Shocking Bubble in Student Loans Adds to Economic Woes

Mar 7, 2013

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Editor’s Comments: First let me say in the interest of transparency that I favor all education to be paid by the government from pre-k through graduate school. My reason is simple — a well informed well educated populace will be more productive, more competitive and less easily fooled by politicians issuing sound bites instead of facts. Information is king. If you want to progress toward the American dream it is no longer evident that working with your hands will get you there. You have to know things that employers need you to know and you have to process things cognitively that only a good education can instill.

Back to reality. The game has been on for at least three decades, perhaps four depending upon how you look at it. Unions were busted wages declined or stagnated, while corporate profits and bonuses went to dizzying heights, leaving the rest of the country at or near the poverty level.

In lieu of wages, we made credit available that was spent like wages except that you had to spend it twice to be out of debt — once at the point of purchase with your credit card and again in installments at usurious rates when the bill came in. Homeowners were using the homes as ATM machines taking out equity loans just to maintain their standard of living. It doesn’t take an economist to know that one day that bubble had to break when the low wages paid to consumers would be insufficient to cover basic living expenses and certainly insufficient to pay the interest and principal on loans.

Conservatives can blame consumers all they want, but the fact remains that in order to create the illusion of a healthy economy, credit and debt was forced onto 99% of the population while wealth was transferred to the top 1%. To live within your means during this period meant you would live with in the most dangerous run-down neighborhoods with the worst schools. The peer pressure and pressure from life virtually forced the vast majority of Americans to accept debt in lieu of the wages they should have been paid.

Now we have the start of suicide and murders that have littered the landscape during the mortgage meltdown and which continue to this day. I know because I get calls from people who threaten suicide and then do it. It’s like the war in Afghanistan: how many people are aware that there were more suicides than those killed in action in 2012? We are numb to the results and our belief in our institutions is at an all-time low for good reason. This was a gradual process with plenty of people who know a lot about finance and economics screaming “STOP!” but were ignored.

In both the mortgage crisis and the student loan crisis, where defaults are skyrocketing, there is an opportunity for a fiscal stimulus to the country that won’t cost the government a dime. Trillions of dollars of stimulus money is locked up in the banks who have sequestered the money overseas along with Corporate America’s $3 trillion that they are holding and afraid to invest because they see what I see — at best an uncertain future for America and a profound distrust of American institutions to cope with the issues because the government is controlled by big business and big banks. It’s called an oligopoly when a group of companies control the marketplace.

Simple logic: why is it that while unemployment remains high and wages remain too low to survive, that Wall Street and the Dow Jones Industrial Average are reaching historic highs? Somebody is paying for those results. Since we cannot support those results through spending discretionary income because we don’t have any, and since we can’t spend our way out using credit because there isn’t any, Big Banks and Big Business are now burying their heads in the public trough taking corporate welfare and dodging liabilities with the full support of all three branches of government.

Doesn’t it bother anyone that during the last three decades the amount of GDP measured by standard means includes financial services which went from 16% of GDP to nearly 50% of GDP. That means that the loss of real productive businesses has been replaced by trading paper on the same deals over and over again so we maintain the illusion that the United States is an economic superpower. And eventually the euphoria in the stock market will be replaced with something less than that when the correction turns into a crash.

If we really want to save our economy, our world status (aside from military power) and the prospects for future generations we need real jobs with real services and real products to be produced here and to stop treating trading paper as somehow adding to GDP.

The solution is right in front of us. In the mortgage markets, the appraisals were untrue and unsustainable and the responsible party, according to existing law, is the lending entity. The loans were unworkable and bound to fail in both the real estate loans and student loans. And the risk was transferred from the loan originator, which is supposed to be the gatekeeper to undisclosed third parties who funded the loan without any disclosure or documentation provided to the borrower.

In short, predatory loan practices and outright fraud, proven by the robo-signing scandal in which fabrication of entire loan files cost only $95 according to its price sheet, convinced millions of people to borrow sums of money they could never repay on terms that were guaranteed to fail at he borrower level. In the meanwhile, the lenders (investors) were sold a different set of terms. The intermediaries tricked the lender, tricked the borrower and then set out to claim the loans as their own, getting the insurance proceeds and proceeds from credit default swaps and federal bailout.

Look under any rock in the private student loan landscape and you’ll find lost documents, robo-signed documents, fabrications, forgery and perjury. It’s the same tune as the mortgage mess.

In any normal situation where bankers go wild, hundreds of people go to jail and receivers are appointed with the express purpose of clawing back as much as possible to provide restitution and reparation to the victims. Following the existing rule of law, that is exactly what should happen here with real estate loans and student loans. It won’t fix everything, but it will fix a lot more than current policy and give a boost to an ailing economy whose foundation is rotting and cracking under the weight of shadow banking.