Comments on the First Tuition Bill

Readers know that I have three children – Eldest, Middle and Youngest – and as it usually happens, life changes.  In this case, it changes because Eldest is moving off to college in a month and if the proliferation of empty boxes awaiting use didn’t bring that home, the arrival of the first tuition bill did.  Within a one week span of the bill’s arrival, she also received other correspondence offering student loans and if I didn’t know better, I’d almost think that it was serendipity that such mail would arrive in such a timely fashion.  What went through my mind in the moment and afterwards?

First was the simple realization that the bill was addressed to The Parents of…  While she’s now eighteen and nominally an adult – are our high school graduates truly adults (hmmm, there’s a question) – the money enchilada comes back to us.  This was especially interesting since we learned at parent orientation weekend that the institution could only send us report cards for the first two years unless the offspring signs a permission form allowing them to do for the final two or so years.  At least we’re clear that our role in the eyes of the college establishment monolith is that of a financial donkey.

Second, the simple question when did this happen?  My flashback was to a two-year old toddler posing for a picture on her first day of preschool, a small blue tote bag slung over shoulders wearing a bright yellow play shirt, face framed by fine brown hair cut in a page-boy style.   At that moment, she was an only child and in the intervening years would be joined by her two younger brothers.  That question was followed by a momentary panic with such questions as have we done enough? and could I have done a better job of investing what was saved?  The pit-of-the-stomach queasiness was only made worse when I tore off the computer envelope tabs and looked at the dollar figure for the first semester.  Despite the fact that I’ve run the numbers and knew what they already were, the emotions exploded out of the box like a knife-wielding, meth-addicted jack-in-the-box. 

Third, despite having run all of the numbers ahead of time, actually looking at the amount of the first bill was a gut-checking experience and especially since the dollar figure in the amount due box was significantly less than what I expected.  My family knows that when truly surprised, my standard response is what the hell? with the register dropping on the second word and then rising – along with a crescendo – on the word hell.  After momentary confusion, I found that the difference was accounted by the school’s assumption that some of the money was coming from a federal direct unsubsidized loan despite our never telling them that that was what we’d be doing.  The college financial aid office explained that their bills automatically include that and I had to specify that our intent was to handle this without debt, although circumstances with two other kids might force a future change.  It bothers me that the institutions continue to raise the costs with the expectations that the families and kids are having to incur even more debt.  While some increases are expected, the fact that the past two decades of rises have far outstripped family incomes.  It all comes back to the fact that higher education is a big business; if you don’t believe it, consider that student debt is now higher than credit card debt or auto loans.

Fourth, within days of the tuition bill’s arrival, Eldest received separate credit offers from Sallie Mae and Citibank.  Sallie Mae’s offer openly played to the emotions with the line that time was running out for a loan before the start of the school year but they’d sweeten their offer with some manner of free credit insurance for a period of time.  Citibank’s offer was more bland but again, the timing was supposedly serendipitous.  Honestly, if you’re faced with the prospect of having to take on tens of thousands of dollars, you shouldn’t be rushed into it and kids can simply be tricked into the sense that it’s now or never.  The matter should be approached in such a manner that the prospect of a Sallie Mae letter is irrelevant and can be directed immediately into the trash and teens/nascent adults don’t have the perspective and experience to realize it.

Fifth, now that the bill is here, what is the mechanism for drawing money from the 529 to cover this?  Money has been plunked there periodically for years but what has to happen to actually get it out in a timely fashion?  By now, Eldest knows that the bill is certainly here and has to be covered by a certain date and this presents a learning moment in how to handle processing.  The question was answered in a few minutes and she walked through the withdrawal paperwork with me so that she could see what was involved.  Can she do it going forward?  No, since it’s in my name as her custodian but it’s helpful for her to see the background structure, something about which the great mass of kids are woefully unaware.

The process is now in motion and the bill filed away until mid-August.  Now it’s time for her to cull and gather and fill those boxes for the trip out.  And then, the reality will sink in again.


Finishing the Project – Kids and Incentives

When we purchased our present home in 2007, we found that the yard  was a high-maintenance affair with a do-it-yourself pond already installed.  After a fish-killing algae bloom in 2009, we began a major yard renovation project to both refurbish the pond and tear out almost 800 square feet of out-of-control periwinkle.  Since we’d had a quote of over $5000 to redo the pond, we thought that we could do it cheaper (a win) and instill some entrepreneurial drive in the older kids (For the Win!).  Since beginning the project in 2010, its end is now within sight and I’ve had to look back to see what I’d do differently.

  • First, don’t let the kids determine the pace of the project.  I’ll grant that it’s been a long – loooong – project tearing out hundreds of square feet of overgrown myrtle, landscaping the first half, installing a two-tier vegetable garden and mucking with a dying fish pond.  The intent was to do the work and let the kids do a large amount of the grunt labor within the context of the usual summer activities, prompted by good old greed.  But I miscalculated on the variety and time constraints of the activities and things lagged.
  • Second, I simply didn’t realize that the bulk of this is pure stoop, grunt labor and that the kids aren’t interested in hours and hours of grunt labor.  They’d do some work but with the interspersal of activities, it was never enough to gain critical mass.  While I’d become concerned that there was laziness that didn’t bode well for the future, especially on Eldest’s part, her subsequent part-time job has reassured me that she’s got a decent work ethic.
  • Third, the kids aren’t just going to go outside and work unless I prompt and actually join in, and set the example.  When I was there, it went better than when it didn’t.
  • Fourth, I discounted Youngest, who’s now old enough to put in the physical work and has actually proven to be more reliable and motivated than his older siblings. 
  • Finally, there’s something to be said for simply saying let’s get this done and be finished with it and making it a priority ahead of other work.  It’s something that I should have done last summer.

But had I done that, Youngest wouldn’t have made the money that he’s made thus far.

So for now, the last segment of the new waterfall awaits and then – then – we can actually enjoy the backyard.

What is LIBOR and What’s the Deal?

There’s a growing brouhaha in England and heads in the banking sector there have already begun to roll.  It has nothing to do with hookers or rogue traders that spend the company dime on cocaine futures; rather, it pertains to something as innocuous as the financial equivalent of a screw, an interest rate called LIBOR, which like a screw serves as an underpinning to a large portion of the global financial structure.  While the action is in England, the effects are felt here as LIBOR is used in financial instruments in the US and the reality is that there are American banks which contribute to the determination of LIBOR.  Did they participate?

What is LIBOR

When most people think of banks, they think that the institutions are free-standing entities that compete with one another for business with minimal interaction; any additional funding needs can be achieved via working through the Federal Reserve System (although the sense is that things are pretty bad if that’s the case).  For the smaller banks, this is par but the larger banks – especially those deemed Too Big To Fail – have daily funding and liquidity needs that outstrip what they have on hand.  These banks consequently interact with one another each day and those with extra will lend to the other institutions at a very small rate, small because these lending institutions expect to have the money back very soon and also because they know with whom they’re dealing.  Consequently, the rate that these institutions charge one another is exceptionally low and requires no collateral for the extremely short duration.  LIBOR – London InterBank Operating Rate – is the name of this rate.

LIBOR came about because of a nudge from the British Banking Association in the mid-1980s.  With the introduction of a wide range of new and complex products – adjustable/variable rate mortgages, interest rate swaps, and other goodies – in the early 1980s, it became apparent that there had to be a common rate upon which the various products could be based else for contractual purposes.  Because London continued to be home to a significant part of the global financial community, the BBA pushed the financial community to develop such a uniform rate and LIBOR was born, taking effect in 1986.  Understand that while the name implies a solely British scale, the actual LIBOR rate is determined by the responses by only a handful of banks from the international community and is updated daily.  These daily rates are then used in an immense number of financial contracts occuring globally as the reference point for the payments that pass from one party to the other.  How immense?  The cumulative financial value of the contracts with some input from LIBOR are in the hundreds of trillions of dollars – that’s Trillions, with a T.

What’s the issue with LIBOR?

The issue with LIBOR, and it’s so far claimed the top three executives of Barclays Bank – a major international bank based in Britain – is that it’s become clear that the daily rate has been gamed by at least several of the banks.  The member banks are expected to report a particular rate each day based upon their best estimate, but Barclays is the first to have been found to have underreported what their rate would be in order to do favors for other institutions; this means that the true rate of interest is actually higher than the artificially low rates reported as the official LIBOR rate for that day.  The difference is unknown at present and would depend upon how many member banks colluded in the rate reports and to what extent was the level of underreporting.  For each of those days affected, any number of variable rate mortgages and other rate-sensitive contracts, would be consequently affected. 

The CEO of Barclays, Bob Diamond, recently testified before a Parliamentary Committee regarding the LIBOR scandal.  His testimony was Barclays actually was pressured to do so by the Bank of England, the equivalent of the English Fed; but the note to file after the BoE/Barclays conversation not only supports his claim, but unequivocably states that not only were other banks rigging their LIBOR submissions, but that the BoE knew of it and wanted Barclays to fall in line with the other rigging banks.  The old saw is that prisons are full of innocent men and given our present who ya gonna believe environment, there will be questions as to the veracity of the note.  But the damage is done as there’s a strong discrediting of the entire financial establishment, profit and regulatory alike.

So long as LIBOR is now under suspicion, there’s now a pall over the use of many of these products.  There’s a true impact on rate sensitive contracts in the works but not yet signed.  Is this truly the real rate or is it rigged?  Is there some other rate standard that can be used in it’s stead and how dependable is it?  There’s a potential impact on mortgages as lenders slow down lending to see how this plays out and families waiting for word on whether they will be able to purchase a home.  The monthly nut for the difference of 3/4 of point in a mortgage rate can be in the hundreds of dollars, so what does this do to home sales?   One of the other great losers in this episode are the various non-profit and governmental entities that might engage in interest rate swaps to help control the cost of capital projects.  Will needed infrastructure projects – bridges, sewer treatment plants, road work – be able to move forward or will they have to be shelved?  With Stockton, California now in bankruptcy and other entities – Detroit, Harrisburg, Jefferson County, Alabama – as poster children for fiscal disaster, how will necessary work move forward? 

This is simply for the world moving forward and says nothing about the rate sensitive contracts that are already in place.  Frankly, if I had an interest rate swap and heard this news, I’d pull the paperwork and review it in a much more skeptical light with an eye towards litigation.

Why is this a big deal?

The implications of a rigged baseline reference point are massive.

The LIBOR rate is a global reference point, much as the gram is a standard for determining mass or the gallon for measuring volume.  But unlike the gram and gallon, there is no true governmental oversight for the protection of the LIBOR rate; the English government essentially let the determination of this global standard to an insular financial industries community that put itself ahead of the common good. 

If you want a comparison, suppose that governments failed to inspect and regulate gasoline pumps but let the maintenance and standardization of those pumps fall solely to the oil companies?  What would you think if you were paying for 20 gallons of gas each week but were in reality only getting 17 gallons in your tank?  Would you be angry with Exxon-Mobil or BP for abusing your trust, let alone your wallet?

What would you think if Otis Elevator purposefully used defective materials in the production and installation of elevators? 

What would be your response if you found a roach in your kid’s Happy Meal and then found that the local health department had suspended restaurant inspections because they considered the folks at McDonalds to be okey-dokey 100% upright citizens?

When your roller-coaster car went barreling off the rails on that last hair-pin turn, would your last thought – before your brain splattered against the pavement – be to curse the state for not inspecting the ride before it opened?

What would you think if you found that your hoped-for home, in the neighborhood with the school you want for your kid, was suddenly unaffordable because your lender had to adjust the rate on the prospective loan to account for a gamed LIBOR reference rate?  What if they simply became Loan Nazis and said no loan for you! 

These examples don’t mean that I have a blanket distrust of business, at least not Otis.  But each of these areas are under public regulation and inspection because there’s a long history that demonstrates that companies and individuals can prefer private gain over the common good, even to the point of death.  In each of these industries referenced, there wasn’t some uniform inspection and enforcement mechanism simultaneously enacted in a piece of blanket legislation; the regulatory oversight was created on an as-needed basis and that need was usually prompted by some scandal involving death, serious threat to the public welfare or serious financial loss. 

No one has died, but there’s damage nonetheless.  The losses put to the public treasury are already in the trillions of dollars and these losses detract from more important uses, let alone the knowledge that we’re mortgaging our grandkids’ future with the debt.  The failure of the fiduciary component of the financial industry has allowed self-interested bankers to plunder their clients’ savings.  The failure of the fiduciary component has allowed the banks to wholesale gamble with their capital, knowing that any failure would be made good by the public trough.  If you aren’t certain of this, consider the recent issue regarding JP Morgan Chase’s $9 Billion screwup that led to their CEO’s appearance before Congress.  While the drama is on in Britain, the problem doesn’t lie solely with the English government.  This is a pointed example of what occurs when oversight and regulation ceases and people with signficant incentives to cheat are left to their own devices and it happens in the US just as it does in other western nations.  The US deregulated the financial services industry in the 1990s and the result since then has been an ongoing parade of unethical and sometimes illegal behavior in the time since. 

Planes aren’t falling from the skies nor are bridges collapsing as a result of this particular episode.  But the banks have still tampered with the screws that hold the financial structure together and when that structure finally goes, the suffering will be immense.  If you aren’t certain, just look at the generational scars left by the Great Depression.  There is an occasional thought that nags at the back of my mind however.  The view of the government’s role before the Great Depression is one of benign neglect as it permitted Laissez Faire capitalism to run it’s course…

…what would our society be like if government was known to have taken an active role in promoting and facilitating the excesses of the late 1920s?



The Return of Postum:  PracticalDad Price Index – July 2012

One of the concepts that Econ 101 students learn is that of the inferior good, which isn’t actually a comment upon the quality but rather it’s affordability versus other goods.  In other words, an inferior good is one that’s used to replace a more expensive or unavailable one when times get tough; Spam is a classic example as sales generally rise during periods of economic downturn and folks move away from more expensive meats to make the budget work.  When times improve, then the sales scale back accordingly.  In today’s environment of rising food prices, Postum would be such an example of an inferior good.

Postum was created by CW Post in the 1890s as an alternative to coffee, which he disliked because of the caffeine content.  In it’s life – it was finally discontinued by owner Kraft Foods in 2007 – the formula was basically toasted grains mixed with molasses.  Although it didn’t taste like coffee nor was it billed as a coffee substitute, Postum sales skyrocketed in the World War II years as real coffee was rationed and millions of Americans shifted to Postum in lieu of the bean.  My own recollection is that it resided in my grandmother’s cabinet and I recalled seeing the bottles in out-of-the-way sections of the coffee aisle shelves until they simply vanished.  America’s love affair with coffee has flourished and one of our most expansive corporations revolves around setting up coffee shops; we have no concern with caffeine as our youngsters swig Mountain Dew and the teens graduate to Monster, Venom or Rock Star.  Postum simply couldn’t compete.

But Postum will be making a comeback in the near future courtesy of former drinkers who bought the trademark and did the formulary work to get the taste right.  There are certainly going to be those who drink it for the taste but I suspect that others will try it as an alternative to coffee for reasons of cost.  When the PracticalDad Price Index began in November 2010, the cost of a 13 ounce store-brand caffeinated coffee can was $2.96; had the packages not been downsized to either 11 or 11.3 ounces, the equivalent cost would be $4.43 for the same 13 ounce can – an almost 50% rise in only 20 months if you account for the downsizing.  If you’re paying less for a can of coffee than the average here, it’s probably because that can is less than the old standard 13 ounce can. 

What happened with the marketbasket from June to July 2012?  The index level increased again from June’s 106.49 to 106.77 (November 2010 – 100.00) so that the cost for the basket is 6.77% higher than November 2010; looking in prices for the food component of the basket alone – 37 of 47 total items – the index rose to 110.32, more than half again as high as the full component. 

As much as I love coffee, I probably will try a cup of Postum when it returns.