Hoover, Housing, and Higher Education: Years of Systemic Gaming Gone Awry
In the 1920s, Herbert Hoover is said to have promised a chicken in every pot. And while that quote turned out to be attributed inaccurately, nonetheless, it is part of our cultural lore. Soon after, the American dream was extended to embrace the premise that everyone should own a house. Then it became the consensus that everyone, with or without a chicken and a house, should have a college degree. We were promoting full stomachs, home ownership, and higher education. After all, this is America. And in America we dream.
Originally the chicken thing didn't work out very well because the Great Depression hit. The house thing worked for a while but then imploded. And the college thing is imploding now, with the student loan bubble hovering over my generation like a toxic cloud. So as millions of students head to college and grad school in the coming weeks, we have to ask ourselves, What went wrong? Or better yet, How do we reframe the dream?
The chicken in every pot dream clearly went wrong considering that today one-third of us are now clinically obese (not to mention that little Depression issue). The housing dream went wrong when a whole lot of greedy opportunists converged to create a house of cards out of, well, a lot of real estate loans made out of cards. Prior to the recent crash, house prices had gone up so high that home ownership looked like a lottery ticket to instant wealth, so some people who didn't have down payments or jobs steady enough to sustain 30-year mortgages bought houses anyway. Then, people who didn't understand the financial implications of their mortgages joined in, and bankers saw huge profits writing questionable loans. Meanwhile, those bankers didn't attempt to explain concepts like "negative amortization" and "adjustable rate" because those higher profits made it possible for them to buy even larger houses. The biggest problem with the housing bubble occurred because the mortgages were sold to other banks in complicated, debt-structured instruments, meaning the banks who wrote the loans weren't vested in the quality of those mortgages in the first place.
The mortgages were bundled and sold like hot cakes to other banks and were being written and foreclosed upon so fast that we had to invent another new term, robo-signing, to describe it. So the loans defaulted in record numbers and we had a housing crisis. That underpinned a wider global economic recession; housing prices collapsed, homeowners learned a new definition for the term "underwater," and the world suffered an economic quake.
Next up, the education crisis. The only way for everyone to go to college is for colleges to lower their standards so everyone can actually graduate (just like the banks lowered their standards so everyone could own a house), meaning that the probably-not-college-material-in-the-first-place students seek out courses they can actually pass while going into massive debt. Debt that, when indexed against income, makes far less sense than it did just a generation ago.
Because of the job crisis.
Damn, but everything is connected.
As I reported two years ago, if you graduated from college around 1980, the entire cost of a four-year degree, even from an expensive private university, was roughly equivalent to your first-year salary. Today, that would translate to an entry-level salary of roughly $200,000. Good luck finding that job. We keep talking about student debt, but until this week we pretty much left off the conversation about college cost indexed against earning potential. In other words colleges are robo-signing degrees headed for foreclosure. Just like the bankers.
But there is an even bigger underlying problem. There are a whole lot of people going to college who are not learning much. While employers are complaining that college graduates don't actually know much, in my business I speak with college professors and administrators on a daily basis. And I am consistently stunned at how little some of them know. In a prime example of our "race to the bottom," and as hard as it might be to believe, this past week I had a conversation with the dean of a college English department who had "never heard of" Salman Rushdie. Not a student. A department head. An English department head.
It is categorically undeniable that Rushdie is one of the most acclaimed authors of our time. Period. The head of an English department at a university not knowing who Salman Rushdie is is akin to the head of a technology department not knowing who Steve Jobs was. And these are the folks teaching our debt-ridden students.
College, like home ownership, used to make universal economic sense. And it is still true that people with college degrees earn higher incomes on average than those without college degrees. In the past, college was a universally good investment. Much like real estate. Now both housing and higher education look like relatively bad investments, at least for a segment of the population. Which puts the onus on students and their families to determine if college makes sense for them at all when there are so many other ways to get an education, and so many other ways to invest tens, if not hundreds, of thousands of dollars in their future.
It is critical that students, and parents of young people, make sure they understand the debt-to-earnings ratio and then target educational plans in such a way that these students will not only get jobs, but also will be able to build careers they can get excited about. In other words, we need to reframe the dream and do the math. Then determine if this investment, and the debt that may trail you for life, will actually pay out.
In this day and age, we may just find that those who elect to forgo Higher Ed and avoid debt altogether end up settling on top, while those who believe the systemic marketing lore selling empty "dreams" spend the rest of their lives kicking themselves for choosing that robo-signed degree. And hey, for the rest of us that debt, which may or may not be paid off when we retire, was hopefully at least worth those epic keg parties.