Has Education Failed You?

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Leo McDonald
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1 Has Education Failed You? Antony Davies copies of this presentation can be found at

2 How the Mortgage Market Works

3 Safe Borrowers Safe Mortgage Commercial Banks Risky Mortgage Risky Borrowers

4 Investment Banks (Lehmann Brothers) Hedge Funds Mortgage Backed Security Commercial Banks Reinsurance Companies (AIG) Pension Funds Other Large Savers

5 End result: How it s supposed to work 1. People with savings loan to people who buy houses. 2. People who borrowed make payments. 3. Free market interest rate regulates risk.

6 How did government short-circuit the process?

7 Two government players enter the game. Low interest rates make borrowing artificially less expensive. Buy mortgages with little regard for risk.

8 Federal Reserve: Low Interest Rates Many Loans High Risk Few Low

9 F&F: Remove Lending Risk Many Loans High Risk Few Low

10 What does this do to housing prices?

11 What did this do to housing prices? Price Old price Old demand

12 What did this do to housing prices? Price Bubble price Old price Bubble demand Old demand

13 What does this do to housing units?

14 What did this do to housing units? Price Old quantity Old demand

15 What did this do to housing units? Price Bubble demand Old demand Old quantity New quantity

16 When does the bubble burst?

17 When does the bubble burst? Price Bubble price Old price Bubble demand Old demand New quantity

18 When does the bubble burst? Price Bubble price Crash price Old price New quantity Bubble demand Crash demand

19 What happened?

20 Simple answer Government broke the link between risk and return...

21 Detailed answer Fannie Mae and Freddie Mac: taxpayers bear risk, but banks keep profit. Community Reinvestment Act ( ): banks must provide loans to low-income and minority borrowers. Riegle-Neal Act (1994): regulatory approval of interstate bank mergers tied to Community Reinvestment Act ratings. HUD (1996): more than 40% of FM and FM loans must go to low-income borrowers. Taxpayer Relief Act (1997): exempts profits tax on home sales up to $500,000. Federal Reserve (2000 to present): holds interest rates low.

24 What does this have to do with college loans?

25 Simple answer Government breaking the link between risk and return...

26 Detailed answer Stafford and Perkins loans: taxpayers subsidize loans. Taxpayer Relief Act (1997): tax credit for college debt. Affordable Care Act (2008): DoE loans directly to students. Loan Forgiveness Program (2014): forgive some federal student loans. Community College Act (proposed 2015): taxpayers pay for students to attend community college. Debt Forgiveness Act (proposed 2015): student loan debt be dischargeable in bankruptcy. Federal Reserve (2000 to present): holds interest rates low.

27 What are the consequences?

28 More college borrowing and risk. Many Loans High Risk Few Low

29 What do high risk student loan borrowers look like?

30 Students who do not have the skills to succeed in college. Students who major in fields that have little earning power.

31 Current policies increase tuition costs. Price Bubble price Old price Bubble demand Old demand

32 Bubble bursts when students can t get jobs. Price Crash price Bubble price Bubble demand Old demand Crash quantity Bubble quantity

33 What happens when the bubble bursts?

34 Taxpayers get stuck with up to $1 trillion in debt (as of today). Millions of low-skilled students wasted four years.

35 College presidents decried as greedy profitseekers. Many small colleges go bankrupt.

36 Call for more government oversight of colleges and college loan markets. Call for nationalizing universities (Affordable College Act)

37 Real Rate of Return on a College Major ($200,000 investment)

38 Real Rate of Return on a College Major ($200,000 investment)

39 Have we learned from our mistakes? Stock market bubble (1990s) Housing bubble (2000s) College bubble (2010s)

40 Has Education Failed You? Antony Davies copies of this presentation can be found at

Synopsis of Case Study

Obliged: Goldman Sachs vs. The U.S. Securities and Exchange Commission Synopsis of Case Study This case study highlights the public relations and external communications of financial services firm Goldman