Friday’s report from Donghoon Lee of the Federal Reserve Bank of New York makes clear that the American bubble economy learned nothing from the Great Recession. With no meaningful reform in the financial sector, it’s cooked up a new one, this time in student loans. And it’s about to blow.
It’s not just that student debt is approaching $1 trillion compared with about $350 billion in 2004. “Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt.” That means the burden is larger than credit cards, auto loans and others. While households have done some deleveraging after the big bust, people losing their jobs went back to school. With most Americans’ net worth about where it stood in 1992, they borrowed. The loans have been packaged into securities by outfits such as SLM Corp. and sold to investors. These derivatives are highly profitable and demand is rising. Now, as the new report makes clear, delinquency rates are rising.
Does this sound familiar?
Not that we’re necessarily in for another Great Panic, unless this trillion bucks is secretly connected to one of the Too Big To Exist Banks which is already facing other concealed troubles. It does mean that as the bubble deflates, an important source of demand in the economy will be lost. Some of the muppets that bought these derivatives may be a little less rich. And large numbers of Americans who borrowed to get a new job will face more misery in a market that will never pay them enough to shed the debt and make getting new credit more difficult. As for the hustles and outright fraud involved, will we ever know, much less see accountability? The Consumer Financial Protection Bureau is a pinata for the GOP. And the Justice Department has yet to bring a single big bankster to, um, justice.
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Today’s Econ Haiku:
Enjoy while you can
A lasting rally, you say?
Yes, bull is involved