Posted Monday, September 19th, 2011 by Anthony Kammer
Debt Forgiveness as Economic Stimulus
Following up on an earlier piece about the student loan bubble, I wanted to share two graphics that depict the over $550 billion in student loan debt carried by U.S. households.
The first shows 2011 student loan debt relative to 2000 debt.
The second reveals how much faster student loan debt has grown relative to all other household debt. If you look closely, it’s possible to notice that since 2008 Americans have reduced their dependence on credit with the exception of student loans.
With default rates rising, the student loan bubble has gotten a lot of attention in the past few months. The Chronicle recently reported that students are bearing an increasing percentage of university costs. A piece at the Washington Monthly demonstrated that many of the added costs have come from increased administrative hiring. And a number of other articles have explored how the debt has impacted people in their 20s and 30s. While it’s tempting to debate how the student loan bubble is or is not like the subprime mortgage crisis, I simply want to note that it has the same potential to create political rifts when the debt proves unpayable.
During the debt ceiling debates back in July, Rep. Hansen Clarke (D-MI) proposed a resolution in the House entitled “H.Res. 365 — Expressing the sense of the House of Representatives that Congress should cut the United States’ true debt burden by reducing home mortgage balances, forgiving student loans, and bringing down overall personal debt.” While this bill is just sitting in committee, it seems noteworthy for being one of the only post-crisis bills that acknowledges what’s actually straining the global economic recovery: high levels of private debt.
The political turmoil in Europe, the subprime/foreclosure crisis, and the student loan/unemployment disaster facing the United States all boil down to the same issue. Creditors made a lot of bad, risky loans leading up to the financial crisis in 2008. But rather than take losses for those loans, what we’ve seen across Europe and the U.S. has been an attempt to use the legal system and political pressure to make sure these creditors get 100 cents on the dollar. Borrowers and, in many cases, taxpayers (in the form of austerity programs) have been tapped to make sure that debt does not get written down. In the U.S., politicians have proven more willing to see homeowners foreclosed on than ask banks to start refinancing mortgages, and student loans were made virtually unforgivable in 2005 when the bankruptcy code was amended.
These outcomes are not mandated by economic principles. Rather, they are political choices that reflect a systematic preferencing of creditors over borrowers. They also happen to be economically bad policies. After a bailout and two rounds of quantitative easing, banks have still not resumed the lending necessary to achieve sustained job growth, and politicians need to realize that policies that protect creditor interests at the expense of an over-leveraged population are postponing economic recovery.
With private debt at record high levels, debt relief (whether in mortgage writedowns, loan forgiveness, or some other form) has enormous potential as an economic stimulus. It would free a portion of people’s paychecks to start purchasing again, stimulating demand and creating jobs. And it would keep many others in their homes. As Kenneth Rogoff, a professor of economics at Harvard and former chief economist, recently wrote, “the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.”
This deleveraging process can happen through austerity and defaults or it can happen through sensible policies that write down debt in ways that can stimulate the economy. David Graeber has written a fantastic book, Debt: The First 5000 Years, that shows how debt has been at the middle of political disputes for all of recorded history. And Bob Kuttner noted quite early in an excellent piece for the American Prospect that debtor-creditor tensions are likely to become far more pronounced and more central to our political debates. Debt resolution is already threatening the stability of the European Union. The sooner American policymakers realize what the current phase of the financial crisis is really about, the sooner we can devise a coherent response and begin the recovery.
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A reader emailed me a link to a good and incredibly detailed infographic on the history and economics of the student loan industry in the US: http://www.healthcareadministration.com/college/
Let me preface my comment with this N.B.- I am currently in debt to the tune of 205k which includes undergraduate work as well as medical school. Would that I could, just wish away all of this debt in the blink of an eye. But alas, I am stuck with it. But not once- not one single time- have I considered blaming someone else for my debt. It is not my creditor’s fault that I wished to attend college(s). They were just a means to my end of pursuing a career in medicine. And now I am to support a measure that could potentially wipe out the credit industry altogether?
Get a grip people. No one forced you to go to college and incur that debt. The world needs janitors and ditch diggers too. No one forced you to buy that Escalade at 11% APR while you only manage 27k a year- the used Chevy Cavalier would have sufficed. Credit cards, vacations, clothes, cars, education- all of it to quiet the insatiable lust to keep up with the Joneses and live the American Dream.
Kudos to Mr. Kammer for his well-written and, might I add, sincere opinion. But your comments that these are “political choices that reflect a systematic preferencing of creditors over borrowers” (Read: Republican choices) and “creditors made a lot of bad, risky loans leading up to the financial crisis.” At what point do you ever wag the finger at the borrower? You say the lenders made poor and risky decisions. I say the borrower was ignorant and overextended themselves. You say Republicans favor the creditors. I say they frown upon people trying to escape a debt.
Let’s be honest, this bill as sponsored by Clarke would not negate debt- open some eyes perhaps, but its language does not really change any laws. But if it did, what happens to the lenders? Do they go bankrupt? What of their staff? What about any company that is able to do business on the basis of credit? Who in their right mind would ever extend credit again for fear of a silly law that could just negate the debt. What if a friend borrowed 100 bucks from you and after the umpteenth time of you asking for it to be repaid, he responds, “Don’t have it bro- your fault for lending it to me in the first place.”
Own up to your debt. Live within your means. And damnit, quit asking for handouts.
Joseph P.
Thanks for your comment Joseph. If I can clarify, the post is not about handouts.
The point I wanted to make is similar to the principle that provides the foundation of all bankruptcy law. When you have a situation where debt becomes unpayable, the losses should be divided among the creditors, debtors, and in the case of student loans, the government. Seeking to enforce unrepayable debts against defaulting students makes them less employable and less economically mobile–it in fact only hurts the economy and further reduces the likelihood that they will be able to pay back the full balance.
The idea that the risk should be shared among the parties simply reflects the fact that a loan comes with an interest rate. Loans are a risk-adjusted investment. If there were no risk to lenders, what incentive would they have not to lend to deadbeats? Indeed, the very fact that most student loans are guaranteed and unforgivable in bankruptcy encourages lenders to make bad loans to too many people because it eliminates the need to do risk-assessments.
The point I was making has nothing to do with republican political choices. I think there’s a very plausible argument to be made that federal education loan guarantees (which have had broad political support) have been a major factor in driving up tuition costs. Who, without a government guarantee, for example, would lend $250,000 to a 19 year old who wants to study English? Framing this as ‘the borrower was irresponsible’ misses the fact that extremely popular governmental policies helped create the mess we are currently in.
The education credit market is incredibly dysfunctional. In light of the market distortive federal policies we already have in place, the least we should do is stop subsidizing major creditors and focus on policies that get people working again.