The most important paragraph I’ve read all week
Exit of College Lenders Sets Off Scramble To Fill Breach
Most lenders rely on the securitization of debt to generate enough cash to issue student loans. This process turns ordinary loans into securities, just like stocks, so they can be bought and traded on the debt markets. But lenders have been unable to securitize any loan made after Oct. 1, when a cut in federal subsidies to lenders went into effect. A few weeks later, the credit crunch that began among troubled mortgage securities started to ripple across the student loan industry. Both developments dried up investor appetite for student loans.
I’m surprised the level of inflation is not higher than it is, given just how much credit and debt there is rolling around in the economy. Seems like everyone is stretching themselves too thin, like not enough butter on too much toast, to paraphrase Tolkien. All this debt permeating the economy is a real problem, but what is the remedy? Letting large companies and even entire sectors of the economy fail (just try to get a subprime loan these days, it’s impossible) seems distasteful, but wouldn’t it be worse to bail them out? At that point you’re just throwing money at buggy manufacturers when Henry Ford is firing up the assembly line. Let them fail and free up those resources for the rest of the economy.
At least, that’s my inclination. Lots of people that seem to know more about this stuff than me keep telling me that many of these companies can’t fail, because they’re all intertwined with each other, so if one goes down it’s like a big house of cards. And it’s all fine and good to lose the sub-prime mortgage lenders, but if all of the lenders go down then we have some serious issues with liquidity in the economy.
April 14th, 2008 at 1:41 pm
Been thinking about this myself. I think you want to help people who can pay for a house stay in a house—if they can afford their house with a 30-year, fixed-APR, government-secured loan, let’s help them stay in their house. There is a social good to keeping those folks in their homes. But as for speculators and people who were clearly trying to live well above their means, well … sorry.
Now, as for the companies who over-extended, the issue is, as you note, far thornier. But we made it through the S&L crisis, y’know? The cure for market liquidity is going to be artificially low interest rates, which was part of the problem in the first place. [The far, far larger issue was that the securitization of mortgages as re-packaged financial instruments made the process of making a loan offer into a commission game, which meant that the people out in the field making the loan offers to folks had a significant benefit to fudging the numbers to make their commission.] Also, this will certainly drive inflation and other nasty things, but I’m afraid of financial system failure being a worse ill than all that, y’know?