To Forgive, Divine.

In 1711, Alexander Pope penned the complete phrase as “To err is human, to forgive, divine.”  This memorable couplet together with his other phrases, “Tis with our judgments as our watches, none Go just alike—yet each believes his own….“ and, “A little learning is a dangerous thing….” along with “Fools rush in while Angles fear to tread” were first published in his satirical three-part poem, An Essay on Criticism.  Curiously, these Pope couplets, still popular as part of modern English, are particularly applicable to the current political economy—especially the state of public and private debt.   Furthermore, sin and forgiveness are likened unto debts and debtor’s being forgiven.  Remember the Lord’s Prayer….Debts and Debtors and seeking forgiveness?  To extend any forgiveness, the extent and circumstances of the sin at hand (the use of debts) must be better understood.

Debt is not bad.  Debt is conditionally good.  Debt is bad if not used very well.  Debt is useful—especially for investment-based transactions.  Borrowed money is a source of funds to invest to acquire assets or to consume goods and services that were eventually produced from the initial assets partially financed and acquired by debt.  These multiplying flow of credit funds are ever circular in such transactions.  What else we have done with borrowed money?  Everything else.

Debt is widespread.   Debt is always and everywhere evident in a financial economy.  The New York Federal Reserve Bank classifies today’s Total Household Debt as follows:  Mortgages, HE (household) Revolving Loans, Auto Loans, Credit Cards, Student Loans and Other Debt.  This Fed branch also reports that recent total mortgage debt has exceeded pre-recession levels.  Student loans have surpassed $1.37 Trillion.  Total household debt currently stands at $13.15 trillion.  Debt is purposely more available to acquire most anything now—to pay-back later under contract with hopefully greater income and consumption generated from the acquisition of additional goods and services.  At least, that is the principle behind lucrative bank and credit card lending for household expenditures.  This credit is important.  The repayment of such revolving loan principal is tracked and scored by credit reporters such as TransUnion, Equifax and Experian.

Unfortunately, this reported class of debt is mostly positioned to facilitate consumption and not investment in assets.   Which is more virtuous (less sinful) and responsible—leveraged consumption or leveraged investment?  Because of conjoined consumption over-leverage, approximately 70% of the households of the US are now reporting that they are living paycheck-to-paycheck.  With such thin discretionary liquidity, this type of debt-based consumption activity eventually generates leveraged instability rather than real economic stability.  Living eventually beyond your means is eventually corrupt.

Our Dissimilar Judgements.   Again by Pope, “Tis with our judgments as our watches, none Go just alike—yet each believes his own.“  While simultaneously observing the same world, the study of economics has different watches—different perspectives, different ideologies, even different watchman.  According to the latest college catalogs and academic descriptions variously published around the Web, there are no less than 12 philosophical schools-of-thought in Economics.  In somewhat alphabetical order they are:  The Austrian-School, Behavioral Economics, Chartalism, Classical Economics, Neo-Classical Economics, Mainstream Economics, Marxism, Monetarists, Market Monetarists, Keynesian, New-Keynesian and Post-Keynesian.

All of these assorted schools-of-thought believe they have the truer economic orthodoxy with which to watch our political economies and to tell us what to do with our timely opportunities.  If they could be grouped into only two major schools, their categorical differences would be more-or-less related to (1) more active or passive involvement of government in the economy or (2) greater/lesser monetary interventions by central banks in the economy to guide economic policy and outcomes.  A such, government fiscal policy and monetary policy are mostly focused upon and selected for economic debate and implementation because they can be more directly managed and controlled through authoritative intervention by those having political or appointed position power.

Of these major twin currents and dozen-or-so tributaries of economic thought, no single school-of-thought predominates—excepting only size-wise, that undercurrent being the most populous: the Mainstream Economists.  This homogeneous academic flow conjoins almost everything and channels the combined median intellectual undertows to collect and create a self-perpetuating group-think.  In this globalist Gulf Stream mindset is where you swimmingly get along to come along.   Such inclusive economic hedging mentality and accepting of a safety-in-numbers philosophical approach reduces tenure risks.   This consenting group rarely predicts much.  Furthermore, the Mainstream economists tend to be comprised of diversified and contented teachers and not risky researchers.  Risky innovation always happens at the edges and on the frontiers of experience by those discoverers seeking and watching the obvious.

No specific or predominate economic school, especially the aggregate Mainstream, predicted the comings and goings of the Great Recession.  Looking back over the last decade of economic forecasting causalities, the Great Recession was mostly due to unnoticed over-indulgences in debt-based real estate transactions creating an asset-bubble.  Eventually, the inflated real estate market experienced shocking debt-servicing issues and illiquidity at its peak.  As the debt-propelled asset prices eventually collapsed, then came the toil of debt servicing the underlying bad loans and the eventual stagnating effects of painstaking deleveraging.

Out of a worldwide economist population of hundreds of thousands of experts, only 12 prescient and voluble individuals publicly and correctly predicted the Great Recession.  At the time, they were on the outlying observatory edges using almost the same watches.  Of this diverse divinatory dozen, somewhat dominated by the Austrian and Post-Keynesian schools, they believed that overly debt-based consumption and speculative investment were and still are problematic.  All the other under-represented schools mostly disregard debt in their economic models and never saw the Great Recession coming.  To never predict anything is to admit you have no vision or science.

Looking farther back in the record, history reports that past recessions were also misjudged and unpredicted by economists.  Therefore, since most economists generally tend to not predict anything en-masse correctly, we must conclude that economics tends to be generally unscientific.  Their failure to be predictive is apparently built-in and continuously excusable.   Using their economic models, they always claim to be personally shocked and surprised when things don’t fit their theoretical math while at the same time maintaining their academically unaffected and honored watchman status.   They simply say the economy got shocked and surprised.   These learned explanations (excuses) somehow give us some solace and cathartic commiseration because the so-called experts did not see bad-times coming either.  Hence, macro-economists are safely irresponsible having been given cover by our reverential public absolution.  For future public safety and well-being, their built-in misperceptions need to be corrected.  Until then, their dissimilar and incorrect judgements are still persistently dangerous—just like a latently hazardous product flaw—a liability needing a theoretical manufacturer’s recall.

When you have real science to rely upon, you have a real social responsibility especially if you are social scientists.  With responsibility comes true professional accountability—an expected norm of advanced societies.  Think of it.  Using science, engineers must stand behind their science-based product and service deliverables.  It is almost unimaginable; what if the majority of economists correctly predicted something important in macroeconomics?  To do that meaningful service, that would engender truly scientific credibility—just like engineering has engendered professional accountability.  But, there is also a paradox with predictive credibility and accountability.  That would imply that a group of prescient and more scientific individuals placed in positions of power and economic policy making would have more ability to better judge and engineer the macroeconomy.   What irony!  Such individuals could abuse their power.  Do we want to have a planned economy by a selected few?  This construct is not new.  Since the Federal Reserve Act of 1913 was passed and amended in 1933 and 1977, the Federal Reserve System has had such an exclusive macroeconomic management and development mandate from Congress—growth with stable prices.  That combination of outcomes has rarely if ever happen.  Furthermore, the Central Bank of the U.S. and a nearly complete consensus of economists did not see the Great Recession coming.  Even though they have the greatest knowledge, power, authority and responsibilities to manage the economy, the Feds are also apparently without real market power or predictive science.  Nevertheless, there is some room for holding the Fed mostly harmless.  If there are known unknowns, then any Federal Reserve operational negligence in failing to act upon their mandate prior to the Great Recession is not applicable.

There are are also economic unknown knowns.  These are things we know but are unaware of knowing their relative import.  This is why there are always surprising destabilizing forces impacting the economy.  Market traders even seek out such volatility.   As they say, there are “Big Bucks in Beta” (the measure of volatility).  Incessant changes and continuous shocks actually comprise our lively markets and the adjoining ever-unstable economy.  Instability is a systemic feature of capitalism.  Centrally planned economies are even more unstable.  A free-market system has more protracted booms than busts.  Command economies have more protracted busts than booms.  For the bust, typically, the last major shock observed in free-market capitalism gets most the blame for the ensuing economic recession.  The prescient key to understanding how to predict the inherently unstable economy is to understand how and where the asset bubbles (over-stocks and over-flows of funds) are starting, building and accumulating in the always breakable system.

The recent lingering question in that regard is, what financially engineered (caused) upstream the downstream debt bomb of the Great Recession?  Typically, with unintended consequences, government regulations, and monetary policies that induce additional instability to an already free-wheeling market ultimately cause an eventual tipping point and toppling of the economy.  The Fair Housing Act, the Community Re-investment Act, the repeal in 1999 of the Glass–Steagall Act, the enactment of the Commodity Futures Modernization Act of 2000 and reduced borrowing requirements set by Fannie Mae and Freddie Mac induced aggressive real estate lending and mortgage production quotas.  Banks always prefer real estate trust deeds as safer collateral for their extended credit.  The Fed also kept interest rates low after the Dot-Com Bomb and its correlated short and shallow 2001 recession that followed.  Immediately thereafter, with so much low-cost credit money concurrently looking for a safer place to work (lending-based investment applications) instead of the  recently shaky equity stock market, the result was an over-supply of easily generated sub-prime mortgages (secured by trust deeds)  fueling a real estate housing bubble.  With so much mortgage paper being generated, collateralized debt obligations (CDOs) and other debt derivatives were subsequently created, highly over-rated, guaranteed and peddled throughout the world.  At that same time, most econometric models never comprehended that real estate prices could ever collapse.  After all, as they teach in real estate, there is a finite quantity of land with all its various improved and stratified locations-locations-locations, which determine their comparable and ever ratcheting upward appraised market prices—ergo, real estate is a very safe bet.  All these confluence of destabilizing factors turned out to be grossly misunderstood.  Any other new load on the economy that adds to the financial mix breaks the back of investment and consumption—and deleveraging and recession follows.  With everyone on their respective economic watch, that is what happened in the Great Recession due to our various misjudgments.

Dangerous Learning.   Again by Pope, “A little learning is a dangerous thing.”  More learning is better than less learning.  If a little learning is a dangerous thing, then more experience is less dangerous.  Hence, learning by doing is the best type of learning.  Economists do not learn by doing.  Milton Friedman said of economists that few had any practical experience with actual supply and demand—of buying or selling anything.  They (economists) are all those who would rather theorize about the risks of doing commerce rather than becoming one of those (businessmen) who would actually do risky cooperative commerce constantly striving to make the payroll at the end of the week and achieve a profit at the end of the month.

There are few substitutes for experience.  Perhaps just one…virtual learning by virtually doing.  Coming the closest to actually doing experiential work is achieved by the use of simulators—e.g., pilots-in-training, etc., find these realistic flight simulator assets very useful practice venues instead of making actual flight mistakes in real-time.  Economists have simulators.  Evidently, these economic simulators are based on the wrong economic practice characteristics.  They make big judgmental mistakes.  For their simulators, Debt is disregarded.  With that, in the real-world of experience, we know that when your outflow exceeds your income, your upkeep will be your downfall.  These risky conditions happen best when excessive debt is incorporated into the general business proposition.   Debt has upkeep.  Therefore, all economic simulations are wrong…..some are only useful when debt, debt cost, debt burden, debt cycles and debt repayments are included in their economic models showing such interdependent stocks and flows of leveraged funds.  This stock and flow modeling approach is more systems dynamics of financial economics rather than shifting, crossing and webbing of Hicks IS-LM graphs being a mainstay of orthodox mainstream macroeconomics, which typically include no aggregate debt considerations.  Looking back at the financial damage, it is dangerous and harmful when the majority don’t know enough about what we are really doing in the real-world .

Rushing Fools.  Again by Pope, “Fools rush in while Angles fear to tread.”  In other contemporary words, there are offsetting acts that are observably plunging versus cautious, profane versus seemly, elegant versus gauche, liberal versus conservative, etc.  These behavioral differences are also inherently economic.  Economics is always political.  Politics is emotional and polemic.  Therefore, economics has emotional and behavioral elements.  But, economics and politics can also have elements of logic.  With that, politics nowadays has also polarized into two major Pope-like offsetting camps—somewhat synonymous with the two major economic schools of thought described above.  Pundits have also noticed.  Gregory Gutfeld, political satirist, has observed that there are just two types of politicians nowadays:  those with “A Wish but No Plan” as opposed to those with “A Plan but No Hope.”  Patrick Caddell, a famous public opinion pollster, has recently cynically remarked that in the U.S., the liberal Democrat Party and conservative Republican Party have denigrated to the Evil Party and the Stupid Party.   Richard Armey, economist and former House Majority Leader (1995-2003) suggested from his congressional experience that liberals were Superficial and Audacious and that conservatives were Thoughtful and Judicious.  In summary, there are those that are foolish and those that are wise.  For a recent study in 2013, researchers found that when it came to risky decision making, liberals were more emotionally-based and that conservatives were more logically-based.  Even more distilled, it’s the emotional versus the logical.  These behaviors are mostly incompatible.  Emotion usually wins.  It is innate.  Emotion, not logic, motivates humans best.  Almost axiomatic, Abraham Maslow’s Hierarchy of Needs illustrates this conclusion; that at every level attained in the hierarchy, it is emotion that motivates us first by basic satisfaction of physiological needs, then safety needs, then satisfying social needs, then stroking our egos and finally the comfort of self-actualization.  At this apex is where logic and reason can prosper as a minority.  Logic is only a leaf on the ocean of emotion.  At least, some logic can rise to the top.

Emotion is comprised of and caused by many things including crises.  There is method in emotion.  Those in power know how to use emotion to stay in power.  Such rational know-how exploits irrational ignorance.  Rahm Emanuel, former Chief of Staff to Barak Obama and current Mayor of Chicago, said, “You never let a serious crisis go to waste.  And what I mean by that—it’s an opportunity to do things you think you could not do before.”  Such emotional method passes legislation.  Examples of this are major historical legislation such as the New Deal and the Great Society.  Their primary emotional antecedence were socio-political movements.  In the absence of a major crisis, legislatures can be well meaning by also creating a continuous flow of virtual crises of various social inequalities.   This is how ongoing liberal legislation is successfully passed.  Housing and education are emotionally related to social justice.  From these ideological and emotional perspectives came such populist legislative slogans and policies as, “Everyone should be able to purchase a home.  Owning a home is the American Dream.”  Also, from perennial political narratives came, “Work smarter not harder.  Everyone should be able to go to college.”  These are thrilling and seductive political statements.   Most aspects of these slogans have actually passed into law.  Then, reality sets in.  Afterward, as a practical matter, it takes new program money to achieve all these greater societal wishes turned mandates.  These two housing and education wishes, turned social programs, were financed by government guaranteed debt.  To acquire the kind of credit money necessary to put anyone in a house and everybody through college means creating an astonishing quantity of new debt (with unplanned consequences).  Amid all of this welfarism with other people’s money, an economy is supposed to operate smoothly.  Not always.  Firstly, we know what happened  with the notion that everyone should own a house regardless of your economic situation (op.cit., the Great Recession).   Secondly, we are now facing the next unstable and unsustainable financing wave—everyone should go to college ultimately creating a possible Education Recession.  Here is what happened.

Starting with the Higher Education Act of 1965 together later with the Direct Loan Program and the Federal Family Education Loan Program, a plethora of guaranteed student loans burst on the scene and flooded the higher education markets to finance not harder working but our working smarter with college degrees tailor-made for seemingly everybody who could get a guaranteed loan.  The student loans were issued by private lending institutions.  The low interest rate loans were subsidized, underwritten and guaranteed by the Federal government.  This action insured that the private lenders would assume no risk should the borrower ultimately default.  Money flowed.  With no risk to the lender and nothing but new lending opportunity going forward, new credit money of, by and for the higher education programs started expanding colleges and their associated tuitions got inflated.  In the same way that home prices ballooned for an eventual correction in the Great Recession due to easy mortgage money, higher education prices have risen just as alarmingly for a certainly looming Education Recession.  The College Board recently published the following research.  With prices adjusted for inflation to reflect 2017 dollars, students at public four-year institutions paid an average of $3,190 in tuition for the 1987-1988 school year.  Thirty years later in equivalent dollars, the public-school four-year tuition average had risen to $9,970 for the 2017-2018 school year. That is a comparative 213% real increase.   The College Board also reported that in 1988, the average tuition for a private nonprofit four-year institution was $15,160, adjusted to 2017 dollars.  For the 2017-2018 private-school year, it is $34,740, a comparative 129% real increase.   Colleges naturally raised their prices as fast as new money became available.  Prices always absorb available extra money.

We should have seen this self-inflicted debt-driven education bubble coming.  Tuition payment is a market transaction at a price.  There are millions of these education market transactions annually.  The associated available stock of credit money with its turn-over satisfies these tuition transactions.  According to Irving Fisher (1867-1947), we know that when the quantity of money in a market rises by unusual means, market prices automatically increase in the transactions.  This truism also happens in vertical market segments.  Milton Friedman (1912-2006), who wrote extensively about inflation (as well as higher education costs), has stated that inflation is always and everywhere a monetary quantity phenomenon.  Over the years leading to the present, there was seemingly nearly free tuition money always available…so, it follows, pursue a nearly free education utilizing easy credit money.  Prices went up.  By definition:  Education experienced inflation; too much money chasing too little education.  Here is more evidence.  There are now more non-profit and for-profit colleges than ever before both being bigger brick and mortar institutions and more virtual on-line colleges.   Financial aid departments at these diploma factories are prominent and highly advertised.   Loans are seemingly more easily obtainable than diplomas.

We did all this to ourselves.  With emotion’s overwhelming logic, to achieve a social outcome, we foolishly created all the extraordinary costs and over-indulgences of higher education.  We foolishly created all the resulting crushing student debt.  There is no such thing as something being easy, let alone free.   There will be consequences.   As Mike Rowe recently put it, “We are lending money we don’t have to kids who can’t pay it back to train them for jobs that no longer exist.”

Lastly, to Forgiveness.   Again by Pope, “To err is human, to forgive, divine.”  During the Great Recession, there were those economists that argued it was all caused by predatory banking and that all their bad loans extended to unsuspecting borrowers that propped up and then popped the economy should be forgiven.  In biblical proportions, declare a Debt Jubilee to all borrowers.  Rather than the borrowers going through bankruptcy, force the lenders to write off all such connected and tainted loan assets.  They called such loans (financial assets) ill-gotten gain.  What is forgotten is that the plunging borrowers were speculating in real estate….while the facilitating lenders’ gains were capped by interest rates that were kept very low.  Volume had to expand.  Banks were provisioning the speculator’s land-rush.  Many banks failed during the Great Recession.  So did many individuals.  Substantial market value and capital got wiped out.  Everybody suffered.  But, like a sinful hangover, everybody eventually worked it out.

There are nowadays economists and politicians that argue that all the student loan debt should also be immediately forgiven.  Bernie Sanders, Senator and recent presidential candidate is one proponent of this.  He argues, if the student loans cannot be paid back, higher education should have been free to begin with.  Education is not ill-gotten gain.  Therefore, higher education should be free for everyone now.  This benevolent aspiration would only exacerbate the problem.  This is a wish without a plan.  How would education be made free to the student?  At what cost to the taxpayer?  What about all those who have long past borrowed for education and paid it back?  If education should be free, should there also be monetary restitution to the borrowers of all the loans that were partially paid back on those loans currently being serviced?  Where is the cut-off?   Forget logic.  What is fair—emotionally?  Since God is loving and kind, and wishing for a Utopia States of America, to forgive is rightly emotional and godly.  Being our future, we love our students of the nation.   We should actually love our economic and monetary system more.   That preference is more gracious and wise.

We are now in the middle of an education-rush.  We have erred with easy student loans.  We are winding things educationally and monetarily up too tightly.  One way or another, this will unwind badly and end in some type of Education Recession.  If you wind the watch up tightly, it must unwind gradually.  To suddenly release or break the mainspring would destroy it and all the other timing and geared components.  Debt is one of the mainsprings of the economy.  To instantaneously forgive large segments of structured household debt and remove substantial multiples of bank capital out of the system would be the greater sin and a greater disaster.   Let us do the probable math.  Debt is money.  If debt is removed, money is removed.  Gross Output is the sum of the products of myriads of crossing transactions cleared at prevailing value-chain prices during a measured period.  To have less money to support Gross Output ($32 trillion), taking cancellable (-1X) outstanding student debt ($1.37 trillion) times current gross velocity (2.4X) times the money multiplier (1.2X), Gross Output would take a 12% hit.  During the Great Recession, Gross Output only dropped by 7.7%.  To cancel all student debt, GDP would go quite negative—causing another protracted recession.  This wishful education-debt cancelling scheme is obviously unthinkable and impracticable.  What seems benevolent often turns out malevolent.  Besides, the Federal Reserve would also rightfully never allow it.  There is nothing divine in any debt jubilee—only a hellish outcome.  In this case, forgiveness is not divine.   Using tough-love, they signed a contract; student loans will need to be worked-out over time.   In the meantime, policy should slow the monetary pace of benevolent educational paternalism.  Prices would then moderate.