the amount of energy used to fabricate the solar cells and install the system.By forcing solar in Illinois, we are causing more energy to be expended in China than we get back over the life of the system in Illinois.”
Will not Improve Environment:And the Wall Street Journal reported that, “In truth, the cost of backup power not only caps solar and wind growth, renewables may already have overshot. The International Renewable Energy Agency, in a discordantly sober report, predicts that wind and solar will start shrinking their share in the fast-growing developing economies in coming years.”
If you still believe carbon dioxide is a problem consider this as reported in the Wall Street Journal, “Germany managed to increase its use of renewables and its output of carbon dioxide at the same time—because it resorted to cheap coal to keep the lights on at a price its people could afford.”
In closing, Illinois should trust the free market to determine what energy is produced and at what price.The free market built this nation and can be better trusted than politicians and special interests.Illinoisans deserve energy that is cheap, reliable and pollutant free. Politicians in state government continue to obscure the path toward those objectives in order to keep political insiders happy.
The federal government is on pace to forgive at least $108 billion of student loans, according to a Government Accountability Office study published Wednesday that analyzed the cost of increasingly popular income-driven repayment plans.
That sum is more than double the U.S. Education Department’s current estimate for the cost of such income-driven repayment plans — an umbrella term for the five repayment plans that base payments on a borrowers’ earnings — and roughly four times the department’s original estimates, the report found.
Why You Should Think Carefully Before Refinancing Your Student Loans
Author Harold Pollack gives some useful tips on managing college debt.
Income-driven plans, which are designed to reduce loan bills to a manageable percentage of monthly income, can be a huge help to struggling college graduates. But some policy experts have raised concerns about the cost of the programs — particularly given the large number of borrowers with graduate school debt who qualify for the programs despite earning high salaries. A key issue: The education department doesn’t break out numbers for different plans, so it’s hard for analysts to calculate how much this latter group is costing the federal government. Soaring Participation
Current versions of income-based repayment were developed during George W. Bush’s administration, but the Obama administration increased the number of plans and expanded the scope of who qualifies. As a result, enrollment in income-driven plans has grown massively in the past few years.
As of the end of June, the outstanding balance in income-driven repayment plans was $269 billion, or 40% of the federal government’s total portfolio of loans made directly — and the number of borrowers in these plans had doubled to 5.3 million in just two years.
The GAO’s analysis assumed that 61% of the total $352 billion in loans in income-based repayment programs would eventually will be repaid — leaving another $108 billion to be forgiven. (Another relatively small share will be discharged because of death or disability.)
5 Ways President Trump Could Affect Your Student Loans
11/21/2016 01:21 pm ET | Updated 1 day ago
NerdWalletProviding clarity for all of life’s financial decisions.
President-elect Donald Trump has plans to address college affordability and student debt, though many details remain to be worked out. In an Oct. 13 speech in Columbus, Ohio, Trump outlined the basics of his views on student debt, tuition rates, administrative “bloat,” income-based repayment and loan forgiveness.
“Students should not be asked to pay more on their loans than they can afford,” Trump said. “The debt should not be an albatross around their necks for the rest of their lives.”
Trump and the Republican Party didn’t emphasize higher education in their campaign platforms, leaving experts puzzled as to what policies a Trump administration might pursue.
“We won’t know what priorities, if any, the administration has until we see what staff is in and what ideas they put out there,” says Matthew Chingos, senior fellow at the Washington think tank Urban Institute.
Some changes to the federal student loan system can be enacted by executive action, but others require congressional action. Here’s what we may be able to expect:
1. Income-driven repayment changes are likely
Under Trump’s proposed student loan program, he would cap repayment at 12.5% of a borrower’s income. He did not indicate if this repayment cap would apply to all federal loan borrowers or only for those who apply for income-driven repayment, as is the case now. In the most widely available income-driven repayment plan currently available to student loan borrowers, known as Revised Pay As You Earn, or REPAYE, monthly payments are capped at 10% of a borrower’s discretionary income.
Trump’s proposal would also forgive student loan debt after 15 years of full payments — five years earlier than the current REPAYE option — though it isn’t clear whether this applies only to income-driven repayment plans.
Jason Delisle, resident fellow at the American Enterprise Institute, says shortening the forgiveness timeline by five years could result in a net increase in the cost of the program for taxpayers.
2. Private banks — not the government — might issue federal student loans
Trump wants to restore a system in which private banks issue federal student loans, Trump’s policy director Sam Clovis said in a May interview with Inside Higher Ed. The Republican Party platform also called for the federal government to stop originating student loans.
Private banks used to issue federally backed student loans until 2010, when the federal government revamped the program and began originating all federal student loans through its Direct Loan program. The Obama administration cited billions of dollars in cost savings as a reason for the switch, and used the savings to offer more Pell Grants for low-income students. Today, most new student borrowing comes from federal direct loans, with private lenders servicing the government-issued loans.
3. Students’ prospective future earnings could inform their ‘loan worthiness’
Trump also wants to let colleges have a say in lending decisions and make them share the risk of student borrowing with lenders, according to the Inside Higher Ed article. It would be up to the colleges and banks to decide together which students could borrow student loans, Clovis said. The decision would be based on factors including the student’s major, choice of college and the potential to find a job after graduating.
For example, students pursuing majors with high post-college employment rates, such as engineering and health care, might be approved to take on more student debt than those studying liberal arts topics. Today, any student — regardless of his or her planned major — can borrow the same amount of federal student loans each year.
The idea that colleges should have “skin in the game” by taking responsibility for student outcomes has bipartisan support. For example, Sen. Jack Reed, D-R.I., introduced a bill in 2015 that would require colleges that accept federal financial aid to share student loan risk with the Department of Education. Chingos says risk-sharing for institutions may also threaten the for-profit college industry, but it’s unclear whether the Trump administration would be sympathetic to for-profit schools.
4. College costs could be reduced by limiting administrative ‘bloat’
Trump said in his October speech in Ohio that he would take steps to push colleges to cut tuition costs. If the federal government is going to subsidize student loans, he said, then colleges must be held accountable to invest in their students. If schools do not invest endowment money to reduce costs, Trump said the government may reconsider whether they deserve to keep those endowments tax-exempt.
“We have a lot of power over the college, and they’re not doing the job of cost cutting because they don’t have the incentive cost to cut it because you’re paying for it,” he said in the speech.
Trump also said in his Ohio speech that he plans to reduce the “tremendous bloat” in college administration. By reducing unnecessary costs of compliance with federal regulations, he said, colleges would be able to pass the savings on to students in the form of lower tuition.
5. You could use federal financial aid to cover nontraditional education programs
On his campaign website, Trump said he planned to “ensure that the opportunity to attend a two- or four-year college, or to pursue a trade or a skill set through vocational and technical education, will be easier to access, pay for and finish.”
Higher-education programs’ accreditation “should be decoupled from federal financing,” the Republican Party platform said. That may mean that students attending those nontraditional programs could be allowed to pay for the courses with federal financial aid. Currently, only students attending schools that are accredited through the Department of Education can qualify for federal financial aid.
After Trump’s speech in Ohio, his campaign did not release a more comprehensive higher education plan on its website.
What college students and loan borrowers can do now
Students seeking financial aid should fill out the Free Application for Federal Student Aid each year they’re in school. Submitting the FAFSA is required by those who want to be considered for grants, scholarships, work-study jobs and federal student loans.
A previous version of this article didn’t state that some changes to the student loan system could be made by executive action. This article has been corrected.
For the fiscal year 2017 budget, the U.S. Department of Education (Education) estimates that all federally issued Direct Loans in Income-Driven Repayment (IDR) plans will have government costs of $74 billion, higher than previous budget estimates. IDR plans are designed to help ease student debt burden by setting loan payments as a percentage of borrower income, extending repayment periods from the standard 10 years to up to 25 years, and forgiving remaining balances at the end of that period. While actual costs cannot be known until borrowers repay their loans, GAO found that current IDR plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016 (the only years for which original estimates are available). This growth is largely due to the rising volume of loans in IDR plans.
Estimated Costs of Direct Loans in Income-Driven Repayment Plans
Note: Due to the timing of the fiscal year 2017 budget, the amount of loans made to borrowers in fiscal years 2016 and 2017 are estimated.
Education’s approach to estimating IDR plan costs and quality control practices do not ensure reliable budget estimates. Weaknesses in this approach may cause costs to be over- or understated by billions of dollars. For instance:
Education assumes that borrowers’ incomes will not grow with inflation even though federal guidelines for estimating loan costs state that estimates should account for relevant economic factors. GAO tested this assumption by incorporating inflation into income forecasts, and found that estimated costs fell by over $17 billion.
Education also assumes no borrowers will switch into or out of IDR plans in the future despite participation growth that has led budget estimates to more than double from $25 to $53 billion for loans made in recent fiscal years. Predicting plan switching would be advisable per federal guidance on estimating loan costs. Education has begun developing a revised model with this capability, but this model is not complete and it is not yet clear when or how well it will reflect IDR plan participation trends.
Insufficient quality controls contributed to issues GAO identified. For instance:
Education tested only one assumption for reasonableness, and did so at the request of others, although such testing is recommended in federal guidance on estimating loan costs. Without further model testing, Education’s estimates may be based on unreasonable assumptions.
Due to growing IDR plan popularity, improving Education’s estimation approach is especially important. Until that happens, IDR plan budget estimates will remain in question, and Congress’s ability to make informed decisions may be affected.
Why GAO Did This Study
As of June 2016, 24 percent of Direct Loan borrowers repaying their loans (or 5.3 million borrowers) were doing so in IDR plans, compared to 10 percent in June 2013. Education expects these plans to have costs to the government. GAO was asked to review Education’s IDR plan budget estimates and estimation methodology.
This report examines: (1) current IDR plan budget estimates and how those estimates have changed over time, and (2) the extent to which Education’s approach to estimating costs and quality control practices help ensure reliable estimates. GAO analyzed published and unpublished budget data covering Direct Loans made from fiscal years 1995 through 2015 and estimated to be made in 2016 and 2017; analyzed and tested Education’s computer code used to estimate IDR plan costs; reviewed documentation related to Education’s estimation approach; and interviewed officials at Education and other federal agencies.
What GAO Recommends
GAO is making six recommendations to Education to improve the quality of its IDR plan budget estimates. These include adjusting borrower income forecasts for inflation, completing planned model revisions and ensuring that they generate reasonable predictions of participation trends, and testing key assumptions. Education generally agreed with GAO’s recommendations and noted actions it would take to address them.
For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.
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FEDERAL STUDENT LOANS:
Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options
GAO-15-663: Published: Aug 25, 2015. Publicly Released: Sep 17, 2015.
Many eligible borrowers do not participate in the Department of Education’s (Education) Income-Based Repayment and Pay As You Earn repayment plans for Direct Loans, and Education has not provided information about the plans to all borrowers in repayment. These plans provide eligible borrowers with lower payments based on income and set timelines for forgiveness of any remaining loan balances. While the Department of the Treasury estimated that 51 percent of Direct Loan borrowers were eligible for Income-Based Repayment as of September 2012, the most recent available estimate, Education data show 13 percent were participating as of September 2014. An additional 2 percent were in Pay As You Earn. Moreover, Education has reported ongoing concerns regarding borrowers’ awareness of these plans. Although Education has a strategic goal to provide superior information and service to borrowers, the agency has not consistently notified borrowers who have entered repayment about the plans. As a result, borrowers who could benefit from the plans may miss the chance to lower their payments and reduce the risk of defaulting on their loans.
Repayment Plan Participation of Direct Loan Borrowers in Active Repayment, September 2014
Few borrowers who may be employed in public service have had their employment and loans certified for the Public Service Loan Forgiveness program, and Education has not assessed its efforts to increase borrower awareness. Beginning in 2017, the program is to forgive remaining Direct Loan balances of eligible borrowers employed in public service for at least 10 years. As of September 2014, Education’s loan servicer for the program had certified employment and loans for fewer than 150,000 borrowers; however, borrowers may wait until 2017 to request certification. While the number of borrowers eligible for the program is unknown, if borrowers are employed in public service at a rate comparable to the U.S. workforce, about 4 million may be employed in public service. It is unclear whether borrowers who may be eligible for the program are aware of it. Although Education has a strategic goal to provide superior information and service to borrowers and provides information about Public Service Loan Forgiveness through its website and other means, it has not notified all borrowers in repayment about the program. In addition, Education has not examined borrower awareness of the program to determine how well its efforts are working. Borrowers who have not been notified about Public Service Loan Forgiveness may not benefit from the program when it becomes available in 2017, potentially forgoing thousands of dollars in loan forgiveness.
Why GAO Did This Study
As of September 2014, outstanding federal student loan debt exceeded $1 trillion, and about 14 percent of borrowers had defaulted on their loans within 3 years of entering repayment, according to Education data. GAO was asked to review options intended to help borrowers repay their loans.
For Direct Loan borrowers GAO examined: (1) how participation in Income-Based Repayment and Pay As You Earn compares to eligibility, and to what extent Education has taken steps to increase awareness of these plans, and (2) what is known about Public Service Loan Forgiveness certification and eligibility, and to what extent Education has taken steps to increase awareness of this program. GAO reviewed relevant federal laws, regulations, and guidance; September 2014 data from Education and its loan servicer for Public Service Loan Forgiveness; Treasury’s eligibility estimates; and 2012 employment data (most recent available) from the Bureau of Labor Statistics. GAO also interviewed officials from three loan servicers that service about half of Education’s loan recipients.
What GAO Recommends
GAO recommends Education consistently notify borrowers in repayment about income-driven repayment, and examine borrower awareness of Public Service Loan Forgiveness. Education generally agreed with GAO’s recommendations, but it believed the report overstated the extent to which borrowers lack awareness of income-driven repayment. GAO modified the report to clarify this issue.
For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.
French Election Hints at a European Shift Toward Russia
The victory of François Fillon in France’s center-right presidential primary is the latest sign that a tectonic shift is coming to the European order: toward accommodating, rather than countering, a resurgent Russia.
Since the end of World War II, European leaders have maintained their ever-growing alliance as a bulwark against Russian power. Through decades of ups and downs in Russian-European relations, in periods of estrangement or reconciliation, their balance of power has kept the continent stable.
But a growing movement within Europe that includes Mr. Fillon, along with others of a more populist bent, is pushing a new policy: instead of standing up to President Vladimir V. Putin of Russia, stand with him.
Mr. Fillon has called for lifting sanctions on Russia and for partnering with Moscow in an effort to curtail immigration and terrorism. He is friendly with Mr. Putin. If pollsters are right and Mr. Fillon wins the French presidency in the spring, he could join several rising European politicians and newly elected leaders who are like-minded.
These changes, along with the impending British withdrawal from the European Union and the election of Donald J. Trump as president of the United States, foretell a “dramatic shift” in the half-century of Western unity against Russia, said James Goldgeier, a political scientist and the dean of American University’s School of International Service in Washington.
“All the trend lines right now point away from a tough approach to Russian aggression and point toward more accommodation of the Russian notion that they have a privileged sphere of influence,” he said.
It is unclear how far into Europe that sphere of Russian influence might extend, or the consequences for nations that would come under it after escaping Soviet domination only a generation ago. But those are questions of degree; Mr. Fillon’s primary victory suggests that the shift has already begun.
A Pro-Putin Populism
Though Mr. Fillon would reverse his country’s hard line on Russia, he would not be the first French leader to reach out to Moscow — Charles de Gaulle, the president from 1959 to 1969, also did this — and could not, on his own, upend European unity.
More important, he would not be alone. Mr. Trump has promised cooperation with Russia and threatened to diminish the United States’ role in NATO. Several East European countries have elected leaders who advocate reconciling with Moscow.
In Western Europe, politics seems poised to move in Mr. Fillon’s direction. Mainstream parties, forced to acknowledge that they cannot contain the far right, are instead working to co-opt it.
Mr. Fillon illustrates this trend well. Unlike the French far right, he wishes to maintain his country’s membership in the European Union. But, indulging Europe’s populist wave, he has promised to curtail immigration sharply, promote conservative social values, impose “strict administrative control” over Islam and bring security against terrorism.
Benjamin Haddad, a French analyst at the Hudson Institute, a conservative think tank based in Washington, said that such policies point, in ways that might not be obvious to Americans, toward another agenda item of the European far right: partnering with Mr. Putin.
“All over Europe, Putinism has emerged as an ideological alternative to globalism, the E.U., etc.,” Mr. Haddad said, with Mr. Putin seen as “a bulwark for conservative values — a strongman against gay marriage, immigration, Islam.”
Mr. Haddad added, “It’s largely a domestic phenomenon, rather than the reflection of a strategic debate over the relationship with Moscow.”
Mr. Fillon’s warmth toward Mr. Putin is apparently heartfelt, and it predated this election. What changed is French voters, who increasingly desire hard-line policies and signs of strength that they perceive Mr. Putin as representing.
Nicolas Sarkozy, Mr. Haddad pointed out, won the French presidency in 2007 by running as a pragmatic pro-American conservative, but this year he ran as a pro-Russian populist. While Mr. Sarkozy lost the center-right primary this month, Mr. Fillon carried that same message to success.
The Eastern and Southern Fronts
In some ways, Mr. Fillon is particular to France, where nationalist politicians since de Gaulle have long asserted French independence from the United States and Britain by reaching out to Russia. But similar trends are playing out in several European countries, along their own particular national lines.
In Germany, for instance, center-left leaders are pushing to abandon their country’s role in leading European efforts to counter Russia. Instead, they advocate reverting to the Cold War-era policy of Ostpolitik, in which West Germany sought a neutral balancing role between East and West.
Often, West European politicians do not see themselves as explicitly calling for aligning with Moscow, but rather for abandoning the costly mission to counter Russia’s aggression against faraway eastern states at a moment when they have more immediate concerns.
Independent journalism.
More essential than ever.
West European leaders see themselves as fighting an increasingly untenable two-front war: a southern front against immigration and terrorism and an eastern front against Russia.
The eastern front is largely a project of policy establishments that see it as essential to maintaining Europe’s postwar order. Voters are more skeptical; a 2015 Pew poll found that slight majorities in France, Germany and Italy said their countries should not uphold their treaty obligation to defend an eastern NATO ally should it be attacked by Russia.
Voters, particularly those on the right, have long seen southern issues — terrorism and immigration — as more important. Their threats to install far-right governments that would dismantle the European project entirely are increasingly credible.
European political establishments, unable to resist such sentiments forever, may feel they have to give up on the east to focus on the south.
The Careening Balance of Power
The international context is starker.
Russia is growing in power and aggression just as the Western order’s two strongest powers — the United States and Britain — are threatening to step away.
In the cold-eyed view of international relations scholars, who tend to measure history in epochs rather than election cycles, what Mr. Fillon says or believes is almost irrelevant. Europe’s balance of power is rapidly shifting east, pulling nations like France with it.
Russia is far weaker than the United States, and its wheezing, energy-dependent economy is half the size of France’s or Britain’s. But it still commands one of the world’s largest militaries and its largest nuclear arsenal. Its 2014 annexation of Crimea showed Mr. Putin’s willingness to use that military in Europe.
Balance-of-power theory states that, when a country like Russia rises, the other states in that region have three choices. They can counter by escalating against the rising power. They can flip sides to join the rising power. Or they can accommodate the rising power, allowing it a greater stake in the region.
In the past few years, Europe had confidently chosen the first option, meeting Russia’s aggression with sanctions and eastward military deployments meant to show Russia that the status quo order would remain.
But that approach looks increasingly untenable with Mr. Trump’s election and with Brexit. Even if Mr. Trump does not follow through on his threats to abandon American commitments to defend NATO allies, those allies have little choice but to prepare for the possibility.
To the degree that is already changing, European states seem to be eyeing the third option: to accommodate Russia’s rise, indulging enough of Moscow’s demands to restore stability.
Within Europe, the old order has been led by Chancellor Angela Merkel of Germany, who sees herself as defending the European project but is increasingly challenged by wavering allies and skeptical populations, including many Germans.
“Merkel can’t do it by herself. Germany doesn’t have that ability,” Mr. Goldgeier said. If she wishes to remain in office, she may have to give on something, and Europe’s hard-line on Russia could be it.
As soon as one country breaks from the united front against Russia, Mr. Goldgeier said, “each European country will look to cut its own deal with the Russians.”
That could mean granting Russia concessions in Syria, lifting the European Union sanctions that were meant to force an end to the continuing war in eastern Ukraine, or tolerating greater Russian influence in Eastern Europe.
It is impossible to predict where these trend lines lead, not because they are in doubt but because they foretell such extreme changes in the European order that their consequences vary too widely to pin down.
Mr. Goldgeier, though, said his immediate concern was for the former Soviet republics that are not members of the European Union or NATO and would most likely be first to come under expanding Russian influence.
“For the people of Ukraine, Moldova and Georgia, these trend lines are quite tragic,” he said.
With fewer than 50 days left before President Barack Obama becomes ex-President Barack Obama, you might think Obama would spend his time gilding the lily enough to ensure he’s remembered for more than just a fraud-riddled health insurance scam which is as likely to survive the coming year as a defenseless newborn in a Planned Parenthood “clinic.”
You’d think. You’d be wrong. Nope, before our man Barry bounces back to Grant Park, he wants to ensure we remember him as a bitter man who has some unresolved issues with white people. And when Obama sat for a game of softball with Jann Wenner, the billionaire publisher of Rolling Stone magazine, Obama eschewed burnishing his own legacy for a chance to whine about how poopy everything has gotten.
“I don’t want to sugarcoat it. There are consequences to elections. It means that the next Supreme Court justice is going to be somebody who doesn’t reflect my understanding of the Constitution. It means that the work we’ve done internationally and domestically on climate is going to be threatened. It means that the Affordable Care Act, which has provided 20 million people with health insurance, is going to be modified in ways that some people are going to be hurt by.”
So what if those are some of the precise reasons America just repudiated his entire regime? He’s worried, you guys! More importantly, he’s worried about the people who did the repudiating.
“(T)here is a cohort of working-class white voters that voted for me in sizable numbers, but that we’ve had trouble getting to vote for Democrats in midterm elections. In this election, [they] turned out in huge numbers for Trump…whatever policy prescriptions that we’ve been proposing don’t reach, are not heard, by the folks in these communities. And what they do hear is Obama or Hillary are trying to take away their guns or they disrespect you… in these rural or predominantly white areas, particularly in the Midwest. It’s going to be harder to do in the South…”
Not just “voters,” but “working class white voters.” I guess the rich white people are ok with the president. It’s those rednecks in the South and rubes in flyover country; they’re the real problem. Evidently, it hasn’t occurred to the originator of the infamous “bitter clinger” epithet that shrieking at gun owners every time some thug commits a crime with an illegally-obtained firearm hasn’t proven particularly effective. It also seems to have escaped the Great Uniter that habitually pigeonholing people by skin color is also known as “racism” in some parts.
But Obama doesn’t just think “working class white voters” are racist trash. He also thinks they’re all morons who would be much better off if they would trust people like him to do their thinking for them.
“Part of it is Fox News in every bar and restaurant in big chunks of the country… One of the challenges that we’ve been talking about now is the way social media and the Internet have changed what people receive as news… The whole movement away from curated journalism to Facebook pages, in which an article on climate change by a Nobel Prize-winning scientist looks pretty much as credible as an article written by a guy in his underwear in a basement, or worse. Or something written by the Koch brothers.”
Right. If only there was a way to keep people from hearing things Obama doesn’t want them to, then Obama wouldn’t be such a sad clown. And it never occurred to him that a president with a nearly unprecedented track record of dishonesty, whining to a magazine publisher who’s about to write some big checks for his own rag’s version of “curated journalism,” might be part of why he can’t turn that frown upside down.
Presuming Obama is right, and the Democrat Party’s problem is one of miscommunication, not their near-criminal disregard for everything from Constitutional limits to basic human decency, then it would follow that Obama should use his post-presidential time to help re-establish those lines of communication. Instead, he’s complaining about stupid white people and duplicitous billionaires to Wenner; a stupid, white, duplicitous billionaire. While Obama’s mewling might seem undignified, or even a bit sad, I fully endorse his continuation thereof. Let him wallow in his miserable sty; blaming silly crackers and their television-watchin’ foolishness for the mess he left behind. — Ben Crystal
These Warehouses are in Homer Township, Semi-Trucks are going down Gouger from 159th Overweight without being tciketed, some speeding, on roads not built for 80,000 lbs. Unsafe for School District 92.
Is Lockport becoming the next Bensenville?
I can speak for all of the homeowners in Creekside Estates because I represent them as the Homeowners Association President. Everyone in this neighborhood purchased their homes with the intentions of living in Lockport for a long time.
Our Subdivision is comprised of 44 homes located on the Northern Boundary of Lockport. About two weeks ago, we received a letter from Big Run Wolf Farm, which he received from the City of Lockport. The letter explained how PROLOGIS was exploring the idea of building a series of five industrial warehouses directly behind our subdivision and four other subdivisions.
This project was an ill-conceived plan from the start without the well-being of the residents in mind. Besides lowering our property values and increasing safety concerns for commuters and school children, due to the increase in truck traffic, Big Run Wolf Farm should be of everyone’s concern. Approximately 40,000 people visit the farm each year. Some elected officials may feel that bringing an industrial park to Lockport will attract new restaurants and retail to our area. In my opinion, most of my neighbors can and would prefer to live with the sounds of a howling wolf!
Most elected officials selling point to its residents is that this project will bring more retail and restaurants to Lockport. If anyone has driven past Bensenville, ask yourself this question, when is the last time I traveled there to eat or shop? My guess is never. One other question, why would an elected official decide to place an industrial park right in the center of five residential neighborhoods? For most of us that built our homes in the years of 2004-2006 we all lost approximately 30% in the value of our homes across the board. If this facility goes in research shows that a minimum of a 20% reduction in value can be expected. The great recession was out of our control, this is not!
Our intentions are not to back down. We are not interested in higher berms, higher trees or real estate tax credits. As a resident in Lockport and a representative of Creekside Estates as their Homeowner Association President, we are hoping that the elected officials of Lockport do the right thing. Most importantly, please listen to your taxpayers. We are what make Lockport a great community, not a bunch of warehouses!
Our sign should always read, Welcome to Lockport, not welcome to the next Bensenville!
Michael Bonomo, Lockport resident
In what direction do we want the City of Lockport to go?
This is the question we ask ourselves as residents of Creekside Estates in Lockport. On November 8, 2016, at the Planning and Zoning Commission meeting, a development by Prologis for a 206.36 acre industrial/business park on the property located south of 143rd Street and west of I-355, and east of Archer Avenue was proposed. The property is to be sandwiched into an area surrounded by 5 residential communities and a beloved Wolf Ranch.
The proposed development will occupy 2.1 Million sq ft. of space with 1,373 parking spaces, 572 semi truck parking spaces along with 328 semi truck docking doors. The effects of such a monstrosity will be numerous and irreversible. Property values will not just decrease, they will plummet. The proposed type of property with hundreds of trucks belching noxious diesel fumes, harming the health of our children and adults, polluting the natural habitat, threatening endangered species, bringing rats and other vermin, creating traffic congestion nightmares will undoubtedly be an economic and environmental catastrophe. We can see no positive outcome for the residents of the city of Lockport should this Prologis Development proceed.
The possibility of this development is a result of recent re-zoning changes of which many residents have been, until recently, unaware. Does this type of development portray the direction we want the City to go?
Carol and Jerry Welenc, Lockport residents
Protecting a neighborhood
We are absolutely stunned our city leadership believes that constructing 2 million square feet of industrial warehouses in the middle of five residential neighborhoods and the Big Run Wolf Ranch is a sound idea. The negative impact on our quality of life, environment, safety, crime, traffic and real estate values will be detrimental to all of us.
In a Daily Southtown article from August 6, 2015, 1st Ward Alderman Jim Petrakos questioned whether the city council was approving too many light industrial projects. And I quote Alderman Petrakos, “We don’t want a lot of empty warehouse buildings along I355.” In addition, Alderman Petrakos had testimonials from his neighbors lauding the fact he vehemently fought industrial development behind his and their homes in the Karen Springs subdivision on his www.jimpetrakos.com website. So, which is it Mr. Petrakos, industrial development is bad if it is in your backyard, but good if it is in mine?
At the November 8, 2016 zoning meeting, a representative of Prologis said that this type of development in the middle of several residential communities is a rarity for them. I would challenge anybody reading this article to go to any of the Prologis facilities in Illinois and see if they have one surrounded by single family homes and a wild life preserve like the Big Run Wolf ranch. You won’t find one.
We don’t know what we are more disappointed in, that Mayor Steven Streit and our First Ward Alderman Jim Petrakos believe this to be in our best interest, or the lack of transparency we were shown as a community in this process.
Trump’s victory was predictable, and was predicted, but not by looking at polls. Polling has taken a beating recently having failed to predict the victory of David Cameron’s Conservative Party in the British general elections, then Brexit, and now the election of Donald Trump. One can argue about what’s wrong with the methods involved, but more fundamentally what polls do is to treat these phenomena as isolated events when they are in fact the product of a common set of causes 30 years in the making.
There are two issues at play here. The first is known as Galton’s problem, after Sir Francis Galton, the inventor of much of modern statistics. Galton’s problem is that when we treat cases as independent—the British election, Brexit, the U.S. election—they may not actually be independent. There may be links between the cases—think of Brexit’s Nigel Farage showing up at Trump’s rallies—and there could be subtler contagion or mimicry effects in play as information from one case “infects” the other, changing the dynamics of the system as a whole. Could there then be a higher set of drivers in the global economy pushing the world in a direction where Trump is really just one part of a more global pattern of events?
Consider that there are many Trumpets blowing around the developed world, on both the right and the left. On the one side, insurgent right-wing parties are bulldozing the vote shares of traditional centrist parties all over Europe. For example, the Finns Party is the second-largest party in the Finnish parliament. In Sweden, the Swedish Democrats are the third-largest party in parliament. In Hungary, Prime Minister Viktor Orban’s political party, Fidesz, runs the country having won two elections. Meanwhile in France, the most popular political party is the National Front, which in all scenarios but one—whatever such exercises are actually worth—is expected to win the first round of voting in the 2017 French presidential election. But when all the other parties in France close ranks to prevent the National Front from winning the second round, it’s hardly a victory for democracy. And even in that bulwark of stability, Germany, the upstart Alternative for Germany beat German Chancellor Angela Merkel’s Christian Democratic Union into second place in her own backyard.
But there is also a left-wing version of this phenomenon. Consider the Scottish National Party (the clue is in the name), which has annihilated every other political party in Scotland, or Podemos in Spain, which has won 69 out of 350 seats in the Spanish parliament. Left-wing upstart Syriza runs Greece—even if it’s under Troika tutelage—and Die Linke in Germany is yet another drain on the vote share of the once-dominant Social Democrats, whose own vote share has utterly collapsed.
These parties of course have very different policy stances. The new right favors nationals over immigrants and has, at best, a rather casual relationship with the liberal understanding of human rights. The new left, in contrast, favors redistribution from top to bottom and inclusive rather than exclusionary growth policies. But they also have more in common than we think. They are all pro-welfare (for some people, at least), anti-globalization, and most interestingly, pro-state, and although they say it sotto voce on the right, anti-finance. To see why, consider our second issue.
At the end of World War II, the United States and its allies decided that sustained mass unemployment was an existential threat to capitalism and had to be avoided at all costs. In response, governments everywhere targeted full employment as the master policy variable—trying to get to, and sustain, an unemployment rate of roughly four percent. The problem with doing so, over time, is that targeting any variable long enough undermines the value of the variable itself—a phenomenon known as Goodhart’s law.
Long before Goodhart, an economist named Michal Kalecki had already worked this out. Back in 1943, he argued that once you target and sustain full employment over time, it basically becomes costless for labor to move from job to job. Wages in such a world will have to continually rise to hold onto labor, and the only way business can accommodate that is to push up prices. This mechanism, cost-push inflation, where wages and prices chase each other up, emerged in the 1970s and coincided with the end of the Bretton Woods regime and the subsequent oil shocksto produce high inflation in the rich countries of the West in the 1970s. In short, the system undermined itself, as both Goodhart and Kalecki predicted. As countries tried harder and harder to target full employment, the more inflation shot up while profits fell. The 1970s became a kind of “debtor’s paradise.” As inflation rose, debts fell in real terms, and labor’s share of national income rose to an all-time high, while corporate profits remained low and were pummeled by inflation. Unions were powerful and inequality plummeted.
The era of neoliberalism is over. The era of neonationalism has just begun.
But if it was a great time to be a debtor, it was a lousy time to be a creditor. Inflation acts as a tax on the returns on investment and lending. Unsurprisingly in response, employers and creditors mobilized and funded a market-friendly revolution where the goal of full employment was jettisoned for a new target—price stability, aka inflation—to restore the value of debt and discipline labor through unemployment. And it worked. The new order was called neoliberalism.
Over the next thirty years the world was transformed from a debtor’s paradise into a creditor’s paradise where capital’s share of national income rose to an all-time high as labor’s share fell as wages stagnated. Productivity rose, but the returns all went to capital. Unions were crushed while labor’s ability to push up wages collapsed due to the twin shocks of restrictive legislation and the globalization of production. Parliaments in turn were reduced to tweet-generating talking shops as central banksand policy technocrats wrested control of the economy away from those elected to govern.
But Goodhart’s law never went away. Just as targeting full employment undermined itself, so did making inflation the policy target.
Consider that since the 2008 crisis the world’s major central banks have dumped at least $12 trillion dollars into the global economy and there is barely any inflation anywhere. Almost a quarter of all European bonds now have negative yields. Unsurprisingly, interest rates are on the floor, and if it were not for the massive purchasing of assets in the Eurozone by the European Central Bank, deflation would be systemic. In sum, we may have created a world in which deflation, not inflation, is the new normal, and that has serious political consequences, which brings us back to Trump.
In a world of disinflation, credit became very cheap and the private sector levered up—massively—with post-crisis household debt now standing at $12.25 trillion in the United States. This is a common story. Wage earners now have too much debt in an environment where wages cannot rise fast enough to reduce those debts. Meanwhile, in a deflation, the opposite of what happens in an inflation occurs. The value of debt increases while the ability to pay off those debts decreases.
Seen this way, what we see is a reversal of power between creditors and debtors as the anti-inflationary regime of the past 30 years undermines itself—what we might call “Goodhart’s revenge.” In this world, yields compress and creditors fret about their earnings, demanding repayment of debt at all costs. Macro-economically, this makes the situation worse: the debtors can’t pay—but politically, and this is crucial—it empowers debtors since they can’t pay, won’t pay, and still have the right to vote.
The traditional parties of the center-left and center-right, the builders of this anti-inflationary order, get clobbered in such a world, since they are correctly identified by these debtors as the political backers of those demanding repayment in an already unequal system, and all from those with the least assets. This produces anti-creditor, pro-debtor coalitions-in-waiting that are ripe for the picking by insurgents of the left and the right, which is exactly what has happened.
In short, to understand the election of Donald Trump we need to listen to the trumpets blowing everywhere in the highly indebted developed countries and the people who vote for them.
The global revolt against elites is not just driven by revulsion and loss and racism. It’s also driven by the global economy itself. This is a global phenomenon that marks one thing above all. The era of neoliberalism is over. The era of neonationalism has just begun.