Student loans are not the next housing bubble ? An und f?r sich

This article is making the rounds, and similar sentiments have been expressed periodically in the last several years: student loans, we are to believe, are the next subprime mortgage. The obvious implication is that they will cause another ruinous financial crisis. I share the concern surrounding ballooning student loans ? my current balance is no slouch, and I am haunted by the question as a faculty member at a small liberal arts college ? but this approach is economically illiterate and misleadingly sensationalistic.

Student loans cannot conceivably cause a 2008-style financial crisis. The loans are directly guaranteed by the government already, so that any ?bailout? would not be like the panic-inducing ad hoc measures that characterized the response to the 2008 crisis. Indeed, the vast majority of the loans are already owned by the Department of Education, and that proportion will only grow as a result of changes to the student loan program that were slipped into Obamacare and subsequent efforts to get as many student debtors to consolidate into government-owned loans as possible. If everyone defaulted at once, that would surely have negative consequences for the government?s balance sheet, but the government?s balance sheet in itself can?t cause a financial crisis ? a financial crisis is a private-sector event. The government can take as big a fiscal loss as it is willing to, and the Federal Reserve has well-known and highly-effective ways of containing any impact on the interest rates on government debt. (If Congress refused to raise the debt ceiling in the face of such an event, that would indeed cause a financial crisis, but that would be a political choice with no intrinsic relation to the government?s student loan exposure as such.)

A recent government report on private student loans seems to have prompted much of this coverage. This report gives significant support to the notion that private student loans used many of the shady underwriting practices associated with subprime and that they have a relatively high default rate ? but it also says that the amount of such loans outstanding is $150 billion. That is a very small proportion of outstanding student loans, and the report also notes that private loans are decreasing after peaking in 2011. As with basically all forms of private-sector debt, they have been securitized and been the subject of other credit derivatives. Yet the amount of money involved is miniscule compared to the U.S. housing market. There is essentially no way that such debt could trigger a systemic financial crisis similar to that in 2008, where major financial institutions were threatened with insolvency and in which derivatives created a potential domino effect.

I have been criticized for being overly literal in my comparison to the 2008 financial crisis in connection with this issue ? though I have no idea what language like ?the next subprime? or ?the student loan bubble? is supposed to invoke if not that massively destructive panic. It is true that student loan debt creates an economic drag (through decreasing the liquidity of recent college graduates) that could contribute to a future recession. Yet that is only one of many economic drags, and by far the greatest such drag is the massive inequality caused by stagnant wages. People in low-wage jobs ? the majority of new jobs created in our crappy economic ?recovery? ? are generally much more liquidity constrained than recent college graduates.

Inequality also leads to greater stockpiling of capital on the part of the wealthy, who do not spend very much on consumption relative to their income, and Marxist theory tells us that such stockpiling leads inevitably to a ?crisis of accumulation? and thus a financial crisis. From this perspective, of course, even in the 2008 crisis, the problems surrounding securitized mortgages were only the proximate cause of the breakdown, since the speculative housing bubble was itself an attempt to head off a crisis of accumulation ? but in my opinion, student loans have essentially no possibility of being even a proximate cause, and their negative economic effects are small compared to the economic inequality that has its greatest effects on the large majority of Americans without college degrees.

It is hard for me to avoid the conclusion that the sensationalism surrounding the ?student loan bubble? stems from the fact that the majority of writers for progressive publications are either relatively recent college graduates or people with vivid memories of their own student debt. Hence they jump on the issue, making themselves and people like them the center of attention ? while ignoring the vast wave of proletarianization that is beginning to make the United States a major competitor in the global sweepstakes to attract capital with low wages (and in fact, many self-styled progressive writers seem to buy into Obama?s incoherent view that greater access to college will in itself somehow help with inequality and wage stagntation).

Now of course I agree that student loans are a terrible policy in many ways. Private student loans are even worse than the garden-variety kind. All forms of debt hurt people?s quality of life, and it is especially unjust that student debt is not dischargeable through bankruptcy. Yet student loans are not and cannot conceivably ever become ?the next subprime? in any sense beyond encouraging people to take on more debt than they can afford through shady lending practices. It?s bad enough that such an argument sticks to finance-technocratic territory rather than making the moral arguments that are actually called for here ? but it?s not even halfway convincing as a finance-technocratic argument.

Source: http://itself.wordpress.com/2013/02/07/student-loans-are-not-the-next-housing-bubble/

james harden breeders cup Mitch Lucker Red Cross CMA Awards 2012 election day Electoral College map