“(Federal) Student loans are the new subprime; were talking about hundreds of billions of (government) losses…”, Jim Rickards
“We felt other consumer lending such as credit cards, auto loans, and student loans (which, by the way, is the most abusive consumer lending product in America, issued to kids with no assessment of their ability to repay and they can’t be discharged in bankruptcy), were riskier and required huge scale and specialized expertise.” Mike Perry, excerpt from Statement #33, January 2, 2013
“I do agree with Mr. Pinto that 40% of FHA’s loans in 2012 were subprime; it’s an objective fact. A recent WSJ article also noted that 33% of all student loans (another government-dominated market) were originally or have become subprime as of March 31, 2012. The idea that government-guaranteed student loans, albeit unintentionally, might have caused recent American college graduates to become subprime borrowers (because the government let them borrow too much for their education and they can’t find a decent paying job in this economy) doesn’t seem possible, does it? And yet, the CFPB will have to exempt government student loans from “The Ability to Repay” rules too, because a college student’s future employment and income are highly uncertain. I believe that’s why the government doesn’t let students discharge these loans in bankruptcy; I guess they want to hold these young adults accountable for their educational and borrowing decisions? I am not sure that’s entirely right or fair, but that’s what is happening.” Mike Perry, excerpt from Statement #42, February 26, 2013
This Is The Next Sub-Prime Crisis: Jim Rickards
Interviewer: Let’s move on, let’s talk about student loans.
Jim Rickards: Sure
Interviewer: Because some new information came out showing that 1 in 7 borrowers defaulted on their federal student loans. This is for the 3 years through September 30th, 2012,
Jim Rickards: Right
Interviewer: It’s an increase over the last time they found these numbers. You call student loans the next sub-prime crisis. Substantiate that.
Jim Rickards: Student loans are the new sub-prime. In 2007, just before the crisis began, there were about $1 trillion of sub-prime, what you would call Alt A or loosely underwritten…you know…they are weak mortgages. So the combined mortgages, ah, you know low doc, no doc, no home equity, no questions asked, that was about $1 trillion. Today, we have about $1 trillion in student loans. Now I want to be clear I’m talking about the government market, there is a private market where it’s well underwritten, well guaranteed, etc., that’s sort of a slice, but the vast majority of this is poorly underwritten, there is a lot of adverse selection, these default rates are going to go up. But they’re vintages, you should expect them to go up further if they’re at 7%, expect to see that to go to 14, kind of push its way to 20. We’re talking about hundreds of billions of dollars of losses right now off budget that are going to go on budget when the government has to pick up the tab.
Interview: But, the government is on the hook,
Jim Rickards: Right.
Inteviewer: so the government can print its own money, the government always figures out a way to deal with these things, so what would be the fallout and you actually think that the student lending by the government is in some way their attempt to help prop the economy up…
Jim Rickards: Absolutely, look it’s not like there’s a smoking gun memo from the White House or the Treasury, but the fact is the Treasury is shoveling money out the door telling, you know, anyone between the age of 17 and 30, come and get it. And we all know students have a high propensity to spend if they have a little money, they’re not going to buy gold or open a brokerage account, most of them are going to buy beer…Ah, but the students, the students are like ATMs. The Treasury’s shoveling money to the students, the students are just writing checks to the schools, in many cases the Treasury will send the money directly to the school. So it’s going to you know unionized faculty, unionized administrators, you know very extravagant facilities at the universities, it’s another way of priming the pump and getting the economy going, off budget, ahh…so it’s just sort of a back door way. That’s why I say it’s the new sub-prime.
Inteviewer: Ok, I gotta go but where does it end, though, because government is on the hook, so what does it matter if the default rate increases.
Jim Rickards: Because then the budget deficit will…I mean we’ve got a shut down government right now because people can’t agree on spending priorities. This will make it worse, this will increase budget deficits, this will increase debt to GDP ratio, put us on the road to Greece.
Inteviewer: On the road to Greece, alright, well we’ll leave it there, that cliff hanger. Thanks so much Jim Rickards, it’s always a pleasure.
Jim Rickards: Thanks a lot.