Looking for the next government induced debt bubble to explode?  Look no further than the student loan market for the next colossal bailout to hit our government mandated banking cartel.  Student loan debt now exceeds the amount for credit cards in this country with far fewer people responsible for paying the outstanding bills meaning that the amounts owed by individuals are far higher on this type of obligation.    

There is over $830 billion in outstanding federal and private student loan debt.  60 percent of that is in default or deferment.  The risk for student loans is assessed by the government by using the cohort default rate.  It measures the rate of default in the first two years of repayment.  After two years lapses in payment are not tracked by the Department of Education for institutional financial aid eligibility.  Government loans do not require credit checks for a student’s ability to repay the loans.  This mimics the poor rating activity for mortgage backed securities in the run-up to the explosion of the housing bubble.

Loan amounts increase as federal subsidies drive up the demand for college education raising tuition for all students.  Total student loan debt is expected to rise by $90 billion this year.  When the bubble bursts and the loans go into default the American taxpayer will be forced to bail out the banks since nearly all of the debts are backed up by he Federal government. Once again Citigroup, BankAmerica, JP Morgan-Chase, and Wells Fargo will be slopping at the trough while the people that they steal from will have no recourse in the judicial system.

Sallie-Mae (Student Loan Marketing Association) was created in 1972 as a GSE.  It began to privatize its operations in 1997 with the process ending in 2004 (with Congress terminating its charter) becoming SLM Corp.. SLM Corp. and Student Loan Corp., a subsidiary of Citigroup, are the two largest holders of student loans.  As with the housing market, in the last 15 years the marketplace has evolved into a securitized environment where obligations of questionable quality are lumped together and traded as asset-backed bonds in the student loan market.

Now as the economy begins to recover (excruciatingly slowly) we find that SLM’s insurance subsidiary is a member of of the Federal Home Loan Bank which agreed to lend to it at the bargain-basement rate of .23 percent effectively continuing the subsidization of these loans.  This inflates the bubble even more as wait for the coming explosion.  These are the same type of shenanigans that occurred in the housing loan market prior to its collapse.

What we know for sure is that when government interferes with markets for the benefit of consumers or producers it destabilizes the equilibrium of the marketplace and distorts the pricing mechanism.  In the end a bubble will form – later to burst when the dynamics of supply and demand finally overwhelm the subsidization of participants causing the market to crash and destroy the lives of all of those caught up in the vortex surrounding the catastrophe.

This is precisely why voluntary economics, not government intervention will stabilize markets and PREVENT the types of busts that Washington creates when it interferes in the daily economic lives of Americans.


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