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Student loan debt usually can't be discharged through bankruptcy so it's unlikely to cause some kind of panic sell-off even if the loans being made are low qual

Student loan debt usually can't be discharged through bankruptcy so it's unlikely to cause some kind of panic sell-off even if the loans being made are low quality. The debt will continue to be a noose around the neck of consumer spending power. Indentured servitude 2.0.

jjoonathan 8y ago
Today's businesses rely, directly or indirectly, on consumer spending power. If its decline hasn't been correctly worked into the present-value-of-future-dividends (aka price) and the market corrects, the magnitude would have no difficulty rivaling or exceeding previous recessions.
- lotsofpulp 8y ago
  As long as the people getting richer keep consuming enough to offset the reduced consumption of those getting poorer, it could work out. We just have to ignore the part where 20% of the population enjoys life while 80% go through the grind to provide for the 20%.
candiodari 8y ago
That's cool ... except of course the point of lending to these students is that they'll pay back installments. Now let's take the banks side, for a second. What happens in banks ? Well they lend money from the Fed (only the big ones) or from other banks (more likely) and lend it out. In return they get an income stream. They lend out X, every month X/100 comes back in, for, say, 110 months. Now what is bankruptcy ? Bankruptcy of your customer means the income stream stops, and you get a "lump sum" repayment. So that means, for example, that in month 20 of the above loan, you get 60% X, and no more income stream. That's bad, of course. (63% is a nice "global average" rule of thumb figure of what you'll get back, obviously in practice it varies and the "quality of the debt", to a large extent, is how much you can expect to get back in bankruptcy) In the case of a student loan, you get nothing. No lump sum is coming forth, and obviously the income stream stops. But you've still got the loan. So that means that you fantasize that every month you make an extra loan which covers the monthly payment for that month. Now let's assume it takes 2 years for your customer to get out of bankruptcy, to the point they can start to repay ("global average" is 1.6 years). In practice student loans are extremely bad quality debt, which is why we have this arrangement in the first place. When the customer goes bankrupt, as discussed, they pay back nothing, and it takes students, in practice, more than 1.6 years to start paying anything back. This is why we have this indentured servitude rule in the first place. So ... how does this affect banks ? Well of course, given the above, that's easy to see, at minimum for the first 1.6 years after increased student loan bankruptcies, they're screwed. In practice, more, and this will cascade: more student loan bankruptcies will force economy-wide tightening, which will cause people to get fired, which will result in student loan bankruptcies. And then we loaned out 1.5 trillion dollars like that. So, assuming the Fed can just mass-stimulate the economy whenever it wants, it's actually kind of OK, for a while. But ... wait ... at what point can they stop stimulating ? Well ... oh ... never. (you might argue at that last point : "not true", if the economic performance exceeds student loan interest rates for long enough (way longer than that 1.6 years from above), then it stops. How much is that ? 7.81 percent. How long is that ? Essentially it often boils down to double how much they're behind. When was the last time the economy did that well ? The 1950s, and ... even then, only for 3 years ... not for long enough given how far behind the average "indentured servant" is) So we can at least now understand that we ought to get mad at the people who allowed this deal in the first place. The banks ... cannot reasonably behave any different from what they're doing.

jjoonathan 8y ago

Today's businesses rely, directly or indirectly, on consumer spending power. If its decline hasn't been correctly worked into the present-value-of-future-dividends (aka price) and the market corrects, the magnitude would have no difficulty rivaling or exceeding previous recessions.

lotsofpulp 8y ago
As long as the people getting richer keep consuming enough to offset the reduced consumption of those getting poorer, it could work out. We just have to ignore the part where 20% of the population enjoys life while 80% go through the grind to provide for the 20%.

candiodari 8y ago

That's cool ... except of course the point of lending to these students is that they'll pay back installments. Now let's take the banks side, for a second. What happens in banks ? Well they lend money from the Fed (only the big ones) or from other banks (more likely) and lend it out. In return they get an income stream. They lend out X, every month X/100 comes back in, for, say, 110 months. Now what is bankruptcy ? Bankruptcy of your customer means the income stream stops, and you get a "lump sum" repayment. So that means, for example, that in month 20 of the above loan, you get 60% X, and no more income stream. That's bad, of course. (63% is a nice "global average" rule of thumb figure of what you'll get back, obviously in practice it varies and the "quality of the debt", to a large extent, is how much you can expect to get back in bankruptcy) In the case of a student loan, you get nothing. No lump sum is coming forth, and obviously the income stream stops. But you've still got the loan. So that means that you fantasize that every month you make an extra loan which covers the monthly payment for that month. Now let's assume it takes 2 years for your customer to get out of bankruptcy, to the point they can start to repay ("global average" is 1.6 years). In practice student loans are extremely bad quality debt, which is why we have this arrangement in the first place. When the customer goes bankrupt, as discussed, they pay back nothing, and it takes students, in practice, more than 1.6 years to start paying anything back. This is why we have this indentured servitude rule in the first place. So ... how does this affect banks ? Well of course, given the above, that's easy to see, at minimum for the first 1.6 years after increased student loan bankruptcies, they're screwed. In practice, more, and this will cascade: more student loan bankruptcies will force economy-wide tightening, which will cause people to get fired, which will result in student loan bankruptcies. And then we loaned out 1.5 trillion dollars like that. So, assuming the Fed can just mass-stimulate the economy whenever it wants, it's actually kind of OK, for a while. But ... wait ... at what point can they stop stimulating ? Well ... oh ... never. (you might argue at that last point : "not true", if the economic performance exceeds student loan interest rates for long enough (way longer than that 1.6 years from above), then it stops. How much is that ? 7.81 percent. How long is that ? Essentially it often boils down to double how much they're behind. When was the last time the economy did that well ? The 1950s, and ... even then, only for 3 years ... not for long enough given how far behind the average "indentured servant" is) So we can at least now understand that we ought to get mad at the people who allowed this deal in the first place. The banks ... cannot reasonably behave any different from what they're doing.