Another Government Creation, Another Bailout?

In the same way that government created the housing bubble, the government has created the college-loan bubble.

Once upon a time, government officials decided it would help them keep their jobs if they could claim they had expanded the middle class.  Unfortunately, none of them really understood economics or even the historical factors that led to the emergence of the middle class in the first place.  But they did know two things:  Middle class people tended to own their own homes, and they sent their kids to college.

So in true cargo cult fashion, they decided to increase the middle class by promoting these markers of being middle class.  They threw the Federal government strongly behind promoting home ownership and college education.  A large part of this effort entailed offering easy debt financing for housing and education.  Because the whole point was to add poorer people to the middle class, their was a strong push to strip away traditional underwriting criteria for these loans (e.g. down payments, credit history, actual income to pay debt, etc.)

We know what happened in the housing market.  The government promoted home ownership with easy loans, and made these loans a favorite investment by giving them a preferential treatment in the capital requirements for banks.  And then the bubble burst, with the government taking the blame for the bubble.  Just kidding, the government blamed private lenders for their lax underwriting standards, conviniently forgetting that every President since Reagan had encouraged such laxity (they called it something else, like “giving access to the poor”, but it means the same thing).

What are the chances that we bail out all those kids who’ve majored in such “in demand” course work as Art History, Religious Studies, Women’s Studies and others?

I’d say pretty high.

10 responses to “Another Government Creation, Another Bailout?

  1. The government did NOT create the housing bubble. That was a free market creation. I’ve pointed you to books, explained what happened…why do you continue to proclaim the indefensible. There is no way to blame the government for the housing bubble. You are ignoring reality in order to hold on to ideology. That is not rational.

    • The government did NOT create the housing bubble. That was a free market creation.

      Of course it is due to the government.

      But, in your defense, it might be time to run a series of posts to get to the bottom of the argument.

      • I’ve given the argument as to why it hasn’t. I realize on the right there has been an effort to blame the government, but looking at the reality it’s a conclusion drawn ONLY by right wing pundits who want to ideologically cover up the reality that markets fail and powerful actors in market need to be regulated by a strong and effective government in order to prevent them from bringing everyone down in their quest for profit. Again, I recommend “All the Devils are Here” by Nocera and McLean (which offers even handed criticism of both parties), or a more enjoyable “The Big Short” by Michael Lewis. Make sure you focus on derivatives trade. Sub prime lending was NOT the problem, the problem was NOT loans to poor people. That could have been dealt with. It was the derivatives trade and what that did to the whole market that caused the problem.

  2. But I think there is a case that the student loan bubble is because of government policy. The housing bubble – no. The student loan bubble – yes.

  3. In the words of the great Harry Hoo ” amasing ” . I know this is spitting in the wind but I must challenge .

    http://www.forbes.com/2009/02/13/housing-bubble-subprime-opinions-contributors_0216_peter_wallison_edward_pinto.html

  4. Putting aside the housing bubble part (where I share Scott’s objections), I will say that I too am troubled by the student loan/college tuition situation. The problem (or at least one of the problems) is that the widespread availability of loans is not being paired with any efforts to slow/stop the exponential growth in college tuition.
    The current system is unsustainable.

    • I will say that I too am troubled by the student loan/college tuition situation. The problem (or at least one of the problems) is that the widespread availability of loans is not being paired with any efforts to slow/stop the exponential growth in college tuition.
      The current system is unsustainable.

      I’m happy that we agree.

  5. Question, why do liberals always demand more money for education ? Answer, many work in the education industry . Question, why won’t anything be done by government to control tuition costs . Same answer . Question, is it about the kids . Answer, it’s about the money .

    • So why do conservatives demand so much money for the military? Is it because many have been in the military? That kind of ad hominem argument only detracts from the issue.

      Another reality check for Alan: public spending on higher education has rapidly declined and continues to do so. Where I teach we’re supposedly a public school, but while in 1990 we had 65% of our costs paid by the state, now that’s down to 30% and continuing to decline. We are actually 70% private. Tuition costs have gone up in part to make up for that decreasing share, though now we’re keeping tuition rates flat.

      Here’s what happened: during the false booms of the 90s and 00s (dot com bubble and real estate bubble) money was flowing everywhere and credit was cheap. Parents wanted their kids to go to the best school possible and were willing to pay. Private colleges (especially mid-level — below the elite) found they had a clientele for $30,000 tuition, even if they weren’t that great. Since they lacked the money of the elite, they didn’t subsidize part of the tuition and expected students to take out loans. With the economy booming, parents and students were willing to do this, and costs kept going up. It was market driven – the demand was high, people were willing to pay more, and credit was cheap.

      Back even then Kiplinger’s had my university on a list of the best 100 values in higher ed – small classes and a liberal arts education but without the high tuition. Now that the market has shifted due to the economy, those mid/lower level privates are not able to sustain those high tuitions. I did some digging and I take back my claim this was mostly government policy. The government essentially backed out of helping subsidize loans in the way they did when I was a student. By the 90s it had been considerably privatized. So I think the student loan bubble is another market consequence of the false bubble economies from the mid nineties to about 2006.

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