But you can't get out of student loan debt via bankruptcy, nor lose the education. I figure the banks figure they're going to be fine, because rather than the SLABS market collapsing, it'll just suffer a correction: the enforced debt peonage of making payments all one's life will ensure those "securities" represent (forcibly and fraudulently extracted) income streams.
Remember Bernie is talking about straight up forgiveness: the debt just disappears. He probably won't be the next President but student loan reform (including existing loans) is a hot topic for many candidates.
The federal government is not going to use a pen to steal trillions of dollars from lenders holding contracts for repayment. That’s a banana republic action.
I don't think this would harm the financial system. Debt held by the govt disappears, privately held debt is purchased by the federal government and then disappears.
I don't know the structure of student loan backed debt but this sounds the opposite of the cataclysmic: the government is guaranteeing they will "print" all the money needed to cover debt owed to 3rd parties, which should mean banks will do better than ever.
I'd be more concerned of cataclysmic outcomes if we changed laws in a way that fundamentally shift the risk profile of student debt as held by 3rd parties
> He probably won't be the next President
He IS a top polling primary candidate, but more to the point I don't think even a democratic Congress would pass a lot of his policy
Honestly, thank you so much for adding this bit to your post.
It's incredible how everything is just treated as if you could handle it in 140 characters or whatever the Twitter character increase has been.
The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages.
The size of the US economy today is around $25T. So student loans are around 6.4% of the economy at present (and growing) and that money may mostly not exist either, because we know these borrowers are having real problems paying and the economy isn't even doing all that poorly at the moment.
Food for thought.
Total asset value of the US economy is about $270T with about $150T in outstanding debt. So the relative proportions are not as extreme as you’re representing.
Clearly it is not sensible to compare two quantities with different dimensions of $ and $/time. It is like comparing distance (miles) to speed (miles/hr). Changing units to (meters/sec) doesn't change the absurdity in any way.
That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem.
The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had been made to credit-unworthy home buyers. When these buyers started defaulting due to a weak economy, the MBS became worthless and financial institutions started going belly up.
So with that said, here are a few facts:
- There's about $1.6T of outstanding student loan debt today, and it's growing.
- Many of the borrowers who took out these loans are demonstrably credit-unworthy, as the .gov link demonstrates, they are already defaulting in growing numbers.
- Sure enough there's a thing called SLABS out on the market (Student Loan Asset Backed Securities). Very similar to a MBS but the collateral is student loans.
I don't know how widely SLABS are spread throughout the financial system at this point.
There are also differences vs 2008, biggest one is that most of the student loan debt is government guaranteed.
That last point gets used to promote SLABS but it seems to me that it just makes their value leveraged to political winds. Here is an example scenario: economy softens, leading many holders of student loan debt to vote for Bernie Sanders because he promises to forgive their debt. He gets elected and follows through on his promise. SLABS all over the system become worthless, banks end up much poorer than they thought they were, and the death spiral begins again.
I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites. But there is certainly cause for attention and concern.
Further reading:
https://www.investopedia.com/articles/investing/081815/stude...
https://www.natlawreview.com/article/rmbs-to-slabs-history-r...