Thursday, March 12, 2015

Credit Bubbles and Unsustainable Student Loan Debt Burdens .... Ginger and Pickles University

Debt is a huge issue for individual Americans and our local, state and federal governments as well. But too often as a nation we behave as if it's not the enormous problem that it is. However, what we don't choose to recognize as our problem today will become one for later taxpayers or end up being paid in full by our kids and grandkids. In any event, in the end We the People will pay.

But now President Obama is proposing to make our education indebtedness issues even worse by ignoring the elephant in the room --- that the costs of attending college are too high and must be reduced dramatically.

Of course, cutting costs at colleges to make our system of education truly affordable isn't on the President's agenda. Nor is offering more value for money spent even part of the college discussion. All that's being talked about is offering forgivable government loans to students, aka government handouts, in an effort to delay presenting to taxpayers the final bill for payment.

Welcome to Ginger and Pickles University summarizes the college student loan situation this way:

"Rising student-loan default rates are back in the news. As President Obama signed a “Student Aid Bill of Rights” initiative Tuesday, he said his administration will study the idea of extending bankruptcy options for all student-loan borrowers.

How did we get here, and what can we expect to come?. . . If you seek a lesson in credit bubbles, you need look no further than “The Tale of Ginger and Pickles,” published in 1909.

Ginger is a tomcat and Pickles is a terrier. Together they run a small village shop, generous enough to operate on a peculiar business model: They are willing to sell things on credit—unlimited credit. . . .

Ginger and Pickles have lots of customers. . . . And so, written down in their account book, Ginger and Pickles have a lot of money owed to them. But no actual money is coming in.

Eventually Ginger and Pickles start getting into trouble, and despite sending out lots of bills, they can’t collect. They go out of business and close the shop.

I first read this story 99 years after it was published, during the housing crisis of 2008.... I found it hard not to see the very same economic forces at work: the inflation and then collapse of a credit bubble.

But there are differences. Ginger and Pickles had no collateral when they sold consumable goods, and so they had no leverage to secure repayment. In the housing crisis, banks that didn’t get repaid could at least take title to a house, and that was worth something. The housing crisis didn’t really see those who had foolishly extended loose credit suffering for their bad choices; the banks, and the politicians who set up perverse incentives, generally all benefited. It was the people who had bought houses they couldn’t afford who suffered the most.

Yet there is another kind of credit bubble, one in which the lender has no collateral and those who are extending the credit are likely to feel a sting. It is the education bubble, in which the government has provided huge sums in taxpayer-guaranteed loans, and it is not clear that those taking the loans will be able to repay them. If those loans aren’t repaid, the taxpayer—that is, the public at large—will suffer. And a college education, like a bottle of milk or bag of peppermint candies, is a good that can’t be returned once it’s been consumed.

So you can see why I have this story in mind as I read recent news reports about education loans. . . . the education bubble involves customers who bought something they can’t or won’t be able to pay for. More students have been defaulting, and this trend is expected to continue for the foreseeable future. Like Ginger and Pickles’s shop, this can last for a while, but it can’t go on forever. At some point, the unsustainable credit has to collapse....

Few people take on education debt expecting to default . . . Under current law, education debt can’t be discharged by bankruptcy. Ginger and Pickles saw a run on the store—but students, and their parents, are increasingly wary of taking on debt and are seeking options other than traditional college education: community college, online courses, even avoiding college for training in trades.

This means that some colleges are likely to close, not because they run out of money, but because they run out of customers. The administration’s suggestion of making education loans dischargeable might make families more willing to buy education on credit—it will keep the students flowing into Ginger and Pickles University. But it won’t deal with the deeper problem, which is that this business model can’t last.

Most colleges have not been running on an empty till, because they aren’t the ones who’ve been extending credit. Their customers have credit with the government, which is backing the loans, and the government has been filling the college till with borrowed dollars.

How long can the government keep doing that, especially if it no longer even intends to collect.... And when a whole nation takes on an unrepayable debt, what happens then?"

Summing Up

Education costs are too high in America from K-12 straight through college.

Health care costs aren't affordable either.

Both are government run and their 'cost plus' models of inefficiency are heavily subsidized by current taxpayers. If this doesn't stop soon, then current students and future taxpayers will get the bill. To repeat, there's no such thing as a free education in the real world.

It's time to stop ignoring the enormously fat debt ridden elephant in our many rooms throughout America's house of indebtedness.

He's hiding in plain sight --- in each and every room. All we have to do is look.

That's my take.

Thanks. Bob.

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