Not just that: this is, ultimately, a giveaway to the academic classes, who have lucked into the business of selling things to unwise consumers spending someone else's money.

When these loans are forgiven (let's not fool ourselves: they will be), the federal government will have moved $1.3 trillion into the coffers of colleges, universities, professors, junior assistant vice-provosts of diversity affairs, athletic coaches and the whole panoply of 21st-century academia.

If loans are forgiven, the money will be "moved" (so to speak) to the bank accounts of the indebted, not academia.

In the case of state schools, student loans also benefitted the tax payers. Student loans means such schools can charge a higher tuition, which means they need fewer subsidies from the the state.

Moreover, I wish it went to the professors etc. but with intermediaries like Great Lakes I also fear that even that is not the case.

Federally-backed student loans, undischargeable and given to all and sundry, to be spent wherever on whatever, is a gigantic short in the moral-hazard circuit.

I would throw an actual party for any dictator in the US who would do to the colleges what Henry VIII did to the monasteries.

I'm not sure you're using the term "moral hazard" correctly. If the loans were dischargeable that would be a moral hazard, because the smart thing to do would be to borrow up to your eyeballs and then declare bankruptcy ten years later on graduation day.

And the schools should not be in the business of telling students what they can afford. For one thing, they probably can't know.

Without the government guarantees, banks would think hard about whether a loan was repayable, and schools wouldn't have nearly as many anthropology or art history programs cranking out unemployable specialists year after year.

The government guarantee removes economic consequences for certain actors -- for the school and the bank, but NOT for the student. The student with an art history degree is now stuck with a massive loan that is not even dischargeable in bankruptcy, whereas the bank and the school suffer no consequences for having trained someone in an unemployable specialty of little to no economic value.

On the contrary, they are incentivized to do that.

The principal on those loans already went there, and forgiving the debt won't move any additional money there except insofar as people with unpaid student loan debt overlaps with people working in academia.

The point of a move this move is twofold. The first is to unburden people who were, in essence forced into massive debt at gunpoint as the result of fairly recent and arguably corrupt policy changes (note the lifetime health / income / well-being stats. for those without college degrees, and the role played by banking lobbies if you doubt any of this).

The second is to signal to the predatory class of administrators who have benefited the most that the party is over. It may be unfeasible to claw back what they got from massively inflating the cost of higher education, but it's more than feasible to cap the damages and force a reckoning that will almost certainly lead to vastly more efficient administrations and more economically healthy graduates.

Sure, I could see being in favour of loan forgiveness if at the same time we completely eliminated federally-subsidised loans. But I don't see that happening: I see us forgiving outstanding loans, then granting even more loans, with absolutely no pressure for students to economise.

True fact: one doesn't need a single-occupancy bedroom or a multi-room suite in order to get a good education. One doesn't need a winning football team. One doesn't need a fancy cafe with subsidised prices; one doesn't need a climbing wall. All one needs for a good education is food, shelter and good professors.

But as long as someone else is (or appears to be) footing the bill, students will angle for the nicest possible way to spend their four, or six, or more, years.

The academic dream is that everyone deserves the same education. This is obviously not a reality, but you should at least acknowledge the middle ground is disliked by the "academic class" and the "non-academic class" alike: it's expensive as hell and we still have idiots running the world.

Why is making loans to people that have, statistically, a very low chance of paying off somehow not also a "bad financial decision"? We pay for "bad financial decisions" regardless of who makes them - debt forgiveness for individuals or bank bailouts when they get in over their heads.

Banks only lend for education because it's not dischargeable - there's no penalty for the bank making a 'bad decision' because they'll get their money one way or another.

Yes, make all student debt able to be discharged in bankruptcy, and we'll see a different dynamic play out. However... there are more predatory lenders out there that specifically target the newly bankrupt so... it may not 'cure' all issues, just shift some of the burden around.

EDIT: had meant to add that we already pay for people's bad health decisions via insurance pools, and we already pay for people's bad life decisions via prisons.

I agree that the government shouldn't be making bad loans to people who are unlikely to pay them back. In fact, that's exactly what I said in my comment: the government should get out of the loan business.

Unfortunately, loan forgiveness would mean me (a current taxpayer) having to pay for the past poor decisions of students.

> We pay for "bad financial decisions" regardless of who makes them - debt forgiveness for individuals or bank bailouts when they get in over their heads.

Banks pay significant penalties for bailouts, while people seem to want debt forgiveness with 0 repercussions. Not to mention this whole issue of banks is orthogonal because most loans are from the government.

If we let the bankruptcy system handle it, people could get out of their loans but there would still be consequences.

It's important to recognize that you're talking about the federal government and not really banks. Whether it's a bad decision to issue student loans to people who are unlikely to pay them back is irrelevant to the parent question about fairness. The government doesn't have money of its own. It has your money, and my money.

There is no scenario in which the government gets penalized for poor lending practices. The citizens get penalized, and that's why people who were conservative with their educational loans and expenses tend to be less than impressed with the idea of writing of a trillion dollars in student loans. That trillion dollars is largely going to come from the pockets of people who aren't carrying student loans.

I was under the impression that only federal student loans were protected from bankruptcy. However, it looks like that changed in 2005 when Congress largely extended this protection to private student loans as well. I still don't quite fully agree with your statement since financial institutions often have a hard time collecting on debt regardless of their legal rights, but you are certainly correct that this encourages financial institutions to take on more risk. Private student loans are performing much better than federal student loans though (11%+ vs 4%+ delinquency rates) so the data implies that they are still practicing somewhat strong underwriting practices. Further, nearly 95% of all private student loans have a cosigner.

Regardless, the private student loan market is very small in comparison to the federally subsidized student loan market. I know it is easy to blame the 'banks,' but in reality this situation has developed largely from societal pressures (college=success), federal and state policies ('cheap' and 'accessible' loans), and unchecked spending at colleges.

Link of an interesting paper on the subject for those curious: http://law.emory.edu/ebdj/content/volume-32/issue-1/comments...

Same reason we let people walk away from homes (or not walk away, simply not be able to afford them), but we'll still give them a mortgage 3 years after their foreclosure; the economy needs the monetary velocity to survive.

Like I said in my comment, I recognize that there needs to be some option for people who can't possibly repay their student loans. Defaulting on your mortgage is not consequence-free: you lose your home and hurt your credit. We don't let people just forgive their mortgages and keep their homes without hurting their credit, but that's what a lot of people are advocating for student loans.

We should treat student loan debt like any other debt.

We should! There's no asset to secure the debt, so just mark the trade line as unpaid/collections and have it be a black mark for 7 years.

If Congress isn't going to fix this, Millenials can max out unsecured credit, pay off their student loans, and then go bankrupt on the unsecured debt; 7-10 years of bad credit is better than the federal government pursuing you for the rest of your life.*

* Not legal advice. Confirm with an attorney first if you attempt such a feat to ensure you stay within the law by doing so.

That seems incredibly harsh.

Then again, you Americans really don't believe in rehabilitation do you.

The 7 year black mark is no one wanting to loan you money because you've shown you won't pay it back, and it's 7 years because the government says it can't be longer. It's not anything truly harsh like prison sentence or anything.

Now, if you're credit score is simply low due to negative marks from late payments or charge offs, yes, it's likely you won't be lent to again until you take action to raise your credit score (by making payments on time).

"Some countries keep failed entrepreneurs in limbo for years. Britain will discharge a bankrupt from his debts after 12 months; in America it is usually quicker. In Germany people expect it to take six years to get a fresh start, according to the commission; in France they expect it to take nine (see chart 2)." http://www.economist.com/node/21559618

Until Bush changed the rules at the request of the financial industry, we did.

Just because it's unsecured doesn't mean we shouldn't be able to discharge it with bankruptcy.

Get the government out of the loan business and the market will correct itself. You won't be able to get a loan for a useless degree and if you end up being unable to pay off your loan you can go through normal bankruptcy proceedings and their consequences.

http://www.economist.com/node/21559618 quoting a research paper:

"With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks — which consist mostly of changes in financial aid — account for the lion’s share of the higher tuition."

And then:

"so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay."

If existing lenders aren't willing to loan to minorities, then there would be a fantastic opening to make a profit in loaning money to poor minorities with high test scores to study STEM.

The US is very deeply invested in the idea that the way to overcome the disadvantages faced by members of certain minorities is education. But those same disadvantages make those students worse credit risks. A credit-based system looking to optimize return wouldn't give these students access to the same educational opportunities.

If the problem is that minority students have difficulty achieving at the level of white students, let's focus on that. I don't think it's very helpful that we saddle these students up with loans but then they don't even end up graduating. Instead of forcing lenders to lend to bad credit risks, let's come up with ways to support minority students so they aren't credit risks. I personally would be happy to invest in minority students studying CS, for example.

And yes, it will be somewhat painful in the short term. We'll have to confront the reality that lending to students with low SAT scores to study esoteric subjects is maybe not a good idea. Perhaps it would even encourage such students to not waste their time and money on bad degrees.

Then again, if less ppl could afford a degree in Queer Musicology (does exist - https://www.musicology.ucla.edu/mission-and-history-1) or let's say Environmental Studies etc maybe the supply and demand would even out so that'll be a good thing.

If you got rid of the insanity that is federal loans it would just increase demand for state schools and community college.

Given that federal loans have always had rates set by government policy (not market rates) and the fact that private participation in the program was ended in favor of exclusively direct loans in 2010, I'm not sure what the concern for "market rates" is -- there is no market involved.

God forbid.

Absent a government, lending is a lose-lose situation. The lender has little recourse to compel the lendee to pay, and the lendee has no protection from the lender.

You can't.

> Isn't that the reason student loans are not dischargeable?

No.

First, student loans are, in fact, dischargeable, though there is a higher bar to discharging them. So expalanations of why they are not dischargeable are unnecessary (and necessarily incorrect.)

But, more to the point, unsecured loans in general are dischargeable without the heightened requirements that apply to student loans; not having something to repossess isn't a difference between student loans and other unsecured loans, so cannot explain the difference in treatment.

Explanations of why they are more difficult to discharge is certainly necessary, though.

I'm also curious how student loans can be discharged except via death of the lendee. It probably happens, but I don't personally know anyone who has discharged subsidized student loans in bankruptcy. (I do know people who have discharged unsubsidized private student loans in bankruptcy.)

I work in the industry, some of the ways you can have your student loans discharged are:

False Certification (Ability to Benefit): For forgiving a borrower's loan based upon a false certification of the borrower's ability to receive benefits to attend college because he/she doesn't have a GED or high school diploma.

False Certification (Disqualifying Status): For forgiving a borrower's loan based on the borrower's disqualifying condition(s) for the degree.

False Certification (Unauthorized Signature/Unauthorized Payment): For forgiving a borrower's loan based upon endorsement or certification of the promissory note, disbursement, or application by an unauthorized person.

School Closure: For forgiving a borrower's loan based upon a school closure that prevents the borrower from completing his/her degree or program.

Unpaid Refund: For forgiving the borrower's loan because the borrower's school did not provide the correct refund to the borrower's lender.

Teacher Loan Forgiveness Forbearance: For borrowers who are eligible for the Teacher Loan Forgiveness program and whose entire outstanding balance will be forgiven at the end of their fifth year of teaching in a qualifying school.

Total and Permanent Disability: For borrowers who are unable to repay their Federal Family Loan Program student loans due to total and permanent disability (as defined by the U.S. Department of Education).

(Also, "borrower" is the more usual term, rather than "lendee".)

(Also, agree on "borrower". It's late and I'm exhausted and all I could come up with was "lendee".)

>You can't.

Yet. ;)

[1] <https://studentaid.ed.gov/sa/about/announcements/itt/faq>

Is there another reason that forgiving student loans improves the health of an economy?

The best way to grow an economy is to give a dollar to its poorest participant, not its richest, because the poor class will immediately spend it on goods, creating demand, where the richer you are the less of your income goes to consumables that drive production.

Side note: "How the Economic Machine Works"[1] by Ray Dalio (manager of one of the world's largest hedge funds) is fantastic in describing these concepts in non-academic-economics terms.

[0]: https://www.federalreserve.gov/releases/h6/current/ [1]: http://www.economicprinciples.org/wp-content/uploads/ray_dal...

It gets wiped off the books and a dollar leaves the economy.

> The person you're giving it to will either spend it on consumption

Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay.

> or loan it to someone else until (ultimately) it is spent.

The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.)

> And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption.

The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money.

If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money.

http://www.federalreserve.gov/monetarypolicy/reqresbalances....

https://chaseonline.chase.com/resources/RateSheetForCons7021...

> It won't reduce the amount of money in circulation.

When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy.

http://www.bankofengland.co.uk/publications/Documents/quarte...

The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that.

However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more.

> Banks absolutely do not have to loan out every dollar deposited to make money.

No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.

Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really.

This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.

I'm not sure if you're under the impression that I'm claiming that holding reserves is the primary way banks make money. I'm not. The discussion about reserves is to answer the claim that a dollar deposited with Chase will automatically result in a 90 cent loan to someone else. It will not.

Borrow from whom? I've heard this idea before that the loans issued by a bank are essentially independent of the deposits, and it makes sense to me from a logistical perspective - is some BofA loan officer going to load up BofA's financials to make sure they have the money to issue the loan? No, they'll just do it, and it's someone else's job at the end of the day to "make it work".

But who are the banks borrowing from? If it's from other banks, doesn't it mean that in the aggregate loans and deposits are tied together?

In general, yes, the aggregated loans and deposits are largely tied together. There some fuzziness even here, though, as the Fed can inject money or move loans onto their books in a number of ways.

The case in point was for a 'wealthy person' (not my term, I don't like it but let's roll with it) who holds the debt of a student borrower. The hypothesis of an above poster was that money repaid on loan service (from the borrower student to the rentier) would not result in increased consumption in the economy and that if the money remained with the debtor that they would be more likely to stoke consumption in the economy. My point was that if someone gives you money you can either spend or invest it (let's forget physical currency for now - in our current monetary system there's not that much central bank money [physical/reserves] in the economy as a percentage of gross domestic product, save for the US with USD1.46 trillion, owing to persistent current account deficits and the Triffin dilemma and other factors - but I digress). But let's take your argument as an example. If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy".

>> The person you're giving it to will either spend it on consumption >Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay.

I'm not sure I really follow what's going on in this segment of your response. Banks take deposits. They fund assets (often loans) with those deposits. Those funds are then used at some point for consumption.

>> or loan it to someone else until (ultimately) it is spent. >The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.)

Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold. If you 'deposit funds' with a bank, then there is a corresponding liability on their balance sheet (an entry on the right side). Other liabilities of banks include debt (both short and long term) and equity capital. Guess what? If you deposit money with a bank (or loan it money by purchasing its debt, or invest by providing equity capital) then whatever funds you provided the bank must be recognised on the bank's balance sheet. This new money you gave them goes on the left side (their assets). Now if you're a bank you can hold physical currency in your vaults (doesn't earn much interest, and there's a potential silverfish problem) or you can loan it out. You could loan it to the Fed[0] for 0.5% or you'd probably want to loan it out to someone else at a potentially higher rate (think mortgages, equities if you want to roll the dice, structured credit if you're feeling like it's 2007, you get the point).

>> And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. >The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money.

Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding?

> If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances..... https://chaseonline.chase.com/resources/RateSheetForCons7021....

$100,000 * 0.04 = $4,000 (loans -> income) $800,000 * 0.01 = $8,000 (deposits -> expenses) -$4,000 (total profit)

Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault?

>> It won't reduce the amount of money in circulation. >When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy.

As illustrated above, a deposit with a bank is a liability entry in their balance sheet with a corresponding asset to match. The asset would either be physical currency if that is what you deposited (how old fashioned) or the debt of another banking institution (which I'm guessing would be netted out at the end of each day - or intraday if that is your central bank's kind of thing - and balanced, or exchanged for central bank money). By definition the money is "loaned" to someone. Now we could really get into the nitty gritty of credit creation and "high powered central bank money" vs "private bank money" but there's probably not the need to get that into detail.

Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :)

[0]: https://fred.stlouisfed.org/series/WRESBAL

This is not a real scenario. Virtually no one's education is funded by direct loans from wealthy individuals. Student loans are issued by banks.

When you pay a dollar on your student loans' principal, that dollar ceases to exist. The bank might turn around and make another loan that recreates that dollar, but they are not obliged to do so. Banks are under no obligation to loan out everything they can. If they were, there'd have been no talk about "tight lending" after the housing crash.

> If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy".

This model of banking assumes a fixed monetary supply, which is not the case. Banks literally create money when they issue loans. If they didn't, the monetary supply would be fixed except in rare instances where the Fed creates money ex nihilo. As you are doubtless aware, the money supply fluctuates constantly. Where you imagine those fluctuations in supply come from?

The article I linked from the Bank of England also covered this, in bold, at the beginning. "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."

> Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold.

Deposits in this context are money. Loans are not. The bank gives you a loan for $100k. This creates an asset and a liability. (Double entry accounting is still mercifully intact.) The $100k sitting in your account now is literally money. You can spend it, transfer it, withdraw it, roll around on the floor in it, whatever you like. It's money. The $100k loan the bank marks down as an asset is not money. It can't be spent, only paid back. It can't be withdrawn, only sold.

The liability increased the monetary supply. The asset does not reduce it except when it's paid back, which is why banks literally create money when they issue loans and why paying off a loan literally destroys money.

The fixed supply model of banking is intuitive but it's also insufficient describe how modern banking actually works. Everyone agrees that monetary supply is not fixed.

> Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding?

It is a money machine.

I don't know what percentage of Chase's capital comes in the form of deposits.

> Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault?

You're forgetting that the Fed pays 0.5% on reserves, which covers that $4000 cost. Obviously breaking even still isn't a functioning business strategy. The point is that banks do not have to lend every dollar possible in order to be profitable, not even close.

And yes, unloaned deposits are either held in the vault or transferred to the Fed. In either case the bank earns 0.5% on them.

> Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :)

I'll decline to mock up a balance sheet for you. I'm not denying double entry accounting.

Which comes from depositors supposedly "hoarding" money in banks. (In fact, banks loan out a >1 multiple of deposits, called fractional reserve banking. So "hoarding" money in banks results in more money being spent, not less!)

Even in a hypothetical scenario where banks always loan the maximum amount they can, a dollar in the bank would result in less money in the economy than simply handing the dollar to someone on the street. Fractional reserve lending means that the bank can issue a 90 cent loan after receiving a 1 dollar deposit. And we assume that the 90 cent loan will stay in the bank as a deposit so that they can issue another loan for 81 cents. And so on. In this model, a dollar in the bank actually results in ZERO net money entering the economy. It's all deposits in the bank that can't be withdrawn because it would cause a cascading loan call.

At any point in this lending chain, if someone decides to withdraw the money they were loaned, it stops the chain and some amount of money less than 1 dollar enters the economy. It might be 90 cents, 81 cents, or 15 cents, but it will always be less than the dollar that was initially deposited. So even in the model where banks always lend as much as possible, there's still less money entering the economy than was deposited.

And of course, banks are aware of the cascading loan call problem and therefore keep more reserves in aggregate than the minimum so that they don't end up in this situation. Which means that the impact of a dollar deposited scales back even further.

If I borrow money from the bank, they simply list it as a credit to my checking account. I can then write checks to buy things. The vendor deposits my checks in his checking account. The money never left the bank, but it still resulted in commerce - for all intents and purposes, it "entered the economy".

There is no scenario in which you depositing a dollar in the bank "results in more money being spent, not less" in comparison with you spending a dollar. It quite obviously cannot be the case, because a spent dollar is economic activity of its own plus whatever economic activity occurs as the result of depositing the dollar, because the spent dollar is most certainly on its way to the bank as well.

Where exactly do the banks obtain the capital which funds their balance sheet? From something other than individuals with investable (deposits/debt/equity) funds?

> This model of banking assumes a fixed monetary supply, which is not the case. Banks literally create money when they issue loans. If they didn't, the monetary supply would be fixed except in rare instances where the Fed creates money ex nihilo. As you are doubtless aware, the money supply fluctuates constantly. Where you imagine those fluctuations in supply come from? The article I linked from the Bank of England also covered this, in bold, at the beginning. "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."

Indeed, if a bank makes a loan on its own book then there's a credit in the deposits account and a debit in the loans account. This has created commercial bank money. It's part of the M1 monetary aggregate.

Now as for the creation of high powered central bank money, I'll point you to the Federal Reserve Balance Sheet[0] where you can see that the Fed has created "around" 2.5 trillion dollars "ex nihilo" since 2008. Literally, they have printed that much money (it's reserve balances, but I'm sure the member banks could cash them in for physical if they asked Janet nicely). Now you might be surprised that the Fed (and other central banks) create money every single day. They also destroy it too. They do this by buying and selling securities which expand or contract their balance sheet.

> Deposits in this context are money. Loans are not. The bank gives you a loan for $100k. This creates an asset and a liability. (Double entry accounting is still mercifully intact.) The $100k sitting in your account now is literally money. You can spend it, transfer it, withdraw it, roll around on the floor in it, whatever you like. It's money. The $100k loan the bank marks down as an asset is not money. It can't be spent, only paid back. It can't be withdrawn, only sold.

If the bank creates a $100k loan "out of thin air" how can you withdraw it or roll around the floor in it? Do they print it out on notes which have the bank's name and logo on them?

> The fixed supply model of banking is intuitive but it's also insufficient describe how modern banking actually works. Everyone agrees that monetary supply is not fixed.

I'm not sure anyone ever said the money supply is fixed? That would be really problematic. The money supply changes by the second, you can see weekly numbers displaying fluctuations in central bank money and commercial bank money (ie: M0/M1/M2 etc) at the St Louis Fed[1]. It would be pretty weird for there to be a fixed money supply (even on the gold standard, after loss and destruction of the metal there's a ~3% annual expansion in supply iirc).

> I don't know what percentage of Chase's capital comes in the form of deposits.

54% in 2015[2]. Where do you think they get the rest of their capital? And how much would they have to pay for it?

> You're forgetting that the Fed pays 0.5% on reserves, which covers that $4000 cost. Obviously breaking even still isn't a functioning business strategy. The point is that banks do not have to lend every dollar possible in order to be profitable, not even close.

So depositing money with the Fed isn't lending it? Does that mean it doesn't show up on the left side of a bank's balance sheet?

> I'll decline to mock up a balance sheet for you. I'm not denying double entry accounting.

You'd be amazed at how simple it makes a discussion when you have a balance sheet and income statement. There's no conjecture, it's just facts. And thanks for the in depth debate! It's been a while since I TA'd this stuff in college.

[0]: https://fred.stlouisfed.org/series/WRESBAL [1]: https://fred.stlouisfed.org/categories/25 [2]: http://www.marketwatch.com/investing/stock/jpm/financials/ba...

Indeed, if a bank makes a loan on its own book then there's a credit in the deposits account and a debit in the loans account. This has created commercial bank money. It's part of the M1 monetary aggregate.

If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy".

I'm not sure if we're talking past each other or what.

> If the bank creates a $100k loan "out of thin air" how can you withdraw it or roll around the floor in it? Do they print it out on notes which have the bank's name and logo on them?

I'm not sure why you're pretending to have trouble understanding this concept. This is you being disingenuous.

The rest of this seems to be us definitely talking past each other. I'm not super interested in how Chase's assets and liabilities break out. I engaged in the conversation specifically because you seemed to be asserting that loan repayment doesn't destroy money. I'm not sure what you're asserting anymore, and the rest is tangential anyway.

There's also the discussion around fractional reserve lending, but I don't think we actually disagree much about the mechanics except that you think banks are essentially obliged to loan every deposited dollar and I don't, but I don't know this this is an interesting point to continue.

Even if these wealth hoarding lending class members had just left their money in the bank, remember that these funds have a corresponding entry on the left side of the bank's balance sheet (not much cash/reserve balances in the banking system) and would also have to be loaned out to someone else in the economy by the bank.

So I still don't see how lending money leads to guaranteed lower amounts of consumption in the economy?

Otherwise...

While there is an element of truth to that, see "the marginal value of a dollar". You "spend" your ten millionth dollar quite differently than you spend your ten thousandth.

Some of these guys for whom money is simply a means of keeping score won't change their consumption patterns much no matter what.

If you want to increase velocity, the way to do it is cause more cash to be in the hands of broke people.

Still, I'm hesitant to draw the conclusion that giving cash to someone with a high MPC results in a markedly higher amount of consumption/expenditure in the economy, as if alternatively that cash was invested by someone with a high MPS it would be eventually spent anyway. Of course there would be some frictional element to this (money needs to be transferred when invested, etc) but I posit that more is made of this than should be.

It'll end up in the deficit just like everything else. As it should. Unlike QE{I,II,III}, this will increase the base.

Saving and spending are both morally neutral; it's just that we think it's Good To Be A Rentier, so we (curiously) bias in a moral case for saving. The New Testament of finance :) allows for bankruptcy, to implement a mechanism for forgiveness.

Saving is pragmatically good. But we seem to make a moral fetish of it - in fact, if our neighbor spends, spends, spends, we benefit. But Liberal Atomism doth make hypocrites of us all...

Ignoring all this, monetary velocity is important and all other things being equal, I'd rather have it than not have it.

Of course you'd need a real economist to do a study to find out if that's actually true.

Will the economy be more healthy? I see little evidence for the assertion. It's possible the damage done by all that debt cancellation will be greater than any benefit.

Cancelling the debt might cause a negligible amount of inflation.

http://www.businessinsider.com/3-charts-explain-the-effect-o...

http://time.com/10577/student-loans-are-ruining-your-life-no...

I hope you realize it doesn't quite work like that.

Fiat currency is a shared delusion of value with invisible hands exerting forces to enforce certain behaviors (the Federal Reserve attempts to stoke inflation in order for the economy to reach full employment, arguably unsuccessfully, while technology and cheap Chinese labor is having enormous deflationary effects, with the result being real estate and equities turning yet again into asset bubbles); never be fooled that we're somehow "losing" value by forgiving debts at the national government level.

No, the Federal Reserve attempts to provide easy money to spur employment, balancing that goal against the competing goal of controlling inflation. The Fed does not try to stoke inflation to drive employment (especially since inflation doesn't drive employment, though employment can help drive inflation.)

Technically, money is created when a bank writes a loan, but the Fed does meta-meta(-meta?) money creation on a global scale.

http://www.bloomberg.com/news/articles/2016-08-14/the-tokyo-...

That's right. The Bank Of Japan is printing money to prop of the value of top companies trading on Japan's exchange. Think about the macroeconomic causes and consequences of that.

>The GPIF’s results are seen as a gauge of broad market performance, as the fund owns nearly 1% of global equity markets and more than 7% of the Japanese stock market. Domestic and foreign equities comprised 44% of the portfolio at the end of March, below its 50% target weighting for the asset class, the fund said in a statement. http://www.wsj.com/articles/japans-gpif-pension-fund-suffers...

There is this can they keep on kicking, hoping to out run the "current" malaise but you can't escape the Great Graying when your economies are dependent upon constant expansion.

> other people's bad financial decisions?

This is different than someone taking a bad loan on their own. This is the case of your parents and grandparents, your government, the schools, the newspapers, etc. all effectively telling you that it's a good idea to invest in education. So good that in a country that loves its liberties and independence so much people will fight against public health care, the government will do the work to guarantee that you can get your education loan.

Surely they can't be all wrong... I cannot honestly blame people for believing the lie in this case.

I absolutely can. I grew up listening to all those same messages and hearing all the same things.

I also realized that it might be a good idea to do some college research and to apply for various scholarships.

High school seniors aren't babies. If they're good enough to get into a college, they should be smart enough to do the minimal research which it takes to find out which degrees are valuable and which aren't. There are tons of resources online to learn about this stuff.

I'm pretty sure that absolutely no one anywhere tells their kid, go to Columbia University, live full time in Manhattan, take an extra three years to finish your bachelors, study pottery making, live entirely off of student loans. Aim for at least $400,000 in debt when you finish.

No one ever says that. Ever.

(As a random data point, the average student debt in 2015 was $35,000. That doesn't seem like an insurmountable bill.)

There's a reason more people are living at home, struggling with their debts, and the middle class is declining and it's not because their bills are so easily surmounted.

Also 35k is still a huge amount that will follow you for decades for some people.

Many people I know who did engineering with me in India were stuck waiting for a 'dream job' and have gone no where with their lives. People like us knew we had no special skills in engineering to wait for a magical moment of a 'dream job' to arrive and took whatever came our way. Incrementally we worked towards improving ourselves and now have near dream jobs.

The more special you think you are, lesser the options you will have. Because you would got used to thinking of many jobs as work beneath you.

Frankly, we have thousands of other problems, highlighted by basic health care, that we should probably prioritize first.

The situation in the US is a political choice, not a consequence of some economic law.

This isn't a word and Norway isn't socialist.

Upthread is strong with hyperbole from an American perspective, and that "neo-" is just to distinguish having strong governmental social programs/services/safety nets (often caricatured as "socialism" from both the right and the left) from old-school destructive actual Socialism.

Clearly the two "well known" publications (the most preeminent Marxist journals) listed in that wikipedia article and the fact that the wikipedia article's definition of neo socialism has absolutely nothing to do with Norways economic model point to the fact that the parent comment definitely didn't make up that word out of thin air.

Norway is not socialist, neosocialist, or whatever dumb made up "socialism" you people try to come up with.

Also something having a wiki page on any website and being used in a couple of journals does not make something a term/word. It only indicates that someone wants it to be a term/word.

"See, the sad thing about a guy like you is, in 50 years you're gonna start doin' some thinkin' on your own and you're going to come up with the fact that ... you dropped 150 grand on a fuckin' education you could have got for a dollar fifty in late charges at the public library!"

It's not the actual learning itself that's expensive; it's the credentials.

Unfortunately, the world isn't making new land. It's a reality of life that we live in a world of scarcity.

The Internet era effectively invalidates structured schooling education for the vast majority of people who do not require the rigored environment such institutions impart. For most people, reading books, watching lectures, and discussing with fellow students of the discipline (or even experts) in social media is more than sufficient to acquire a knowledge of desirable fields of study.

The only difference is, you don't get a piece of paper after doing it for four years many industries mandate you have to try to use that knowledge professionally. But if you are only in it for fulfillment, you can get that right now, without any state institution subsidizing your living and accommodations to acquire it.

Is there a country in the world where this isn't possible now?

Maybe it's just having the sheepskin that matters most.

Compared to Europe the education system in the US looks like a system that is trying to get as much money out of young adults as possible rather than getting as many people as possible an affordable education.

In fact, there are lots of free calculators which will show you the expected earnings and cost of different degrees.

You can single-handedly decide to go to a cheap community college for the first 2 years.

Apart from that she also went to Columbia University. Totally overpriced in my opinion, but it made her really happy. Because of her decision back then, now, as a couple we have a "second mortgage". Not all financial decisions in your life are under your own control.

the private college system is what you are describing.

the community college and public university system does exactly that, but nobody talks about it, because it's un-glamorous and un-dramatic.

Really I don't blame young people for this. There are too many degrees and too much money is being created to pay for them. The state loves this, it creates lots of money and it ties people into debt which seems to be the entire aim of western states now as they want to work people hard all the time. If you attain financial independence through non-debt you might decide not to work 40 hours a week. Then the establishment can't cream off your labour, and they hate that.

Not at all! These people are called "conservatives".

I used to feel the same way as you. But we need to stop loading young adults with debt that can never be dismissed. Young adults are easy prey. Student's are for the most part clueless on what it means to be in debt without being able to pay for it. Mostly student's are desperate to afford their dream school or study for the one profession that will increase their pay check and are willing to sign a simple contract to get it.

Luckily some of us know early on that we must get trained in a marketable skill to pay back the loan. Greek studies or French literature will not cut it these days. Not all of us are that lucky to know it.

We need to look at the lenders and schools too. They don't care who they lend to because they have a guaranteed repayment. This leads to predatory lending for lenders.

Schools don't care what they teach. This leads to nice to know classes. They will always find student dreamers that will major in (name you silly major here.)

The supply and demand curve has gotten out of wack. Maybe only certain majors and schools can be eligible for loans as a start.

Also, how is it that a student can go to school from K-12 and not have a skill. High schools need to be responsible too. I took a year of Calculus in high school. It's nice to know it yet it has not lead to a pay check. I'm sure there are other more productive ways to spend a year of school.

Indebted students are a symptom of the bigger problem on how to train society's future workers. It's time to do something about it. Debt forgiveness and a reform to the educational system is a great place to start. BTW, free higher education is not the answer. Look at what happens to the K-12 graduates. Free higher education will only extend that system without much results.

Yes, student's are stupid and it sucks that some will get a free ride but they are only a part of a bigger problem. We need to look at the problem more broadly.

I give students more credit than you do. If you're capable of going to college, you should be capable of understanding compound interest.

> The supply and demand curve has gotten out of wack.

I agree completely. Get the government out of this business and we'd see realistic supply and demand.

It'd be much easier to get a loan for a CS degree and a degree in CS would cost a lot more than one in English literature. Instead, we have the ridiculous status quo where the latter costs almost exactly the same as the former despite vast differences in value.

If you set up the situation so that students can get themselves into crippling debt due to the market, you should realistically recognize that this might result in people with different underlying assumptions deciding that those students/former-students should get bailed out. So maybe it's better to just figure out ways to preempt the problem, which leaving it to the market (often a fairly abusive place for the less-informed or less-wealthy) doesn't really do.

Making them dischargable in bankruptcy would be a very useful change here, but where I disagree is that the market would be good at usefully signalling "this is a valuable degree" or "this isn't a valuable degree."

Err, we do. It's called taxes, which fund the military.

More importantly, joining the peace corps is a choice. Nobody compels you to do it. Taxes are not: if student loans are forgiven, I'm being forced to pay for other people's financial decisions. I find that much more objectionable than my voluntary charitable contributions.

You may not like being forced into something, I may not like being forced into something, a criminal may not like being put in jail - but there are certain rules on the aggregate which are set up not for the individual, but to benefit society as a whole. There are situations in which the ethics of upholding a society overtake those of an individual (e.g. the prevention of returning to a, "state of nature," argument.)

Beyond that, in our situation, there are multiple extenuating circumstances of for-profit universities who had lobbied the Federal Government to gain special treatment which would grant them the capability to be funded via student loans. Those Universities then went on to employ extremely unethical practices, preying on those who did not have the proper background or capacity to choose. Mind you, this was all done with Federal money, sanctioned by your and my tax dollars, which we have no choice in paying, as you stated. What we do have a choice in, is saying that a certain percentage of student loans should be forgiven due to extenuating circumstances such as unethical for-profit educational institutions, educational institutions such as ITTTI which went out of business, etc. I think the underlying assumption that people are making here on this discussion is falling prey to the, "slippery slope," fallacy in that ALL student debt should be forgiven, when in reality perhaps only a certain percentage should be, due to the high incidence of unethical educational institution degree-awarding growth which occurred subsequent to the 2008 economic collapse.

What you will see on here is a lot of people making appeals to the economic benefits of making a decision which benefits a larger aggregate of the population. If you can't stomach that, then you should at least watch the latest Frontline Documentary on For-Profit Schools, and read the Wikipedia Articles on various for-profit schools which have recently gone out of business, like ITTTI.

Like I said in my original comment, the government shouldn't be in the business of student loans in the first place. If it weren't, a lot of these for-profit schools wouldn't exist (because private lenders would realize that they're bad credit risks).

In economic models, one of the biggest reasons for soaring tuition is increased ability to pay. So every move to increase how easy it is to take out student loans causes tuition to go up which causes pressure to make it easier to take out student loans.

Therefore the expected result of your policy is outrage, short term dislocation, and then greatly reduced tuition. Which will move money from academic administration to the rest of the economy.

The cuts in state aid were mostly due to the 2008 financial crisis. However over decades, tuition has been rising significantly faster than inflation, while state aid has mostly kept up with inflation.

Furthermore rising tuition is not just a phenomena of state schools. Private universities have seen tuition skyrocket over the decades by similar percentages as public schools, and they never received state aid.

https://badgerherald.com/news/2010/04/07/as-state-funding-fa...

and the cuts have continued, eg a further $250m in 2016

http://host.madison.com/wsj/news/local/education/university/...

* Student loans that cannot be discharged via bankruptcy.

* Student loans that are more accessible thanks to both government loans and lending policies that encourage banks and credit unions to furnish student loans.

I think a student from a middle class family (meaning loans and not grants) should be able to attend four years of an in-state college, get a full education, perhaps work a part-time job but also have time for the kind of valuable extracurricular activities that are a part of the college experience, and graduate, without going into an unreasonable amount of debt. But it sounds like the reality is that that amount of debt, for that scenario, has climbed quite a bit.

The price of tuition practically /skyrocketed/ after it become impossible to discharge student loan debts.

Worse we've had two recent 'recession' periods and had insufficient recovery since then. It is extremely difficult for those entering the workforce to find entry-level jobs, and the competition for those seeking part time jobs means anyone going to college is automatically 'overqualified' (source, my own personal experience; over a decade ago, and I DOUBT it's gotten any better since!)

This chart shows part of the story:

https://en.wikipedia.org/wiki/College_tuition_in_the_United_...

https://en.wikipedia.org/wiki/File:InflationTuitionMedicalGe...

"... All rates are computed relative to 1978. [51]

Cost of living increased roughly 3.25-fold during this time; medical costs inflated roughly 6-fold; but college tuition and fees inflation approached 10-fold. Another way to say this is that whereas medical costs inflated at twice the rate of cost-of-living, college tuition and fees inflated at four times the rate of cost-of-living inflation. Thus, even after controlling for the effects of general inflation, 2008 college tuition and fees posed three times the burden as in 1978."

You are undoubtedly not the only one who feels this way. It's very natural.

However, in the west sometimes I think we forget how lucky we are, and that the rest of the world often pays for our bad decisions and with much more than money.

I would rather pay their student loans and be grateful for what I have as a white western person, which puts me on a privilege level well above a large proportion of humanity.[1]

I am _not_ trying to preach, just giving you some food for thought.

[1] And this is why here in Canada, I am pleased to pay for other people's healthcare too.

I am very aware of my privilege. In fact, that's why I donate at least 10% of my income to charities operating in the developing world.

That's actually part of why loan forgiveness galls me so much. It's offering a subsidy to people who are actually some of the most privileged people in the world. College-educated Americans are hardly an underprivileged group.

There's also a choice aspect of this. Going into huge debt for college is a decision, as opposed to being born into an underdeveloped nation or falling victim to illness. [0]

Points taken above.

I'll just point out that the focus on fairness is a strong human trait, and IMHO it is a trait that we over-express. Often our notion of fairness is very biased as well.

We are most likely to recognize situations that are unfair against us, but easily gloss over all the unfair advantages we may have.

An anecdote: One time I was complaining to my grandmother that something wasn't fair, what did I do to deserve this... etc.[1]

And she said: "Don't say that. If we got just a fraction of what we had coming to us for our sins, we'd be in big trouble!"

If we insist that things should be fair, let's be very careful about what we wish for.

[1] She was the most upstanding, hardworking honest person I have ever met, and a whole community agrees with me. And even though her point was made from within a religious framework, I think it is very applicable. She died almost 20 years ago, and she would have been 100 years old today. She is greatly missed. I also realize it's a bit of an imposition to mention this in your thread. I just wanted to insert a reference to a remarkable individual on this anniversary. Her name is Thérèse Pilon.

I think I've been appropriately rewarded and punished for my decisions in life.

I'll probably never even _know_ the totality of my good fortune, like the portion of an iceberg that lies under water it's invisible to me.

I'm not trying to persuade exactly... I just feel that this may be true for many of us.

Anyway, thanks for listening.

You don't think all Americans pay for everyone's healthcare?

http://i.imgur.com/yU9b1Ta.png

These things really, really shouldn't happen in the first place, but when they do, the systemic effects should be prioritized over individual gains.

Only downside would be more economic activity because well educated people can spend more of their money on things....oh wait, that isn't a downside.

Should each of us support the status quo, because we don't to give up our little piece? Are we in a Nash equilibrium?

You might be the one who made a bad financial decision. A loan might have made you richer in the long run. ;-)

Even though I worked hard to pay back everything with interest, I still wouldn't wish the experience on anybody. I don't understand how funding other people's education is somehow a "punishment" to me.

We should absolutely stop subsidizing this craziness though.

Get a degree in something useful (ex. CS) instead of political science or musical theater.

It's a tricky problem. To both provide consequences and support the weak amoung us.

Moral hazard and consequences are exactly why smoking is one of the few things which are allowed to affect premiums under ACA.

Bad financial decisions that they made at age 18 with heavy pressure from everyone around them?

I got bigger fish to fry.

you've got a serious lack of perspective if that's what you think this is

If what you are implying is that the eventual result of non-forgiveness is access to education only for the wealthy, I would disagree - there are other options, none of which are perfect that I'm aware. That said, I'm trying to figure out what reasoned argument you might be making with this statement which might be an exercise in futility.

The simple truth is that the world isn't a fair place and doing the right thing is not the same thing as doing the fair thing. Fair is "everybody gets treated equally". That just isn't how things work in the real world. Right is "to the best of our ability, we try to help people get what they need." That's something we can really aspire to. Doing the right thing.

How is that fair?

Yes, this is called living in a society.

Instead, remove the standard of requiring certain levels of education. Perhaps require industry-specific credentials that can be earned through exam or internship for most jobs. College should be about personal exploration over career preparation—at least in the bachelors level.

Students can complete credentials as part of their final semester Senior curriculum or on their own time.

You're not being punished, in any sense of the word.

You would be paying regardless of your own decisions. You are not being punished, you are being forced to contribute. If that's the way your fellow citizens vote, that is how it will be (though I doubt it will happen soon).

Right. That's why I said I was being punished for choosing to avoid loans. It's what makes loan forgiveness such a moral hazard: we discourage people for making the financially prudent decision to avoid crippling debt.

If I had instead borrowed money to finance my education, I could have gotten it forgiven and avoided this punishment.

You can say it's "unfair," or "undeserved," or like you say below, that it "discourages people from making a financially prudent decision". But no one wants to "punish" you -- that would be absurd.

I started college in 2006, and graduated in 2012. Why did it take me so long? Partially because I switched majors to one that would yield a stronger career (read: tech), and partially because I worked my backside off for years, including a full year away on an engineering internship. I worked 20+ hours each week during school doing remote engineering so I could graduate without debt. I regret working so much. Some of my grades suffered because I was oversubscribed, and the work time meant I didn't have much of a social life. I applied for every merit scholarship for which I was eligible, and 33% of my college expense ended up being paid for by one I was fortunate to be granted. The paid-for months were the best.

So I agree with the question: Why should other kids have it easy when I busted my ass? My answer is nuanced. Kids who coasted through school on piles of debt while enjoying the ample time it afforded should not get away scot-free. Nevertheless, it is in society's best interest to help them out. Like it or not, we live in a capitalist and consumer-driven society. Debt is holding people back, as the WSJ article described. We all benefit when people can get out from under their debt and contribute, and we also all benefit when everyone is educated (even if it costs each of us something).

Society has a right to expect something in return, however. My college scholarship was from the federal government, and it came with a service requirement. It was a fair deal. They paid part of my way, and I owed them part of my time. I worked in a job I picked that was relevant to their interests, and contributed to their cause, while starting my career. Both sides won.

My ideal solution would allow citizens to dispel student loans through public service. Unlike making student debt eligible for bankruptcy, public service wouldn't be punitive. The deal would be that you have give back to society if you want society to have your back. We should bring back the Civilian Conservation Corps, and the Works Projects Administration. We have crumbling infrastructure? No problem: put graduates to work fixing it. They can earn minimal wages while getting student loans reduced for each month worked. They'll dispel their loans, have a job (an issue for many), learn practical life skills, and we'll all benefit from public works that make the country stronger. We can have shining bridges, beautiful parks, and an educated citizenry with the agency to move forward and pursue their higher ambitions. Some countries have mandatory military service. Is asking for a few years of service so much for those who want to dispel their loans?

We actually already have public service loan forgiveness programs. I think they're great and would support expanding them to additional fields.

There needs to be negative pressure applied to the price of education.