Economy Bubble the Student Loan Market
I typically like to keep the discussion directly related to energy on this blog, but economic discussions become inevitable when dealing with energy. I have had the good fortune to sit and talk with many leading economist from Nouriel Roubini (RGE Economics), Mark Zandi (Chief Economist Moodys), and Nariman Behravesh (Chief Economist IHS Global Insights). I had dinner with both Mark and Nariman on different occasions within months of each other late 2008 and early 2009 to discuss my concerns of the next bubble – at that time the focus was on the housing market. I questioned both of them on my concern on the student loan issue. They both scoffed at me and said it was much too small of an issue – perhaps true in that I was early to the issue, but why not solve things before they do become an issue? I have since emailed them with no response on how big it would need to be. Back in April this year it has surpassed both credit card and auto loan debt crossing the $1 trillion dollar mark.
The reason I thought of the student loan was the realization that upper education expense was the last great cost that has been going up since 1970s by over 10%/yr, given that the housing market went pop. If you dig down into it, it really becomes even more “sinister” than the housing market in terms of issuance of loans. There were confirmed stories of migrant workers being issued significant loans ($500K+) to purchase houses. Of course the dream of home ownership was instilled in society; so the desire to have a house was clearly at play. Even though loans perhaps could not be paid, at the very least the banks had the collateral of the home. As the home market was rising, some bankers actually made money on those defaulting. For the consumer, in many cases those who defaulted had an opportunity to declare bankruptcy and move on with their lives. The bankruptcy opportunity is designed to put some responsibility on the loaner to not loan with recklessness, but to do some fiduciary review. However the market regulators allowed shifting of the burden of the loans to multiple institutions including government run entities, removing any need for fiduciary review. Thereby you had a significant increase in demand for housing which would have not been there. Economics 101 states increasing demand leads to increasing prices. However since the loan amounts were allowed to rise to such significant value that a migrant farmer could get a loan for $500+K the housing market went on a multi-year growth spurt. I would be wrong if I also didn’t add the credit derivatives (CD) – obligations (CDO) and swaps (CDS) – played a large role in the explosion. Perhaps a positive side to the student loan market, currently no credit derivatives in the student loan markets that I am aware off. I presume since it cannot be discharged – see below – why have to insure it. The CD instruments certainly speed up the process of the bubble. If it were not for the CD, it would have gone on longer and perhaps at a more gradual pace as seen in the student loan market. Lastly failed regulators, in allowing false documents and misleading robo-signers without significant penalty also led to the bubble. In the housing debacle, we are dealing with grown adults with life experiences.
In the student loan case, you have a young individual being given a loan to study and earn a college degree which is preached since his ability to read is a must have. The person takes the loan, but the loaner does not do any fiduciary review with this individual. A background check on the person’s ability to perform in college in the discipline chosen is not even examined. The ability of the loaner to even payback once that degree is given is not done. Simple checkups during the school year to make sure the student is attending class are not even done. All this work is no more complicated than actuarial work used in the insurance business or evaluating small business loans. The reason for this recklessness is unlike housing loans there are no means to discharge this loans – bankruptcy will not help you. Your wages will be garnished for the rest of your life or until you are able to pay off the loan. (Students taking loans please re-read the last two sentences – the loaner is not your friend). Once again, just like the housing market, “new” demand causes an increase in price. As the colleges continue to get students who are willing to pay more and more; why would they stop the price rise? The students are paying more and more, but really they are just loaning more and more.
A recent article on Zerohedge demonstrates the extent of the bubble as it relates to the housing market and shows how such a key player, Ben Bernanke, in these issues can be so wrong. The graph are very poignant in there is bubble – just when will it pop is the trillion+ dollar question.
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