State of the Economy: Walked out of my local bank and?????

[_Analytics]

Last night I had dinner with somebody who works at a local bank. I drilled him for two hours about various details on the state of the economy.

Here are the takeaways from our conversation:

1- The recession was very bad, but it did in fact end three years ago, and the recovery is still going forward.

2- Ben Bernanke’s efforts to save the economy have been nothing less than heroic. According to my friend, Bernanke is the only one in Washington who has actually done anything of significance to help the economy, and that Bernanke will be remembered as being the perfect man for the job.

3- It appears weak demand, especially in housing, will continue to keep the economy from reaching the previous levels of “normal.”

4- There is absolutely no evidence that we will have a significant amount of inflation anytime soon. He said the Fed is vigilant of this risk, and that it has mechanisms in place to destroy the liquidity in the market that it has created extraordinarily quickly as soon as doing so becomes necessary. He said an expanded money supply causes inflation if and only if the people who have access to the created money try to actually spend it in a way that stretches the economy’s production capacity. In the current situation, banks are sitting on a ton of capital, but there just aren’t very many qualified borrowers who want to borrow the money. There is so much slack and excess production capacity in the economy right now, inflation is very unlikely.

5- Loans for autos, credit card debt, and new house loans are all way down. The only sector where people are borrowing more money is student loans—(don’t look for massive layoffs at institutions of higher learning!).

6- I drilled him repeatedly on what are the underlying causes of the current situation. He talked about such things as the dismal situation of the international economy, demographics, gridlock in Washington regarding addressing the long-term deficits, changing technology, and inequality. The Affordable Care Act hurting the economy in any way didn’t come up.

[_cinepro]

Yeah for student loans! Since they're college students, they'll no doubt use this borrowed money wisely and whoever is on the hook for a default has nothing to worry about.



Wait, who was on the hook again?


And that's great news about inflation. The next time I pay 30% more for a can of food that is 20% smaller, I'll remind myself that inflation isn't a problem and that Bernanke has everything in control.

[Anonymous]

Yeah for student loans! Since they're college students, they'll no doubt use this borrowed money wisely and whoever is on the hook for a default has nothing to worry about.



Wait, who was on the hook again?


And that's great news about inflation. The next time I pay 30% more for a can of food that is 20% smaller, I'll remind myself that inflation isn't a problem and that Bernanke has everything in control.

Interesting that you had to refer to an article that is almost a year old in order to make your point about inflation. Looking at the latest numbers, maybe you should be more worried about deflation--the EPI went down last month.

The household fuels, utilities, and supplies price index fell 1.74 percent in October. Electricity prices declined 4 percent because of seasonal changes. These large drops were somewhat offset by prices of fuel oil and natural gas, which are still trending up.

Motor fuel and transportation prices dropped 1.35 percent in October, thanks to a 2.1 percent decrease in the price of gasoline. Gasoline has been particularly volatile in the past few months: This month’s decrease followed a 4.1 percent increase in September.

Several economic factors signal that these prices are likely to decline further in the near future. First, the manufacturing industry, which is the engine of the recovery, has weakened over the last few months. Second, many analysts expect sluggish economic growth in the first few months of 2013. All this may lower the demand relative to an ample oil supply. Meanwhile, spot prices for Brent crude oil dropped 2.4 percent to $109.89 per barrel in October.

Recreation services decreased 0.21 percent in October. This change can be attributed to prices for cable and satellite television and radio, which fell 0.72 percent.

[_Analytics]

Regarding student loans, that exception to the trend in other lending proves the point: people with money want to save it and earn a reasonable amount of interest on it. But they can't find enough credit-worthy people who want to borrow it. Student loans continue to go up because the government is loaning the money and doesn't care very much about the credit-worthiness of the borrowers.

Get rid of student loans, and fewer people would go to college. Massive job losses at universities (to say nothing about college-town restaurants and bars). And then the economy would have fewer educated people who are capable of competing in the modern economy.

I'm not a fan of the college loan system, but it is a mixed bag.

[_cinepro]

Get rid of student loans, and fewer people would go to college.

You say this like it's a bad thing. Although obviously the cost of college would come way down, so it could actually increase the number of students.

Massive job losses at universities (to say nothing about college-town restaurants and bars).

You say this like it's a bad thing. I agree that the student loan program is being used, in part, as a taxpayer subsidy to universities and university towns (and to help sustain a "financial bubble" that will ultimately pop and crash, leaving the tax payers once again on the hook).

And then the economy would have fewer educated people who are capable of competing in the modern economy.

Don't think easy borrowing for students automatically leads to a greater number of "educated" people who are prepared to "compete" in the modern economy. But if standards and criteria were introduced to focus student loans on those students who are studying needed disciplines and are most likely to complete their studies, I would be all for it.

I'll come clean and admit that a lot of my disenchantment with the system comes from my experience as an employer in the entertainment business in Los Angeles. As I've discussed in other threads, I employ many twenty-something workers in entry level/lower technical jobs on the periphery of the movie business. For most of them, this is their first job out of school, or transitioning into the entertainment industry from other careers. Over the years, I have interviewed dozens and dozens of applicants with degrees from USC and other expensive film schools, but have found it impossible to find work in the industry. Even I can't hire them! And for those I do hire, I end up sending out garnishments with their pay checks. These poor souls are up to their eyeballs in debt, with slim-to-none chances of getting a good enough job to pay it off any time soon.

Now, I'm not running a sweat-shop by any means. It's just the reality of the business; the supply of labor is way, way exceeding demand in Hollywood. And I don't begrudge people who can afford it from attending an expensive school. But who in their right mind would lend someone hundreds of thousands of dollars to go to USC film school when that person has almost no chance of getting a good enough job to pay it back?

Only the government would.

I'm not a fan of the college loan system, but it is a mixed bag.

I don't know what kind of a bag it is. I only know that I'm the one left holding it.

[_cinepro]

Interesting that you had to refer to an article that is almost a year old in order to make your point about inflation. Looking at the latest numbers, maybe you should be more worried about deflation--the EPI went down last month.

As long as Bernanke has his foot on the gas, deflation is one thing I will not be worried about.

[_Analytics]

Don't think easy borrowing for students automatically leads to a greater number of "educated" people who are prepared to "compete" in the modern economy....I don't know what kind of a bag it is. I only know that I'm the one left holding it.

Those are all excellent points. It’s quite clear to me that a main reason college has become so expensive is that colleges can raise prices with impunity, knowing that kids will pay as much as they can borrow. The system implicitly assumes that students are rational decision makers who will rationally evaluate the costs and benefits of any given college program.

In today’s editorial, George Will derided democrats because they allegedly don’t trust people to make good decisions (e.g. with a Medicare voucher system). But as the experience of the student loan system shows, many people are terrible decision makers, and the government shouldn’t give out vouchers (or loan guarantees) on the premise that they are.

If I were in charge, I’d get rid of the student loan program, and instead focus on providing government-funded scholarships designed to fill key jobs in the economy; if you want to be a nurse or an engineer, there would be enough scholarships available to fill the projected demand. In contrast, if you wanted to study film making or basket weaving, you are at the mercies of how well you can accomplish that on your own in the free market.

The larger point, though, is that the current state of the economy is driven by low demand. Too many people have too much money that they aren’t spending or otherwise putting to productive use. The people who have money either need to spend it or loan it to somebody who will.