[apatters]

Sure, the most relatable problem is that a lot of college grads have debts they can't pay off.

That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem.

The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had been made to credit-unworthy home buyers. When these buyers started defaulting due to a weak economy, the MBS became worthless and financial institutions started going belly up.

So with that said, here are a few facts:

- There's about $1.6T of outstanding student loan debt today, and it's growing.

- Many of the borrowers who took out these loans are demonstrably credit-unworthy, as the .gov link demonstrates, they are already defaulting in growing numbers.

- Sure enough there's a thing called SLABS out on the market (Student Loan Asset Backed Securities). Very similar to a MBS but the collateral is student loans.

I don't know how widely SLABS are spread throughout the financial system at this point.

There are also differences vs 2008, biggest one is that most of the student loan debt is government guaranteed.

That last point gets used to promote SLABS but it seems to me that it just makes their value leveraged to political winds. Here is an example scenario: economy softens, leading many holders of student loan debt to vote for Bernie Sanders because he promises to forgive their debt. He gets elected and follows through on his promise. SLABS all over the system become worthless, banks end up much poorer than they thought they were, and the death spiral begins again.

I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites. But there is certainly cause for attention and concern.

Further reading:

https://www.investopedia.com/articles/investing/081815/stude...

https://www.natlawreview.com/article/rmbs-to-slabs-history-r...

[eli_gottlieb]

Right, so the difference here is that you can be foreclosed on, and the bank takes your house. You can even go bankrupt when you lose your house.

But you can't get out of student loan debt via bankruptcy, nor lose the education. I figure the banks figure they're going to be fine, because rather than the SLABS market collapsing, it'll just suffer a correction: the enforced debt peonage of making payments all one's life will ensure those "securities" represent (forcibly and fraudulently extracted) income streams.

[apatters]

Except that all of those angry debtors can vote, and elect representatives who change the applicable laws. So one way things are different this time around is that government action could precipitate events in unpredictable ways.

Remember Bernie is talking about straight up forgiveness: the debt just disappears. He probably won't be the next President but student loan reform (including existing loans) is a hot topic for many candidates.

[sokoloff]

Any forgiveness is likely to be executed by the forgiving entity paying off the loans.

The federal government is not going to use a pen to steal trillions of dollars from lenders holding contracts for repayment. That’s a banana republic action.

[vonmoltke]

The federal government is the one holding all that debt, so that is exactly what is going to happen.

[sokoloff]

There is a high 8/low 9 digit inventory of private student loans, not held federally.

[apatters]

If we're being cynical, I think they would forgive the debt and bail out any large financial institutions who are damaged by the act of doing so. It would be very in character.

[helen___keller]

> Remember Bernie is talking about straight up forgiveness: the debt just disappears.

I don't think this would harm the financial system. Debt held by the govt disappears, privately held debt is purchased by the federal government and then disappears.

I don't know the structure of student loan backed debt but this sounds the opposite of the cataclysmic: the government is guaranteeing they will "print" all the money needed to cover debt owed to 3rd parties, which should mean banks will do better than ever.

I'd be more concerned of cataclysmic outcomes if we changed laws in a way that fundamentally shift the risk profile of student debt as held by 3rd parties

> He probably won't be the next President

He IS a top polling primary candidate, but more to the point I don't think even a democratic Congress would pass a lot of his policy

[neuronic]

> I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites.

Honestly, thank you so much for adding this bit to your post.

It's incredible how everything is just treated as if you could handle it in 140 characters or whatever the Twitter character increase has been.

[apatters]

Also to supply some context for those numbers (this is probably way too simple and wrong in some way though)

The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages.

The size of the US economy today is around $25T. So student loans are around 6.4% of the economy at present (and growing) and that money may mostly not exist either, because we know these borrowers are having real problems paying and the economy isn't even doing all that poorly at the moment.

Food for thought.

[avalys]

You’re not comparing equivalent quantities. GDP is an annual figure (Gross Domestic Product), and you are comparing it to total outstanding debts that are paid off over decades.

Total asset value of the US economy is about $270T with about $150T in outstanding debt. So the relative proportions are not as extreme as you’re representing.

[apatters]

I knew there would be some sort of issue with that comparison, thanks!

[the-dude]

If the value disappears overnight, wouldn't it be fair to compare it to the yearly figures?

[ssivark]

If it disappears "overnight", then would the right comparison be to daily GDP? which would increase the computed percentages by a factor of 365.

Clearly it is not sensible to compare two quantities with different dimensions of $ and $/time. It is like comparing distance (miles) to speed (miles/hr). Changing units to (meters/sec) doesn't change the absurdity in any way.

[the-dude]

I run a business. If I had to 'write off' some asset today because it has proved to be worthless, it will affect the yearly report.