Student Loans Replacing Mortgages As The Credit Cycle Peaks

Courtesy of a link on Jesse’s blog, I’d like to link you to a blog post on Scientific American, of all places, that puts the Great Financial Crisis in a mathematical and human perspective.  While I would have chosen a title that reflects that ultimately the collapse came from greed more than an equation, here is a LINK to “The Real, and Simple, Equation That Killed Wall Street”.

It puts, among other points, the importance of low volatility to booms fueled by cheap central bank credit in a helpful context.

It’s brief.  Please consider reading it and then coming back here.

In one sense, nothing much has changed, just the names and the asset classes, between then and now.  Headline asset prices keep ramping higher.  No one knows where the top is.  All you know is that cash is trash.

NINJA home loans turned into NINJA student loans, as last night’s updated WSJ article made clear (LINK):

Repaying debt has become more difficult in part because loan balances have grown and the interest rates on federal loans have increased as a result of a shift from variable-rate to fixed-rate loans. Most federal loans now carry interest rates of 6.8% or 7.9%, versus a rate of 2.875% on federal Stafford loans in May 2005, said Mark Kantrowitz, publisher of the financial-aid website…

Stafford loans, which account for more than three-fourths of federal student loans, impose no credit standards and are capped at a total of $57,500 for undergraduates. Ruben Medrano, a 52-year-old undergraduate studying business management at Texas A&M University-San Antonio, said taking out about $26,000 in federal student loans was much easier than taking out an auto loan or a mortgage. “The last vehicle we purchased, we spent four to five hours in the dealership,” Mr. Medrano said. “The student-loan process took me 30 to 45 minutes and I never had to leave my home.”

Then there are the distressing numbers that are just like the subprime mortgage numbers that TPTB told sheeple not to worry about pre-Lehman, then ran pictures of Depression-era soup lines to flush the last weak holders out of their stock positions:

In the five years through last March, the portion of all student loans that were 90 days or more delinquent rose to 11.4% from 8.8%, while the average student- loan balance per borrower increased 30% to $23,829, TransUnion found…

Another study, released Tuesday by credit-score provider Fair Isaac Corp., found that roughly 26 million consumers had two or more open student loans on their credit report in October 2012, up from about 12 million in 2005.

These student loans emanate almost exclusively from the Federal government.  They represent money out the door but are excluded from the budget.  Thus the “adjusted” deficit is a good deal larger than stated, assuming that a reasonable proportion of the student loans are going to either default completely or have the principal and/or interest rate modified lower.  Thus, the Fed has also been funding a part of these educational loans as well its share of Social Security, Defense Department, etc. expenditures.

As the Scientific American article ends, with a quote from Richard Fisher of the Dallas Fed, the more things change, the more they remain the same.

Something’s got to give.  

But who knows how and when?



4 comments to Student Loans Replacing Mortgages As The Credit Cycle Peaks

  • Hans

    Free education for everyone; then a bailout; then a vote for the bailoutor! Then the organism dies and the life cycle is complete…

    Dr X, many thanks for your many threads!

  • George Orwell

    We are dancing on the edge of a bubbling caldera while drunk.
    We’ve stumbled several times but not yet fallen into the lava.
    However, we are dancing faster and closer to the edge all the time.
    The fall won’t hurt us but the landing will be unpleasant.
    Enjoy the party!

  • [...] Student Loans Replacing Mortgages As The Credit Cycle Peaks ( [...]

  • David Pristash

    Things are never what they seem when we talk about the FED and money and greed. But the place where the greed is found is not really Wall Street its Washington DC. For example on the Monthly Statement of the Public debt for December 2012 The Debt held by the public was $11.581 trillion the inter-government debt was $4.851 trillion totaling $16,433 trillion. Basically right at the statutory debt limit, not that that matters. Although the administration and the media only show the $11.581 as what is owed.

    However that is not the real story nor is it even close. The actual TOTAL number in this category can be found on the Consolidated Balance Sheet Bureau of the Public Debt for the same month which comes much closer to what the federal government actual owes. All things considered its shown as $17.633 trillion not $16.433 trillion a difference of $1.200 trillion. Taking out $82.0 billion for miscellaneous debt leaves $1.118 trillion which represents the money the FED and the Treasury have loaned out to …. anyone that will take it apparently.

    This puts the US at a Debt to GDP ratio of 111.4% in current dollars well on the way to someplace I don’t want to go.