Friday, July 06, 2012

Debt Problems

Looking at a few blurbs on balance sheet recessions (Mike Konczal has a lit rundown).  I think the economics is fine, but the focus is really on one major part: the housing bubble.  That is certainly the big problem, and the debt overhang from the bubble deflation is huge, but I think that student loan debt needs to be inserted into this as a complimentary problem for two reasons:

1. Housing debt and student loan debt land on two somewhat overlapping segments of society that do massive amounts of purchasing relative to their income/wealth. Basically young(er) people getting started, but at slightly different stages.

2. Lots of people used home equity to pay off student loans.  This was seen as a good thing (and really, it probably was).

In the years from ~2000 - 2007 one of the "smartest" things a new college grad with loads of debt and a shiny new job could do was buy a house, wait a year or so (maybe make some improvements) then pull out the equity through a refi and use it to pay off student loans/the car/credit cards.  Suddenly you are left with one bill, much smaller than the combined others, and the interest is all tax deductible.  Huge win.  Even if the house value falls, this is a pretty good deal.

Imagine a world where we didn't end up in massive debt to go to college...say 30 years ago.  Those college grads who used equity to pay off their loans would now have less total debt and would be less likely to be underwater which also makes them less likely to, say, walk away (which, in any non-recourse state is also the smart move).

College grads today could either afford to move out on their own, getting an apartment and furnishing it, or would at least have more money to spend on fun/car/clothes/whatever.

The easy fix would be for the fed to use its magical "make money" power to obliterate student loans and give say $25k to any homeowner. A better fix would be for the fed to buy up all that debt and incentivize both paying it off and spending.  This could be through the debit card plan I proposed for student loans earlier but other means could work as well. 

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