The housing bubble popped because the government encouraged, through tax loopholes and support of insurance, legal, and government bureaucracy, the spiralling debt of its citizens. The same thing is about to happen now with student loans.
In 2008 people began to notice that the investment houses they bought for a mortgage of $250k (paying as little as 1% of that amount) could not be sold for $251k or more and stopped paying their mortgages. The banks noticed that they had a lot of property and not much money. And no one wanted the property. It was the definition of an economic crash: loss of confidence means loss of value. $250k in value changed overnight to no value; the money just disappeared.
Economists call that a “market correction”. In the stock market you buy stock for $1000 and the next day it is worth $100. The money is gone, and cannot be recovered unless someone else invests and people begin to believe the stock is worth $1000 again. It is a matter of confidence.
In larger terms the entire US economy is a matter of confidence world wide. There is no other currency that enjoys the confidence the world has in the US dollar. If that ever changes we will instantly join the third world, unable to buy imported goods at affordable rates. Our dollar, worth less, will not buy “cheap Chinese goods” anymore.
Today we see all over the news, as though the government is trying to prepare us for a disaster and a new rescue program, that US university students borrowed billions but cannot find jobs. What happens when banks find that no one is paying back their loans? In this case the banks don’t even hold mortgages to empty properties. And many of these loans are guaranteed by the government, and the government has special powers to recoup the money from the former students.
Is this all too complicated? Historically we can see what happens: a new and expensive government bailout is on the way. Almost every penny the ex-students make on the books will go to paying back their loans, and interest accumulates. At minimum wage the loans will take a long time to repay, and they will ex-students will have no take-home pay. The government will need to provide jobs for those who default on loans or they will be consigned forever to the roles of those, like illegal immigrants, who can only work for cash so the government can’t track them and they don’t starve.
I hesitate to explain the only sane alternative at this time because no one, as of yet, seems to understand the problem.
copyright 2012 Kent Johnson
