Credit is a big part of the Occupy Wall Street movement. They want debt forgiven, some even calling for an across-the-board forgiveness of all debt. By having this demand, they reveal another area where their college education has failed them. Let's do a quick version of what they should have learned.
To illustrate, let's create a hypothetical scenario. Person 1 (let's call him “Bill”) has a business idea, but lacks the funds to make it a reality. Bill is sure that his idea will make lots of money, but he is frustrated because he cannot implement his idea. Person 2 (let's call him “Tom”) has money that he has accumulated that he is not actively using. Bill comes to Tom and asks if he can borrow some of Tom's extra money, so that he can implement his awesome idea. Tom is not sure about the purported awesomeness of Bill's idea, and is reluctant to lend Bill the money. Bill is so confident in his idea that he offers to repay Tom 110% of the money that he wants to borrow. This provides Tim an opportunity for financial gain, and he decides to lend Bill the money he needs.
This story illustrates some of the basic concepts of credit.
Loan - money belonging to someone else, that is temporarily made available to another person.
Interest - money, in addition to the loan amount, that is paid to the lender.
Risk - the likelihood that the loan and interest will not be repaid.
In our story, a 10% interest rate was enough to make Tom assume the risk that Bill's idea would generate the money Bill thought that it would.
Banks and other lending institutions have simply taken the above scenario and enlarged its scale. They take depositors' money, and lend it to those who need it. They also provide services, such as securing the money they've received, providing convenient ways for people to get to their money. For some services, banks charge fees; for some services, banks pay interest. Because banks must be able to return depositor's money on demand, they must assess risk before giving a loan. Some risk they simply will not accept; some risk they will accept, but charge the borrower a higher rate on the money to make up for it; and low risk is generally acceptable.
Student loans, a particular interest item to the #OWS set, are no exception. It is understood that obtaining an education may require money that a fresh-out-of-high-school person probably does not have. (Whether it should is a different topic altogether.) However, lending institutions see the value in having an educated populace, and are willing to extend loans to students to allow them to obtain productive skills. They realize that college-educated people are more likely to have good jobs, buy cars and homes, take vacations, and do lots of other things that inject money into an economy.
So, what's the problem with them forgiving loans? It's theft, plain and simple. Whoever was extended credit would be stealing the money not from the bank, but from the depositors of that bank. The bank is simply an intermediary set up to provide a mutually-beneficial service to both saver and borrower. (I'll tackle the class warfare aspect in the next post, but it's stilltheir money no matter how much they have left.)
Another assumption regarding student loans is that the degree obtained will help this happen; with many degrees these days, a person may be no more qualified to hold employment than they were before they went to college. When I went through college right out of high school, my adviser recommended certain degrees as being more employable than others. I don't know if colleges don't have that, or if advisers these days think that we really need a ton of Fill-in-the-Blank Studies degrees; either way, that sort of degree has limited employment opportunity. If you obtained that sort of degree, and now can't get a job, you rolled the dice and lost. Now, it';s time to act like a grown up and get whatever work you can to provide for you (and your family, if you have one), and start repaying that loan you took out.
Lemme get this straight. A bank lent you $100k that you handed to a college for a worthless degree, and now you're mad at… the bank?
Banks provide an important service by offering credit. If that credit is not repaid, the system collapses. If you think it's hard getting a job now, try bankrupting all the employers, and see how much more plentiful (or scarce) the jobs become.
Sunday, October 16, 2011
10:52 pm
Daniel J. Summers
This is the first in a series doing the education that the colleges which the Occupy Wall Street gang (#OWS hereafter, taken from the shortened version of their #OccupyWallStreet Twitter hash tag) failed to impart. I have two in the queue behind this one, but there may be more.
For those living under a rock, a group has been camped out in New York, protesting Wall Street. There was a list of demand published, but many protesters were quick to point out that there was no official list. However, there have been recurring themes. Corporations are greedy. The rich get richer while the poor get poorer. Debt is bad. People aren't hiring them even though they have a college degree. A job is a right.
Dear #OWS, your parents and your colleges have failed you. Before we dig into details of why your demands are unworkable, there are a few big-picture things we need to discuss.
Welcome to the Real World
This is where your parents have failed you. You are the generation who grew up “safer” than ever, protected from terrible things like concrete under your playground equipment, lack of head protection when you rode your bike, having to suffer the indignation of losing your soccer match because they didn't keep score, etc. You are the result of a social experiment gone horribly, horribly wrong, where a bunch of too-smart people decided that the way children were reared for generations had to change. They were going to do it better. They were going to do it more safely. They remembered how bad they felt as children, when they were picked last for sports, or struck out and helped their team lose a game; or how they were made fun of during the awkward stages as they grew from children to adults; or how they never fit in with the “in” clique at school. So, they tried to eliminate all these things. No scorekeeping, and everyone gets a trophy. “Don't say that word!” “Bullying is wrong!”
Where they went wrong is that by their attempts to eliminate bad things, they did not teach you how to deal with these bad things. I'm all for the elimination of bullying, but you can't wish that and make it go away; you should be trained on how to deal with it. In real life, there are winners and losers; there is no “no scorekeeping” option. Everyone does not get a trophy. There are attempts, and there are failures. You have tragically had your opportunities to learn how to deal with this as a child snatched from you. Now, you're behaving as children would normally behave; you're just a lot bigger. You're adults, so you think that your demands aren't childish. Sadly, I'm here to inform you that they are. Railing against the real world is futile; you are not going to change it, at least not much. You would be much better served applying yourself and learning how things work.
A College Degree Is a Tool, Not a Guarantee
Here is one area where your college has failed you. No matter what the admissions adviser told you, a college degree is not a guarantee of a good job. Even in good economic times, a college degree is likely to get you in the door, at an entry-level position. (You understand where the term “entry-level” comes from right? The level you start, when you enter a company?) The people that have been there for 10 years beg to differ with your assertion that you should start out at the level to which they have worked themselves up. And, if your degree ends with “Studies,” you're probably 1/4 as employable as someone with a degree oriented toward something a business would actually need.
The Corporations You Decry Have Made Your Protest Possible
You have utilized the services of several public and private companies. Let's take a look at the evil that's made this protest possible, shall we?
Twitter - Still a private company, Twitter was valued at $10B earlier this year.
Google (GOOG) - You know, the owners of YouTube, the developers of the Android mobile operating system, and the target of your “Google It!” chants? They are a publicly-traded company valued at $57.85B (plus assets, minus liabilities)
Did you drive, or take public transportation, to get to the site of your occupation? Those evil oil companies made that possible.
Now, what you're not going to read in future installments are claims that the “real world” is perfect. There is room for change, and there are people running companies who have no business running them. However, if you want to maintain the lifestyle in America to which you've become accustomed, or improve it, you really don't want to be throwing the baby out with the bath water.
I'm sorry your parents and colleges have failed you. If you stay tuned to this spot, I'll help educate you on why the things you're so worked up about, contrary to what your “I wish communism worked because it's just such a good idea” professors taught you, are actually good for you.