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-- Posted Monday, 20 October 2008 | Digg This Article | Source: GoldSeek.com
Rick’s Picks Monday, October 20, 2008 “Phenomenally accurate forecasts” As the U.S. economy sinks into a quagmire, colleges and universities are going to be especially hard hit, since they long ago became unaffordable for most Americans. Until recently, the exorbitant cost of a college education didn’t matter as much, since student loans were plentiful and parents could take out home equity loans to cover what they could not afford. But both sources have dried up completely in recent months, and that means the nation’s colleges and universities will have to scramble to fill seats next fall, when the problem hits full-force. Student loans should loosen up some in the meantime because the main source of such loans, Sallie Mae, is now backed by the U.S. Treasury. But in these increasingly hard times, the very idea of borrowing, whether against home equity or via an IOU to the Government, is going to seem less appealing than ever to parents of college-bound kids.
So far, the news media have emphasized only the supply side of the problem. The New York Times, for one, has run several articles about what parents are doing to cope. Here’s their short list, from a survey of 2500 respondents: - Apply for need-based scholarships (67 percent)
- Require child to work while attending college (62 percent)
- Plan to get more student loans, including government loans (53 percent)
- Send a stay-at-home parent back to work (30 percent)
- Plan to take out a home equity loan (27 percent)
- Plan to liquidate a retirement fund (11 percent)
- Borrow from a relative (8 percent)
- Sell a home or other real estate (7 percent)
No question, it’s going to be a struggle for most households. But what will the colleges do if student applications nosedive, as seems unavoidable? Apparently they haven’t given the matter much thought, assuming sources quoted by the Times are indicative. “If we start seeing massive layoffs [in the U.S.],” one campus spokesman said, “we may be in for a real bumpy ride.” For sure. But our guess is that few college officials have considered just how tough things could get, since no one working in a bursar’s office was around during the Great Depression. Colleges have always taken for granted that parents would scrimp and save, literally mortgaging the farm if they had to, in order to send their kids to college. But these days, with incomes stagnant, home values collapsing and investment portfolios imploding, few parents will be in a position to take on more debt, even for so lofty a purpose as putting their kids through college. A Possible Bright Side There may be a bright side, however, since Government backing of Sallie Mae in theory would allow the agency to expand student loans promiscuously and indiscriminately. One could even argue that this is better policy than blowing hundreds of billions of dollars on the apparently hopeless project of inflating real estate values. As far as giveaways go, it promises to be one of the more popular programs. Also, it seems likely that colleges will have to tap deeper into their endowment funds in order to offer more, and bigger, scholarships. For some of the wealthiest schools, such as Harvard, Stanford and University of Texas, this should not present a problem, at least in theory. Princeton, which costs around $25,000 per semester to attend, could give virtually every student a free ride using annual gains of just 2% from its $13 billion portfolio. Harvard’s fund is nearly three times that size, and so it would have no problem filling classrooms in a pinch. Unfortunately, most colleges do not have endowment funds nearly so large; moreover, it remains to be seen whether even the best-managed funds can earn 2% on their money in deflationary times such as these. The funds might even have some down years, which would be unprecedented. Whatever happens, most colleges and universities will face financial pressures of a magnitude never before imagined, much less experienced. Will the schools at long last be forced to yield to the rules of supply and demand? *** Switzerland Safe? Look Again… When we wrote here a while back that Europe, especially Switzerland, would never stoop to using funny-money to “save” its banks, we had UBS in mind. Events have proven us wrong, however, and it now appears that Switzerland will use exactly the same smoke-and-mirrors tricks that the U.S. employed to magically restore the appearance of health to an insolvent banking system. As reported Friday in the Wall Street Journal, “Swiss banking giant UBS will transfer up to $60 billion in problematic assets to the Swiss National Bank, and raise 6 billion francs, or $5.3 billion, by placing mandatory convertible notes with the Swiss government, which will result in the government owning a 9% stake.” The significance of this news should not be lost on those who have long considered Switzerland a safe refuge for cash. While we’ve never doubted it is possible to fool some of the people all of the time, and all of the people some of the time, we’d have thought it downright impossible to fool the Swiss into believing in the quintessentially American concept of free lunch. With Swatch mentality encroaching on the Swiss banking fortress, burghers are surely rolling in their graves. *** Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Monday, 20 October 2008 | Digg This Article | Source: GoldSeek.com
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