Ready to pop? The subprime student loan bubble balloons
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Bill Bonner Guest blogger
Yes, dear reader, the market seems to have turned. Friday was a disaster鈥�
鈥淕rim Job Report Sinks Markets,鈥� reported The Wall Street Journal.
We鈥檝e had our 鈥楥rash Alert鈥� flag up for the last two weeks. Hope it helped.
Day after day stocks have been falling. And day after day has brought more bad news. Greece was on the verge of collapse. US growth figures revised downward. Consumer sentiment fell. House prices are still going down. Unemployment is going up.
The whole world is 鈥榯urning Japanese.鈥�
And then, oil closed at $83 on Friday. The Dow fell 274 points. The 10-year T-note must have thought it was already in Tokyo; the yield dropped to an unbelievable 1.45%. Was that a typo on the Bloomberg line?
And get this, gold rose $57.
Whew!
What鈥檚 happening?
The Great Correction is getting greater. And the odds that the feds will panic鈥n the US or in Euroland鈥re increasing.
Remember, the Fed works for the banks. And the bankers know who their ultimate master is. They鈥檒l play it cool. But if stocks fall below 10,000 on the Dow鈥nd unemployment gets worse before the November election鈥hey鈥檒l come in with more QE. That鈥檚 why gold is up so strongly. Investors are running scared. They know they can鈥檛 trust the euro. As for the dollar, they鈥檙e not so sure鈥�
We can hardly wait to find out what happens today!
What鈥檚 the next industry to bubble up鈥op鈥nd collapse?
鈥淪tudent loans,鈥� said our new friend, Barry Dyke.
From the far north鈥ell, from New Hampshire鈥arry has been following the money. And he sees a lot of it going to the education.
Why?
鈥淚t worked just like subprime,鈥� he explained.
The feds bankrolled it. Guaranteed it. Regulated it. And conveniently didn鈥檛 notice as it got to monstrous proportions鈥� And then, when it blows up鈥hey鈥檒l be there again, pointing fingers and promising to 鈥渞egulate鈥� more heavily.
鈥淲hen you pay for something, you get more of it,鈥� says presidential candidate Ron Paul.
The feds paid for one heckuva a lot of education鈥ubsidizing students and colleges鈥ith trillions of dollars. They pay for GIs to go to school. They give grants to the schools themselves. And they hand out hundreds of billions in loans, at low teaser rates (just like subprime!) to students鈥ften to students who are unqualified and unlikely to get much out of it.
Here鈥檚 the Washington Post story:
As the nation amasses more than $1 trillion in student loans, education experts say a vexing new problem has emerged: A growing number of young people have a mountain of debt but no degree to show for it.
Nearly 30 percent of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago, according to a recent analysis of government data by think tank Education Sector. College dropouts are also among the most likely to default on their loans, falling behind at a rate four times that of graduates.
鈥淭hey have the economic burden of the debt but they do not get the benefit of higher income and higher levels of employment that one gets with a college degree,鈥� said Jack Remondi, chief operating officer at Sallie Mae, the nation鈥檚 largest private student lender. 鈥淎ccess and success are not linking up.鈥�
The plight鈥妎f 鈥渘on-completers鈥� has grown in magnitude as student debt tops $1 trillion, according to the Consumer Financial Protection Bureau. In addition, the sputtering economy has forced a growing number of students to make difficult choices between the benefits of a degree and the burden of paying for it. More students are balancing their studies with full- or part-time jobs or signing up for a reduced course load to save money, increasing the likelihood that they will not graduate.
Colleague, Justice Litle is on the case too:
We have all heard it said: 鈥淵ou can鈥檛 put a price on a good education.鈥� But this is silly 鈥� of course you can.
It was the thoughtless peddling of such a mantra that allowed institutions of higher learning to raise prices with impunity鈥� year after year, at a faster rate than inflation, as costs spiraled out of control鈥� with government-sponsored loan programs fueling the whole thing.
Sound familiar?
Echoing subprime, the college bubble even has its own version of the 鈥減rincipal-agent problem,鈥� in which the financial interests of the college (which profits from the loan money) have no alignment with the students (who voluntarily drown themselves in debt).
Soon these (literally) poor, debt-burdened waiters and waitresses of the future may realize they were snookered, and wake up angry鈥� not unlike the legions of starry-eyed home buyers who, caught up in the rush of the American dream, chained themselves to a grossly inflated asset at a price impossible to pay.
Geez. It looks like college students have been the chumps in this story鈥limflammed by the feds and the universities.
But, remember, we are grateful to the patsies. They鈥檙e the ones who keep the whole scammy economy going.
Imagine what would happen if young people decided to learn something instead of going to college? They could get a job learning from a plumber or a machinist鈥r apprenticing to a furniture maker鈥r just sitting in the library with a big stack of books and a notepad. No tuition payments鈥o beer parties鈥o orientation programs (No means no!)鈥o graduation programs (You can make a change!)鈥o research labs鈥o football stadiums鈥�
鈥magine if a group of them got together, hired a teacher鈥nd learned the classics鈥r theoretical physics鈥r quantum mechanics鈥r linguistics鈥he old fashioned way? Let鈥檚 see, pay the teacher $80,000鈥plit it among 7 students鈥� Good teacher/student ratio鈥uch better than sitting in a lecture hall with 150 other students. And $8,000 each.
A lot better than the $40,000 we spent to send our five children to college. Yes鈥e spent about $40,000 for each of them, per year. You can do the math. It adds up to $800,000. And we鈥檝e got one more to go!
That鈥檚 why we鈥檙e still writing these Daily Reckonings鈥e can鈥檛 afford to stop.
And it鈥檚 kinda fun, frankly鈥s long as you don鈥檛 take it seriously.
But let鈥檚 not talk about us. Let鈥檚 talk about them. Those poor young people鈥eaving school with $25,000 in debt (approximate average)鈥nd a punky job market.
If they got a degree in math or science, they can probably get a job. But what if they got a degree in the social sciences? Or the arts? Or no degree at all? How many baristas can Starbucks hire?
What can they do?
Go to work for the government! Or at least go to work in ZombieTown. You don鈥檛 need to know anything to work for the feds. No kidding.
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
