Transcript College Loans and Housing Bubbles: What Have

College and Housing Bubbles:
Have we learned from our mistakes?
Antony Davies
copies of this presentation can be found at
www.antonydavies.org
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How the Mortgage Market Works
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Safe Borrowers
Safe Mortgage
Commercial Banks
Risky Mortgage
Risky Borrowers
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Safe Borrowers
Safe Mortgage
Commercial Banks
Risky Mortgage
Risky Borrowers
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Moody’s
Standard & Poors
Safe Mortgage
Investment Banks
(Lehmann Brothers)
Hedge Funds
Commercial Banks
Mortgage Backed
Security
Risky Mortgage
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Investment Banks
(Lehmann Brothers)
Hedge Funds
Reinsurance Companies
(AIG)
Pension Funds
Other Large Savers
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Commercial Banks
Mortgage Backed
Security
Investment Banks
(Lehmann Brothers)
Hedge Funds
Reinsurance Companies
(AIG)
Pension Funds
Other Large Savers
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Commercial Banks
Safe Borrowers
Safe Mortgage
Commercial Banks
Risky Mortgage
Risky Borrowers
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Safe Borrowers
Safe Mortgage
Commercial Banks
Mortgage Backed
Security
Risky Mortgage
Risky Borrowers
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End result
1. People with savings loan to people
who buy houses.
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Safe Borrowers
Mortgage Backed
Security
Mortgage Backed
Security
Mortgage Backed
Security
Mortgage Backed
Security
Safe Mortgage
Safe Mortgage
Risky Mortgage
Risky Mortgage
Reinsurance Companies
(AIG)
Pension Funds
Other Large Savers
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Risky Borrowers
End result
2. People who borrowed make payments.
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Safe Borrowers
Mortgage Backed
Security
Mortgage Backed
Security
Mortgage Backed
Security
Mortgage Backed
Security
Reinsurance Companies
(AIG)
Pension Funds
Other Large Savers
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Risky Borrowers
What happens when there Is too
much risk?
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Safe Borrowers
!
Safe Mortgage
Safe Mortgage
Risky Borrowers
Risky Mortgage
Risky Mortgage
Risky Mortgage
Risky Mortgage
Reinsurance Companies
(AIG)
Pension Funds
Risky Borrowers
Other Large Savers
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How did government short-circuit
the process?
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Two government players enter the game.
Lowers interest rates making
borrowing less expensive.
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Buy mortgages with
little regard for risk.
Fed lowers interest rates  more people seek loans
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F & F absolve banks of risk  more risky people seek loans
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What does this do to mortgage
markets?
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Federal Reserve: Low Interest Rates
Loans
Risk
Many
High
Few
Low
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Fannie and Freddie: Absolve Banks of Risk
Loans
Risk
Many
High
Few
Low
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What does this do to housing prices?
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What did this do to housing prices?
Price
Old price
Old
demand
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What did this do to housing prices?
Price
Bubble price
Old price
Bubble
demand
Old
demand
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What does this do to housing units?
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What did this do to housing units?
Price
Old
demand
Old
quantity
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What did this do to housing units?
Price
Bubble
demand
Old
demand
Old
quantity
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New
quantity
When does the bubble burst?
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When does the bubble burst?
Price
Bubble price
Bubble
demand
Old
demand
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When does the bubble burst?
Price
Bubble price
Bubble
demand
Crash
demand
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When does the bubble burst?
Price
Crash
supply
Bubble price
Crash
price
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Bubble
demand
Crash
demand
What happened?
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Simple answer
Government broke the link between risk and return...
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Detailed answer
• Fannie Mae and Freddie Mac: taxpayers bear risk, but banks
keep profit.
• Community Reinvestment Act (1977-1995): banks must provide
loans to low-income and minority borrowers.
• Riegle-Neal Act (1994): regulatory approval of interstate bank
mergers tied to Community Reinvestment Act ratings.
• HUD (1996): more than 40% of FM and FM loans must go to
low-income borrowers.
• Taxpayer Relief Act (1997): exempts profits tax on home sales
up to $500,000.
• Federal Reserve (2000 to present): holds interest rates low.
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What does this have to do with
college loans?
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Simple answer
Government breaking the link between risk and
return...
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Detailed answer
• Stafford and Perkins loans: taxpayers subsidize loans.
• Taxpayer Relief Act (1997): tax credit for college debt.
• Affordable Care Act (2008): DoE loans directly to students.
• Loan Forgiveness Program (2014): forgive some federal student
loans.
• Community College Act (proposed 2015): taxpayers pay for
students to attend community college.
• Debt Forgiveness Act (proposed 2015): student loan debt be
dischargeable in bankruptcy.
• Federal Reserve (2000 to present): holds interest rates low.
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What are the consequences?
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More college borrowing and risk.
Loans
Risk
Many
High
Few
Low
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What do “high risk” student loan
borrowers look like?
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• Students who do not have the skills to
succeed in college.
• Students who major in fields that have little
earning power.
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Current policies increase tuition costs.
Price
Bubble price
Old price
Bubble
demand
Old
demand
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Bubble bursts when students can’t get
jobs.
Price
Bubble price
Crash
price
Bubble
demand
Old
demand
Crash
quantity
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Bubble
quantity
What happens when the bubble
bursts?
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• Taxpayers get stuck with up to $1 trillion in
debt (as of today).
• Millions of low-skilled students wasted four
years.
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• College presidents decried as “greedy” profitseekers.
• Many small colleges go bankrupt.
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• Call for more government oversight of
colleges and college loan markets.
• Call for nationalizing universities (Affordable
College Act)
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Have we learned from our mistakes?
Stock market bubble (1990s)
Housing bubble (2000s)
College bubble (2010s)
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College and Housing Bubbles:
Have we learned from our mistakes?
Antony Davies
copies of this presentation can be found at
www.antonydavies.org
www.antonydavies.org