Harvard University’s endowment is down at least $8 billion. The slump, slowdown, recession or depression–or whatever you want to call it–is taking its toll on higher education’s piggy banks.

The Wall Street Journal reports that, “The University of Virginia Investment Management Co. said it lost nearly $1 billion, or 18 percent, of its endowment over the four-month period, reducing it to $4.2 billion. In Vermont, Middlebury College says its endowment fell 14.4 percent, to $724 million. In Iowa, Grinnell College’s endowment dropped 25 percent, to $1.2 billion. In Massachusetts, Amherst College says its endowment, $1.7 billion as of June 30, also fell by 25 percent.”

Since cost containment is an idea foreign to American higher education, these losses are going to translate into many a bitter moment for countless thousands of college students. At Harvard, which is an extreme case, more than one-third of operating funds come from the now-depleted endowment. In the good old days, higher education might have shrugged its shoulders and told its students to go take out larger loans, something which is hardly possible at this gloomy moment in American history.

Had colleges and universities now looking at large losses kept their money in safe, low-interest, government securities, they would be in much better shape–but they would also have been attacked by their alumni for such conservative, low-yield use of their endowments. The Journal reports that for many years places like Harvard and Yale “pioneered an investment approach that de-emphasized US stocks and bonds and placed large sums in more exotic and illiquid investments, including timberland, real estate and private-equity funds.”

Illiquid is the word for it. Harvard has been trying to sell $1.5 billion in private equity funds and has been unable to get more than fifty cents on the dollar on its original investment. Private equity funds use their money to execute corporate takeovers, and to call them lucrative is something of an understatement; given the university’s past profits, it would be hard to shed a tear for Harvard–except that it will be innocent students and faculty who will get it in the neck.

The rationale for private equity funds, known as buyout shops, is that they take over poorly run companies and spin them off into higher levels of productivity and profitability. Though sometimes that actually happens, we have also seen private equity funds put a little money down, borrow much more to pay for the company, strip it of its assets and leave it dead or dying.

The ever-enterprising Wall Street Journal reports that, “Of the 109 US companies that have filed for bankruptcy this year with assets of $1 million or more, 67 have been owned by buyout shops or been spun off by them, according to data provider Capital IQ. Among the more prominent casualties are retailers Linens ‘n Things Inc. and Mervyn’s LLC.”

Mervyn’s was seized and looted by Cerberus Capital Management, the same group of billionaires who now own Chrysler; having exhausted other avenues for unearned profit, they are begging the federal government for a handout. How Cerberus destroyed Mervyn’s is instructive. According to the Journal, they and some others “bought Mervyn’s from Target Corp. in 2004 for $1.25 billion. The investor group, which structured the buyout as two separate purchases–one for the retail operations, and one for the chain’s valuable real-estate holdings–has earned Cerberus more than $250 million in profits, say people familiar with the deal.”

The stores were stuck paying off the debt Cerberus contracted to buy Mervyn’s. This debt was not money borrowed to make Mervyn’s more competitive or productive. The stores got nothing from the debt but an added burden and, as is often the case with such private equity takeovers, the victim company collapsed under the weight of the obligations dumped on it and perished along with thousands of jobs.

Another example, this one involving a historic name, is that of Sears. It has fallen into the hands of a hedge fund operator who is milking the company by using its cash to buy back its own stock.

One element in the disaster that has overtaken the American economy is the vast misallocation of capital by entities such as the private equity funds. They are not venture capital enterprises that made bad bets on what seemed like good ideas but free-market vampires. They have been able to take over healthy business organizations and ruin them for their own profit and the larger society’s loss.

One of the not-yet-investigated stories is how so much capital fell into hands that wasted it on destructive games of profit, pointless mergers and acquisitions or insane derivative speculations. In the largest sense, capital is the fruit of the labor and the savings of the whole society. To see university endowments and to witness nothing less than productive companies destroyed by debt and bankruptcy is a crime.