Bubbles and credentials.

View 698 Thursday, October 27, 2011

· Uncle John McCarthy, RIP

Bubbles

We’ve previously discussed the origin of the Great housing Bubble. There’s a good article on it in today’s Wall Street Journal, The Mortgage Crisis: Some Inside Views by Columbia professor Charles Calomiras revealing new evidence that the crisis was not only foreseeable , but foreseen. The turning point was in early 2004, when the Bush Administration regulators succumbed to the pressure for “affordable” housing and did not intervene as Freddie Mac made massive cuts in underwriting standards. Prior to 2004 there was a cap placed on “low doc” and “no doc” loans, but Freddie Mac officials said in a memo to loan security officials worried about giving jumbo loans to people who could not prove their income and credit stability, “under the current circumstances, a cap would be interpreted by external critics as additional proof we are not really committed to affordable lending.”

The key word is affordable lending: lending money to those unlikely to pay it back is “affordable” lending. Affordable lending is an entitlement. As usual I ask, if someone is entitled to something, who is obligated to pay for it? Where does the entitlement come from, and who has laid the obligation on someone to pay it?

And as usual, the entitlement comes from the will of those who want the entitlement, and the obligation to pay for it comes from those willing to use the machinery of the state to extract it. It’s all part of the trend. And they never catch wise.

Of course the “affordable lending” injected large sums into the housing market. When more money chases goods, the price of the goods rises. This inevitably produces a bubble. It can go on quite a while. The Housing Bubble inspired the credit swap bubble, the Mortgage Secured Assets bubble in which massive packages of high risk loans were bundled into packages that were then sold (with high commissions to those packaging and selling) to Government backed outfits like Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac paid huge dividends to investors and huge bonuses to its managers. But if something cannot go on forever, it will stop. The housing bubble could not expand forever, and in 2008 it stopped. The result was the Mortgage Secured Assets collapse, which led to the Second Great Depression that we enjoy to this day. Fannie Mae and Freddie Mac were taken over by government, which assumed their losses. The Treasury bailed out investment banks that had invested heavily in various derivatives they sold each other at increasing prices. The entitlement was for “affordable lending”. The obligation fell on the American middle class. So it goes.

The Education Bubble

There is another bubble building and we all see it: the academic bubble. While some “higher education” actually teaches something valuable, most of what is taught today does not seem to do that. As more and more people go to these institutions the classes get larger, and as more and more are admitted, the content of what is taught goes down to accommodate them. Staffs grow. Costs rise. Student loans inject more and more money into the system. It is estimated that the total of outstanding student loans is about $1 Trillion. That is a $1 Trillion dollar expansion of the funds available for spending on education. The system was well able to absorb that. Prices rose. Tuition costs rise. The need for student loans rises. The political demand for “affordable” college education increases. Loans are restructured, graduates with worthless degrees are guided into “public service” as a mean of reducing their debts. Those in what would have been the middle class find themselves in bondage for most of their lives. Those fortunate enough to come from the ruling class which can afford to send its young to colleges without the necessity of student loans converting them to bondslaves can go demonstrate for more “affordable” education for a few days or weeks to assuage their guilt feelings.

And the bubble rises.

If something cannot go on forever, it will stop. We have a college education bubble. At some point it will burst. What will happen next I do not know.

In some of my early stories I postulated a new kind of Higher Education, with large international corporations opting to start their own higher education programs. They needed well educated workers and executives, and the traditional education institutions were not providing them.

There remains a demand for well educated workers and executives. It’s possible to get that if one is careful – although even the intellectual elites are subjected to tribute levied by the Social Studies and Special Studies and Responsible Studies departments which have entrenched themselves in academe. As technology becomes more complex the demand on those studying chemistry and physics and engineering and modern biology rise to greater heights, yet the Department of Redundant Studies and the various Departments of Voodoo Science get more shrill in demanding that the smart kids in the tech schools go over and “get a well rounded education,” meaning that they go waste some time in one of the Voodoo departments. That can’t go on forever.

One tragedy here is that these parasites are killing genuine liberal education. When I was an undergraduate at the University of Iowa there was a “core course” requirement in liberal arts. Those included a year of George Mosse’s lectures on Western Civilization, and courses like “Greeks and the Bible,” “Masterpieces of English Literature” — none of which I would voluntarily have taken I think. I am very glad that I wasn’t given the choice. There is an importance to civilization’s continuity. I know that it was important to my life that I learn differential calculus, but I think George Mosse’s searching questions about the Enlightenment, and Mr. Carstairs’s discourses on Milton had an equally important effect on my life. Certainly the seminar paper I gave on Camus did. If instead of those courses I had been forced to take Voodoo Studies in the general humanitie, I am not sure what the result would have been, but I do not think it would have been good.

The Higher Education Bubble is running full tilt. What will happen when it stops? Because it will. It cannot go on forever.

Credentials

As to what happens then, I remind you that you can’t really predict the future, but you can invent it. And sometimes things invent themselves. Look to the roots of the university system. Think about what Universities are organized to do, which is to collect money and spend it on themselves while issuing credentials. The actual produce is the credential, which in theory certifies that its holder has certain capabilities. Note that the validity of the credentials and the appropriateness of the education product are determined by the university system itself. Note the regulations which force employers to take account of the credentials lest they be sued for one or another form of discrimination in hiring employees (who cannot be fired for incompetence if the incompetence results from a ‘disability’ like alcoholism).

And the beat goes on.

You can’t predict the future, but you can invent it. I note that some of the greatest lectures ever given, and most of the great works of all time, are available for almost nothing. What is needed is a means of converting a real education into a credential. Your children need a credential. They really need an education as well. The cost of the credential is much higher than the cost of the education. The cost of the credential for all but the wealthiest is subjecting their children to student loans.

Who here is so base as to sell his children into bondage?

Salve, Sclave.

Uncle John McCarthy, RIP.

<http://www.nytimes.com/2011/10/26/science/26mccarthy.html?_r=1&hp=&pagewanted=all>

—

Roland Dobbins

As I have said earlier, I am not very good with memorials and obituaries. John McCarthy was a friend of forty years and more, a member of the Citizen’s Advisory Council on National Space Policy that I chaired, and the man who introduced me to what later became the Internet. One of my last meetings with him was at the “Singularity” conference at Stanford. We corresponded perhaps monthly for the past twenty years and we were both members of a couple of closed Internet conference groups. I learned a very great deal either directly or indirectly from John. The world is a better place for his having been in it.

Der Dr. Pournelle:

Richard Muller, an announced climate-change skeptic, did a study reviewing climate data; among his funders were the Koch brothers. He recently announced his finding: climate change is real.

http://www.washingtonpost.com/blogs/ezra-klein/post/a-skeptical-physicist-ends-up-confirming-climate-data/2011/10/20/gIQA6viC1L_blog.html

Comments?

– Nathaniel Hellerstein

Is there anyone on Earth who does not believe that climate has changed, very dramatically, during historical times from the Bronze Age on? In Viking times we had a Warm, so much so that there were colonies in Greenland, and Greenland was in fact green enough to warrant the name. Then, after 1300, there was a dramatic shift to cold, the Viking colonies were covered with ice, Greenland became Iceland as Iceland became volcanoland. Brackish canals in Holland froze over to accommodate Hans Brinker and the Silver Skates. The Thames froze over hard enough that there were markets set up on the ice. The Hudson froze over hard enough that cannon could be brought across the river to George Washington in Harlem Heights the day before Christmas 1776. It was cold. Then the warming began. It continues now.

There is no climate model that can duplicate those trends: you can’t start with the initial conditions in 800 AD, or 1300 AD, or 1800 AD and do a computer run that gives you the actual observed results. The models aren’t much good. They may be the best we have, but shall we bet the future economy of the US on them, particularly since China and India will not?

I do not like the increase in CO2 but I am far less concerned about its effect on climate than I am about its effect on ocean acidity. We ought to be spending money on research on what we can do about carbon dioxide levels. I suspect that if we had bought Amazon rain forest to make parks we might have had more effect for what we have spent on carbon reduction than what we did with it. At some point there will be money in this, but for now the research into CO2 level reduction (and controlling ocean acidity) is going to need basic research. Make some of the money thrown about available for that research.

I am hardly astonished that there has been climate change. Everything I have ever read about history indicates that climate has been changing for a long time. The Ice Age – which in theory we’re still in, this being only a remission – had an enormous effect on humanity. See my friend Adrian Berry’s Ice With Your Evolution for some intriguing speculations on those effects.

Of course there is climate change, and it is important to understand it, but in fact we don’t have very good models of climate change. As always, the question is not “is it changing?” but rather how much? And What caused that? And we can’t say we know until we can feed in the initial conditions for, oh, say, 1900 and run it; when the outcome looks like what did happen from 1900 to present, including the “new ice age” trends that scared us in the 70’s, we can start having some confidence in our answers. Until then we need to do more research and less politicking.