Student loan debt and the housing market

My wife and I have been watching Parenthood, and we found ourselves in total agreement with Adam Braverman’s insistence that his daughter not take out student loans in order to finance a Cornell undergrad degree. Thanks to recent changes in bankruptcy laws that make it practically impossible to default on student loans, it would be insane to finance an undergraduate education this way — a professional or trade school degree might be another matter, but only just barely.

At any rate, in that light I read with interest the following part of a Yves Smith post on problems in the mortgage market:

Finally, the 30 year mortgage does not fit with job tenures that now (per a Yankelovich survey commissioned by McKinsey in the mid 2000s) of under 3 years. The traditional mortgage assumes that the borrower has a rising, or at least stable, income over his working years. We now have shorter jobs and longer periods of unemployment, which sap savings and make defaults more likely. And that’s before you factor in that the mortgage was normally a household’s top priority payment, but the inability to discharge student debt in bankruptcy effectively makes it “senior” to mortgage payments. All this suggests that it may be necessary to go against the pet wishes of the mortgage industrial complex and implement housing policies that do more to promote rentals. [emphasis added]

The idea that people may be defaulting on mortgage debt in favor of student loan debt makes a lot of sense, and it’s yet another reason why we need to radically overhaul the student loan industry.

World power swings back to America – Telegraph

World power swings back to America – Telegraph:

The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.


Forget the top 1% — Look at the top 0.1%

Forget the top 1% — Look at the top 0.1%:

click for larger chart

(Via The Big Picture)

Fighting the Last Monetary War

Fighting the Last Monetary War:

William Jennings Bryan. 1 negative: glass ; 8×...

Image via Wikipedia

by Tim Lee

In 1896, Williams Jennings Bryan captured the Democratic nomination for the presidency with a rousing speech that ended with a theatrical challenge to advocates of the gold standard: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

The United States had adopted a gold standard 20 years earlier, and the supply of gold had not been keeping pace with the rate of economic growth. The result was deflation at an annual rate of 1.7 percent a year. This was particularly hard on farmers, many of whom had mortgages that got harder to pay off as dollars appreciated.

Bryan was calling for a return to the bimetallic monetary standard that had prevailed before the Civil War…

I just finished reading Money Mischief, a collection of essays by Milton Friedman published in the early 1990s. One of the striking things about Money Mischief is how much more attention it devotes to the dangers of too much inflation than too little. Friedman famously blamed the Federal Reserve’s deflationary policies for the Great Depression, so he was certainly cognizant of dangers of deflation. But his analysis of the Great Depression gets only passing mention in Money Mischief. The phrase “liquidity trap” does not appear in the book’s index, and there’s no discussion of what a central bank should do in a situation like today when conventional monetary easing fails to spark a robust recovery.

Friedman’s focus on inflation made sense in 1991, because inflation was still relatively high and there was a real danger that the Federal Reserve would relapse into excessive money printing. Yet the Federal Reserve has been steadily reducing inflation over the last year. Still, there’s a significant faction on the Fed, and among conservative politicians more broadly, that continues to worry about the dangers of inflation despite the nation’s high unemployment rate.

Indeed, there’s evidence that Friedman himself would be with the inflation doves if he were alive today. In 2000, Friedman argued that the Bank of Japan, which had already pushed nominal interest rates down to zero, should buy long-term government securities to further expand the money supply—a policy strikingly similar to the QE2 policy that inflation hawks have warned will spark inflation…

Monetary policymakers have a tendency to fight the last war, making mistakes opposite to the ones made by their predecessors a few decades earlier. In the 1970s, a Federal Reserve terrified of another Great Depression gave us a decade of stagflation. Is today’s Fed, terrified of stagflation, giving us an unnecessarily long and severe recession?

(Via Disruptive Economics)