The Recession Precedes the Financial Crisis…

…Not the other way around.

It’s when people are unable to repay their debts that the banks start running aground, except when the loans are nondischargeable and either pre-TARPed by the government (guaranteed FFEL loans) or auto-TARPing (direct loans). Then the problem is wholly different: The loan balances simply grow like a cancerous polyp on aggregate consumer credit reports. And this is what’s happening—not that the Fed believes it.

Enter the New York Fed’s recent “Household Debt and Credit Card Report” on student loan debt. In the “Special Section: Student Loan Debt,” it reads:

Higher education is crucial to improving the skill level of American workers, especially in the face of rising skill premiums and a relatively unfavorable labor market for less skilled workers. Due to increasing enrollment and the rising cost of higher education, student loans play an increasingly important role in financing higher education, and student debt is the only kind of household debt that continued to rise through the Great Recession.

…Which I take to mean that the Fed also believes that we can’t possibly create a “favorable labor market for less-skilled workers” and so we must—MUST—educate them via debt.

 Propotion of SL Borrowers 90+ Days Delinquent

So the delinquency rates are sky-high. Note that these estimates mix federal and private debt.

Let’s create a parallel universe where the loans are dischargeable in chapter 7 and after a chapter 13 repayment plan. What would we see? For one, the debt levels wouldn’t be increasing through the depression:

Non-Mortgage Debt Balances

Student debt is the only kind of household debt that continued to rise through the Great Recession and now has the second largest balance after mortgage debt.

These are not good things. Rising debt without rising growth is very bad.

According to The Wall Street Journal, the Fed’s economists don’t speak as boldly about higher-ed-for-all as the report does, but there is a kernel of dread slowly growing from the denial. “The high delinquency rate is very worrisome, said Wilbert van der Klaauw, an economist with the New York Fed, noting that higher education has traditionally produced a sizable financial payoff. ‘We hope the returns to these educational investments are going to be there” as the labor market rebounds, he added.'”

The good news for the Fed—other than the fact that none of its economists will lose their jobs for failing to observe the obvious—is that the student loan bubble can’t destroy the economy, unless private lenders lend out, like, another $4 trillion on top of their mere $150 billion. It is, however, embarrassing for the government to say that its loans are “traditionally” good debt when a third of the youngest debtors are delinquent, and it’s slowing growth because it’s a capitation tax on our supposedly most-productive workers. The shortfall to bondholders can be paid with rich people’s taxes; your living standards won’t be reduced a whit (unless the government really does decide to levy a capitation tax).

The bad news is that the government still doesn’t really care if people are defaulting on the loans.

5 comments

  1. Not sure why you would think that FRBNY is in cahoots with the College Board. FRBNY has pumped up the numerator with non-delinquent loans and has artificially removed performing loans from the denominator. The results are the artificially-high delinquency rates FRBNY presents. FRBNY seems more “Zero Hedge” than Sandy Baum. Wonder what their agenda is . . . wanting to nudge Americans into the service jobs that represent the real need for America’s capitalists?

    1. The loans the FRBNY removed from the denominator aren’t in repayment, so they’re neither performing nor nonperforming. However, I’m pretty sure IBR loans are considered in repayment even if they’re essentially in default. The fact that a higher proportion of the loans owed by debtors under 30 that are in repayment are 90+ days delinquent implies that when the current crop of young debtors hits the job market, they’ll rapidly default as well. IBR appears to be making little difference so far.

      Higher education is crucial to improving the skill level of American workers, especially in the face of rising skill premiums and a relatively unfavorable labor market for less skilled workers.

      This is the same skill-biased-technological-change argument I discredited last week, which, incidentally, relied on some of Sandy Baum’s research. As the Fed economist said to the WSJ, college “traditionally” pays off, which implies he still believes it does. Maybe he doesn’t want to sound alarmist, but on balance I think this was more College-Boardy than not.

      As for Zero Hedge, they think the government will go bankrupt and force us to live hand-to-mouth to repay the bondholders just like when we borrowed massive amounts of money to win WWII and then lived in extreme poverty in the 1950s and 1960s. My parents and grandparents still lie to me about how there was always work and rising living standards back then. ZH doesn’t just predict doom: It

        wants

      it so it can brag about how stupid you were not to realize how right it was all along.

  2. Credit bureaus don’t have student loan statuses such as deferment, forbearance, suspense, cancelled, discharged, etc. All they have is current and past due. FRBNY is guessing wildly, based on principal balance fluctuations, which accounts are in what it considers “bad” loan statuses, such as deferment, forbearance, and $0 payment IBR. (Very few students choose ICR and IBR, compared to the press buzz.)

    Furthermore, FRBNY is combining delinquent and defaulted, which are totally separate and have different denominators. This distinction does not exist in other consumer loan products, where chargeoffs occur. DoE never charges off anything.

    It is just as logical to assume everyone currently in a forbearance will never default as to assume they all will default.

    1. “A weasel hath not such a deal of spleen as you are toss’d with.”
      Henry IV, Part I, Act II, Scene 3

      I really loathe the student-loans-can’t-wreck-the-economy-therefore-they’re-NOT-a-bubble response. Bubbles must be able to create a financial crisis, don’t you know, so it doesn’t matter if degrees are “overvalued assets”—which they’re not, except for the ones that are. Forget the fact that it makes no difference from the debtors’ perspective. They’re just “agents” in the rational model.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s