How many of these financial bubbles can there be? I remember a brief mention of a student loan bubble in an episode of PBS’ “Frontline” that stuck in the back of my mind after seeing it. The bubble wasn’t the focus of the episode but it seemed like something that should have been getting more attention. Looks like it is gaining some more press as indicated by this article and interview with Professor Robert Reich. Then I saw another article posted the same day just a few hours later that argues there is no crisis and we should pretty much just ignore it. So I read this thinking it might put this issue to rest in my mind and there will likely be no bubble popping.
It failed miserably.
In fact, the article arguing against the idea of a bubble seems to only reinforce its inevitable arrival. The only statements contained in this piece to say this crisis isn’t coming is a few experts informing us they don’t believe it will happen. They back this up with virtually zero information or statistics to support their case. So we just have to take their word for it that it won’t happen. Sounds great. I’m sure no expert said the housing and derivative bubbles would never come despite the writing on the wall and that worked out perfect because they never came…oh, wait. We got hit with both of those if memory serves.
That being said, let’s look at some of the info given that should calm our fears of this potential crisis. The first is student loan debt has nearly doubled in the past five years from $600 billion to over $1 trillion. As stated, this total “exceed(s) the amount of credit card debt and auto loans.” The rationale for the increase is that more people are out of work and are going back to school to change careers and the bubble will not burst because most of these new graduates will get jobs allowing them to pay off the debt. Sounds reasonable. Except for one factor.
What happens if the job market doesn’t recover to whatever point they are assuming it to hit? They have to be guessing the unemployment rate is going to continue its recent decrease into the near future. But what happens if it levels off or begins to rise? What then with the student loan debt? We’ve been down this road before. We were informed by experts housing prices would never fall and the bubble would never burst. Are we going to fall for this again?
Another factor this article mentions but doesn’t delve into is this debt slowing the process of new grads purchasing homes and cars and other consumer goods because of the chuck of money taken out of their checks by student loans. Think about the effect of that on the economy. It potentially slows any recovery process even more since this money is going to already wealthy financial institutions instead of being spread around to other areas of the economy. This slower recovery means less job growth. Which then leads to more loan defaults. Which then gets us to another bursting bubble.
Some experts are telling us not to worry. Again. Well, Professor Robert Reich is an expert as well and he says to worry. Judging from this glance at the numbers, I have to lean toward him being right.