All loans, in the eyes of honest borrowers, must eventually he repaid. All credit is debt. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.Henry Hazlitt
The financial crisis of 2008 took most people by surprise. It came suddenly, moved quickly and acted violently. The ensuing years devastated the American economy and left many wondering how we could let something so terrible happen. Many smart people inside and outside of government spent years fretting over just that. Simply put, the financial crisis was an over extension of credit (mortgages) to an insolvent party (the American public) and the same thing is happening again now.
Many narratives were put out during the crisis and after blaming the banks for predatory lending, shady information and risky asset management. A lot of that was true but in the times immediately leading up to the crash everything seemed good, great even. The banks were simply trying to feed an exponential demand from the public for credit to buy real estate. There was a housing frenzy. Everyone was making money. The banks were making money, home owners, house flippers, contractors, realtors, rental owners etc. Everyone was making money and everyone was happy. Until they weren’t.
The American public had bought into a dream (a lie) they had been told by their parents, and the government, and the banks, and themselves: home ownership was the American Dream. Better still, home ownership was an investment in yourself. Even better than that, it was an investment that could never go down only up. From 2000-2008 many could not imagine real estate being a risky or negative investment. Markets were hot everywhere and hot continuously. With demand so high, the dream so real and the credit so loose, everyone bought in. Easy money. Easy come, easy go. We all know what happened next. The moral of the story was twofold. Borrow smarter, lend smarter. We got rid of ARMs, credit became harder to obtain, mortgage rates went down, the banks were punished, new money was pumped into the economy and slowly everything went back to normal. The fever was over and now we’re safe.
Sadly, a measly decade after the worst financial collapse since the Great Depression there is a new and nearly identical credit bubble ballooning out of control as we speak. Student loans. The trend is progressing in such lockstep with the housing crisis I can’t believe we are slowly walking down the same path as before. Eyes closed, wallets open.
Much like the previous generation was told the dream was to own your own picket fence with a yard and a dog and an SUV, the following generation was told something different. Houses, cars, property, that’s all bunk. You saw what happened to them. You guys need to invest in something more precious and intangible: an education. In 2016 a whopping 69.7% of high school graduates enrolled in college according to the Bureau of Labor Statistics and according to the National Center for Education Statistics the graduation rate for those seeking bachelor’s degrees was 60%. College is the new norm. And its expensive.
A large group of people are sold on an idea, a dream, something to strive for, something that most people can’t afford on their own, then the government and the banks step in to help people fulfill their dreams with credit. Sounding familiar yet? The credit for student loans is flowing nearly as fast as the credit for mortgages was a decade ago. Its cheap, easy to obtain and everyone has to have it. Colleges are signing up kids who just turned 18 to loans in their name. Educational loans, living expense loans, loans for food, room and board. Once again the credit is abundant and again, risky. This is credit, again, that most of those who are accepting it can’t pay back or will spend the next two to three decades attempting to.
The last financial collapse happened when too many people went insolvent at the same time. That’s bound to happen with such large numbers of loans coupled with risky lending. And its happening again. This time however, the problem could be worse. At least during the mortgage crisis the financial institutions recouped assets. They were considered toxic assets but they were still assets. Tangible things: land, houses, cars, buildings. Hundreds of thousands of mortgaged properties exchanged hands and landed somewhere. With the upcoming credit disaster, there will be nothing to recoup. You can’t repossess someone’s diploma and even if you could its not worth anything. When this batch of eager borrowers goes belly up on their massive amounts of student debt, and they will, it will hit just as hard and as fast as the 2008 housing crisis but this time there won’t be anything left behind to leverage for a bailout. We will be left standing, mouths agape and accounts empty looking at each other asking, not for the first time, how did we let something so terrible happen?
If anyone is thinking about defaulting on their student loans or waiting it out for some kind of magical forgiveness (another lie) just remember that you’re not just shorting a faceless financial institution, you’re shorting all of us. They say history repeats itself, I just hoped we would wait a little longer before trying.