Writing at The Hill Peter Morici expresses skepticism about one of the policy proposals that Elizabeth Warren has championed: college debt forgiveness. The piece is hard to excerpt but it’s reasonably short. I urge you to read the whole thing. The bottom line is that college debt forgiveness will improve little other than the balance sheets of the young people who’ve undertaken educational debt.
There are many other reasons to be skeptical including that most of the debt has been undertaken by the children of the prosperous. It would be yet another subsidy for the rich. And what about the young people, many of them poor, who have no educational debt? How fair is to spot kids with well-heeled parents a couple of grand (or a couple of tens of grand) while offering nothing to the half of all young people who do not pursue higher education?
I say, with two children in perpetual peonage, make up your mind, allow bankruptcy or sic the IRS on them full force. Imprison them. They are depressed, listless, any reckoning of paying off that debt in their lifetime, (plus interest) is obviously a futile effort. They should never have attempted college. But John Wayne Gacy should never have killed those kids and stuffed them in his crawl space. You play, you pay. I know both my kids would rather serve a ten year sentence than lifetime garnishment, but they have no choice now. That was yesterday, and yesterday’s gone.
I don’t see how we afford this so don’t favor it. That said, it might not be such a bad idea to actually invest in younger people rather than all the money we spend on old people.
Steve
If I go to Atlantic City and lose big at the tables, is it the responsibility of people who don’t gamble to pay off my debt?
If anybody should pay off student debt it’s the colleges and universities, for massively inflating the price of education. What’s the point of their endowments if they’re perpetually set aside for a ‘rainy day’. This is the rainy day.
This argument reminds me of the housing crisis: No responsibility for those taking on loan debt. Like the housing crisis the notion was that borrowers were held at gunpoint and forced to sign contracts. (Just ask Steve)
Education: it’s good, so everyone has to go to college.
Housing: it’s good to be a home owner, so everyone has to mortgage a house.
Education: benefits all the hangers on – administrators, profs, loan administrators, the contractors who build shiny new buildings…
Housing: benefits all the hangers on – the mortgage brokers and administrators and creditors, the builders, the real estate agents…
Education: the loans are packaged and sold off of lenders balance sheets
Housing: the loans are packaged and sold off of lenders balance sheets
Both: holding the bag – taxpayers and those holding bad loans when the music stops
We didn’t learn a thing. The blame game starts. Those who sought and actually took out the credit are angels, well, at least convenient political props. The politicians move on unscathed.
” (Just ask Steve)”
Actually, there were lied to and mislead.
“No responsibility for those taking on loan debt.”
Many of those people lost homes. The people handing out 125% mortgages and liar’s loans? They got bailed and we made sure they still got their bonuses. Cant miss those yacht payments can we?
“Nearly 10 million homeowners lost their homes to foreclosure sales in the U.S. between 2006 and 2014. The effects of the subprime mortgage crisis are not only still being felt today, they have indelibly changed the way Americans view homeownership and the way we live.”
https://www.marketplace.org/2018/12/17/what-we-learned-housing/
Steve
There is nothing fair about life.
Student debt is a real problem — I propose a special debt forgiveness program totally funded by a tax on university endowments.
Universities benefited from tuition exceeding inflation – so they can share the cost of fixing the problem.
Going forward, I think it wise if Universities were the ones directly issuing credit to their students; give them real exposure to the risks of overcharging students.
I doubt there is any just way to construct such a program—it will inevitably become a form of upper middle/upper class welfare. To be just it would need to be means-tested which would boil down to it being a tax deduction.
I don’t question that student debt is a problem. I question the justice and workability of a debt jubilee.
@Guarneri: It’s not like liar’s loans. In those the loan recipient purposefully misstated their income in the loan application, a fact they should have known. It was a crime if it was a government-backed loan.
Students don’t know what their future income might be, the job market and economy is changing. It’s like a business venture that didn’t work out, and businesses get to file bankruptcy, benefit from the corporate shield and get a fresh start. The only complication is that bankruptcy doesn’t allow the debtor to keep any assets, and a degree is an asset, and as I understand it, many other countries impose an income test and a delay in order to prevent opportunistic discharges.
My impression is that the two main groups suffering the most from debt are (1) those who drop-out and don’t get a degree; and (2) professional class, running up six figures of debt. Probably different approaches might be appropriate, with less concern about the drop-out not having a degree and maybe dropping-out was the best decision for everyone. Maybe the professional class needs to provide community service?
Ironically, it is the case or at least used to be the case that being a professional meant that you subscribed to a code of ethics that included obligations of community service. Increasingly, they’ve talked themselves into the view that they need not provide their services free or at low charge to those who cannot afford to pay.
In my view the entire notion of “the professions” should be abandoned. The legal protections afforded to professionals should be dismantled and they should be treated just like anyone else.
@Drew
When you were a loan officer, I assume that you were able to detect the loan scammers. Other than Glass-Steagall, what changed in the years after you left?
Anybody too stupid to realize that they are being scammed should not be allowed to lend money. Period.
“Anybody too stupid to realize that they are being scammed”
Seriously? They set up liar’s loans and your conclusion is that some of the banks got scammed? Banks are supposed to assess risk and distribute capital and they totally failed to even try to assess risk. In fact if you remember all of the interviews done right after the crash they had dozens of people who became “loan officers” who had not prior experience who were actually encouraging people to lie on their applications. Still, it just boggles the mind that you would not hold the “experts”, the finance professionals responsible for finding out if someone had even the remotest ability to pay back a loan.
Steve
Why assess risk if you know you will be indemnified against loss?
@steve
Thank you, but I was addressing @Drew. I would suggest that you work on your reading comprehension.
I assume that you are aware that every night loans are issued by one bank to another without documentation. The lender does not verify the assets or income of the other bank. These are “liar’s loans”.
Re professionals:
This is something I found on student loan debt advisor website, as the average student loan debt of his clients:
Dentist $377,477
Physician $316,364
Veterinarian $271,604
Lawyer $218,348
Chiropractor $240,818
Pharmacist $221,052
Orthodontist $621,000
Physical Therapist $156,526
Occupational Therapist $193,100
Physician Assistant $194,588
Nurse Practicioner $164,136
Psychologist $226,000
Speech Language Pathologist $85,200
Architect $152,000
Optomotrist $258,556
Obviously, these are people in the most need, but I find some of these kind of shocking because I’m not as certain about the occupational growth for some of these professionals, like orthodontia.
For reference, the federal government provides a total of up to $31,000 in students loans for an undergraduate degree; currently at 4.53% interest rate to be paid within at least 10 years. A payment of about $325 per month. Beyond that there are loans that I believe are what I would characterize as parent loans. I kind of wonder if the total should be raised because that figure won’t cover a lot of four-year programs, and perhaps some issues might be with how students are paying for the rest.
Tasty –
Simple loans – mortgage loans – are underwritten primarily on 1) loan to value (that is, well collateralized in the event of default), 2) the applicants history of repayment, 3) income. Collateral and glorified credit scoring. When #1 was shot to hell in the housing downturn #2 and #3 didn’t matter nearly as much. “Home prices don’t go down†and insufficient equity down were the big mistakes. Don’t mind steve, he doesn’t know what he’s talking about.
What I did was a different type of loan altogether. Underwriting leveraged business loans is a comprehensive and detailed exercise. The process is measured in months. Internal and third parties are engaged to investigate quality of earnings and accounting practices, market dynamics, manufacturing and distribution capabilities, sourcing, systems and metrics, insurance, environmental issues etc. Both hard collateral and potential enterprise value are evaluated. Most importantly, the fine art of assessing management becomes crucial.
Scammers are usually easy to detect if you have been doing this for awhile. You just have a sense. One of the most frequently used tricks is to simply run the plants hard for a while (or just change standard absorption rates) to capitalize fixed costs into inventory. It falsely boosts profits………for awhile. The other typical issue is a dramatic change with a key customer. That’s why you do customer calls or have a “survey†group do the same. But you really don’t see much scamming. The issue is judgment. Retail loans are a different cat.
“I assume that you are aware that every night loans are issued by one bank to another without documentation. The lender does not verify the assets or income of the other bank. These are “liar’s loansâ€.”
CITI has no idea if BOA can pay back a loan? Sure.
Steve
@steve
CITI has no idea if BOA can pay back a loan? Sure.
No, they do not. CITI assumes that BOA is solvent and will repay because they always have. As long as BOA’s ledger is not filled with garbage, it is a good assumption, but when the solvency of BOA is unknown, they will not lend.
@Drew
“Home prices don’t go down†and insufficient equity down were the big mistakes.
If the financial industry did not know this, how were first-time homebuyers to know? You imply that the homebuyers were scammers, and @steve claims that the financial industry were scammers.
I think that human nature was the problem. They believed the model because it had always worked, and humans tend to believe that trend lines will continue indefinitely. Other humans understand that trends will eventually inflect.
Until 2016, the election model was that the candidate who spent the most money would win, and until 2016, it worked. The big upset of Trump’s election was not that he won but how he won. Had he outspent Hillary Clinton and won, the anger would be towards the model.
When you were in the financial industry, it was a totally different world. There was not enough money to create a housing bubble large enough to collapse the financial system. No bank would have been allowed to become insolvent due to CRA loans.
Most house prices do go up, and most people do repay their mortgages. Periodically, these trends will reverse, but the financial industry got greedy. They started including onerous terms for least sophisticated and creditworthy borrowers.
Many of the sub-subprime borrowers were told that by making the mortgage payments on-time, their credit score would improve, and at the reset, this would allow them to refinance their ATM mortgage at prime rates.
This is true, but it is also highly likely that something would negatively affect their score before the reset. Later, they began including early repayment penalties. It seems as if these loans were designed for default.
Don’t mind steve, he doesn’t know what he’s talking about.
Wait. Are you telling me that he is not an expert on Alt-A loans?
He is not totally wrong. At the sub-subprime level, there were a lot of sleazy practices. It was not everybody, but there were enough. You should look into it and compare it to what you remember. There were no-doc borrowers that knew what they were doing, but not enough to cause a financial collapse. (I am sure there were prime borrowers who knew what they were doing.)
I have never advocated total debt forgiveness. There could have been a government program to restructure the debt. I would include income adjusted payments, but they debt would not be discharged. The payments would be adjusted upon income changes, and when the house was sold, it would go to payoff or paydown the government held debt.
TB- And BOA is publicly traded so they know a lot about them. They know what investors think about them and they what the bond raters think about BOA. They have tons of information. They also, as you point out, have a track record. This was completely different t than someone a bank didnt know coming in for a loan and the bank gives it to them knowing nothing about that person’s finances. I cant believe you would even compare the two situations.
Steve
“CITI has no idea if BOA can pay back a loan? Sure.â€
C’mon, steve. That’s why liquidity and the markets froze in the crisis. You didn’t know your counterparty risk. It was the very essence of the crisis.
Jesus H Christ.
“If the financial industry did not know this, how were first-time homebuyers to know?â€
They weren’t. It’s called risk.
“You imply that the homebuyers were scammers..â€
No I don’t. Some were speculators, some were buyers in earnest. In either event my point is that no one forced them to sign or their brains would be on the contract, Corleone style. Their is a reason people are not able to contract until they are of age. They have a responsibility to understand what they are signing.
“When you were in the financial industry, it was a totally different world. There was not enough money to create a housing bubble large enough to collapse the financial system. No bank would have been allowed to become insolvent due to CRA loans.â€
Not really. The fatal structural flaw was that loan originators could clear their balance sheets of risk by syndicating/securitizing the loans. That’s been going on in commercial banks and mortgage originators long before the housing crisis. The solution would have been loan retention of, say, 20% and not being threatened by regulators and the Clintons for not making risky loans. But once the ability to sell it off was standard practice, well, you know what happened.
“They started including onerous terms for least sophisticated and creditworthy borrowers.â€
Not onerous. Terms that would get the deal done. They were encouraged to do it. And yes, some were unscrupulous. This may be a point where we are just going to have to agree to disagree. I don’t believe in absolving borrowers of their responsibilities to know what they are doing. If they are not sophisticated enough they need to seek counsel or not borrow. Ignorance is not an excuse. This might shock you, but when I see ads on TV or radio I don’t believe them either. Except for the ones that say if I eat this powder I’ll look like Adonis and women will throw themselves at me right and left. I’m sure those are true…….
BTW – no lender wants defaults and to become land barons. They make loans, not manage foreclosed properties.
There is only one tiny segment of the entire lending industry that “lends to liquidate.†But they do just the opposite of what was being practiced by home lenders. They decrease their loan to value, not increase it. They exist almost entirely in the small business loan market.
@steve
What @Drew said.
@Drew
BTW – no lender wants defaults and to become land barons. They make loans, not manage foreclosed properties.
You’re joking, right?
Technically, you are right. The garbage they originated got sold into MBSs, and the GSEs bought them. So, they did keep the quality, and then they reacquired the garbage as CDOs.
@Drew
If your business model is to lend money to the most financially illiterate and least creditworthy, I think you should be prepared to lose your money, but I guess you think otherwise. The good news is that Dodd-Frank will do nothing to prevent a repeat, and the clowns will be at it again.
You might want to consider that the existing financial industry is only possible because of the Fed, fractional reserve lending allows the lenders to issue dollars rather than banknotes. With the exception of M1/M2, the entire financial system could be rendered worthless by repealing the Federal Reserve Act?
Without the Fed, numbers on a bank ledger would be numbers on a bank ledger. The day before Nixon stopped exchanging dollars for gold everybody thought it was impossible, but one day later, the impossible became possible.
If AOC, the MMT adherents, and the self proclaimed socialists understood the financial and monetary systems, they would realize that by repealing or rewriting the Federal Reserve Act they could render most financial wealth worthless.
The government must be paid using legal tender, and the only reason you can send the IRS a check is because the Federal Reserve Act allows the numbers on your bank’s ledger to be considered legal tender. Without the ability to convert those numbers into legal tender, you would be required to pay using M1/M2, and since there is not enough M1/M2 to cover all those numbers, M1/M2 would quickly become far more valuable than those numbers on a ledger.
The instant President Warren signed the bill authored by AOC my piddly savings account would be worth more than all your financial assets. The financial ‘playingfield’ would be equalized before the ink was dried.
Nixon ended the gold exchange because countries holding large amounts of US dollars decided to outsmart the US. They too thought the US would never change the rules of the monetary system.