Peddling Loans and Lies to Kids

There’s nothing like an abundant flow of money and credit to push prices out of whack.  Borrowing from tomorrow to buy today has the effect of boosting demand.  Prices must rise to equilibrate the boost in demand.

But prices can never quite equilibrate when the supply of money and credit keeps expanding.  On the flipside, the amount of debt supporting the price increases must also run up.  Before long the price structure becomes so distorted that it’s nearly impossible to pay for near anything with cash.

Take housing, for instance.  In most cities it’s impossible to buy a bad house in a decent neighborhood with cash.  An abundance of credit has pushed house prices well above what a middle class income earner – with an aggressive savings plan – can possible store up in cash.

The only hope for a potential home buyer is to take out a loan and sign up for 30 years of debt servitude.  The one consolation for the borrower is, if the Fed keeps the credit expansion game in place as it has over the last 40 years, over time, their burden will be lightened.  After about 10- or 15-years, a fixed mortgage payment will be far less than a rent payment for a comparable house.

Occasionally, however, asset prices supported by cheap credit will plunge…like in 2007.  Even with cheap credit, the incomes generated by the economy could not afford a housing payment.  Nonetheless, the Fed did its darnedest to keep house prices from falling too far…resulting in prices that are still inflated.

A Good Story

Of course, for prices to really get out of whack there must be more than just cheap credit.  There must also be a good story.  An abundance of cheap credit isn’t enough to really blow the top off of prices.  There must be something far more incredible for believers to believe in.

Obviously, the stories that propelled housing prices into the upper stratosphere during the last decade were compelling.  But they were nothing compared to another story.  Not by a long shot.

In fact, the combination of a fervent belief, drilled into an eager populace since birth, along with lax lending standards and an abundance of cheap credit has resulted in price distortions beyond comprehension.  This has also resulted in one heck of a looming debt crisis.  A debt crisis that will be a significant drag on the economy for at least a generation…probably more.

What we are talking about is the student loan crisis.  We’re sure you know the story.  But if not, in a nutshell, here it is…

Borrowing money – lots of it – to pay for a college university education is the best investment you can ever make.  It’s an investment in yourself…and your future.  For with a college degree you are guaranteed a high-paying corporate or agency job, in a safe cubicle, with two weeks paid vacation, a pension or 401k plan, and to boot…a gold watch when you retire.

Peddling Loans and Lies to Kids

No doubt, the false promise of this story, coupled with an abundance of cheap credit, not only pushed up college tuition rates to downright criminal prices.  It lead an entire generation so far into the debt wilderness, they may never find their way back.  What’s more, the big banks and the government – including Barry himself – were in cahoots peddling loans to kids who were told the good story over and over since the moment they could walk.  And what a lie it has turned out to be…

That sought after piece of paper – a college degree – has turned out to be less than worthless.  The jobs that were promised disappeared in 2007, never to return.  Moreover, for many, that college degree has become an immense liability when an anchor of debt’s attached to the back of it.  But for every problem of the government’s making, there’s a solution that’s far worse…

“Enrollment in federal student loan debt forgiveness programs skyrocketed nearly 40 percent in the last six months,” according to the U.S. Education Department.

“The programs—particularly the one revamped by President Barack Obama in 2011, Pay As You Go—forgive federal student loans after borrowers have paid a certain percentage of their income for a certain number of years.  They aim to make sure people aren’t prohibited from working in public sector jobs by hefty debt loads or paying loans into retirement, but they could reportedly cost the federal government as much as $14 billion a year.

“At least 1.3 million Americans are enrolled in the program, with $72 billion in debt, leaving government officials scrambling to find ways to reign in the costs of this program.

“The Obama administration recently proposed capping debt forgiveness at $57,500 per student, in part to cut costs and in part, they say, because debt forgiveness shouldn’t encourage institutions to keep pushing education costs up and borrowers to take on an unmanageable amount of debt.”

That’s right.  Debt forgiveness programs encourage universities to charge even more for a college degree…and creditors are more than willing to oblige students as they chase their hopes and dreams when the taxpayer will pick up the tab.

We could say many things, but we won’t.  Rather we’ll close with a brief observation…

Economic distortions offer a magnificent window into absurdity.  The making of the student loan crisis and the solutions that have followed are equally absurd.  Don’t you agree?

Sincerely,

MN Gordon
for Economic Prism

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