Thursday, March 23, 2017

Next Financial Bubble?

Few of us seem to remember the last big financial bubble that popped in 2007-2008.  Americans are buying big trucks, big houses and spending borrowed money like there's no tomorrow.

So what could be the next big bubble pop that sends our finances careening down the hill?

How about student loans?  Could that do it?

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.

The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.

The idea caught on, and pretty soon, everyone was doing it.

As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.

Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them.

FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.

But it didn’t take very long for the madness to start again.

By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.

Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.

It was madness.

By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.

And of course, we know what happened the next year: the entire financial system came crashing down.

Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea.

By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.

In fact, delinquency rates for ALL mortgages across the country peaked at 11.5% in 2010, which only extended the crisis.

But hey, at least that’s never going to happen again.

Except… I was looking at some data the other day in a slightly different market: student loans.

Over the last decade or so, there’s been an absolute explosion in student loans, growing from $260 billion in 2004 to $1.31 trillion last year.

So, the total value of student loans in America today is LARGER than the total value of subprime loans at the peak of the financial bubble.

And just like the subprime mortgages, many student loans are in default.

According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost the same as the peak mortgage default rate in 2010.

This is particularly interesting because student loans essentially have no collateral.

Lenders make loans to students… but it’s not like the students have to pony up their iPhones as security.

That’s what made the subprime debacle so dangerous.

Millions of homes were underwater, so when borrowers didn’t pay, lenders didn’t have sufficient collateral to cover their loan exposure.

With student loans, there is no collateral. Lenders have no security to recoup their loans.

So when students don’t pay, someone is going to take a hit.

That ‘someone’ will likely be you.

That’s because hundreds of billions of dollars of these student loans are either owned or guaranteed by the United States government.

So as borrowers stop making payments, it’s the taxpayer who will suffer yet another massive loss.


A few weeks ago we saw an article that said 1/3 of college students were using STUDENT LOANS to take spring break trips!  Why not??  If the government is stupid enough to give kids $1000 to go get drunk in Mexico....what 20 year old kid is going to say no?

Of course WE HOPE this obvious bubble doesn't pop and lead us into the next financial disaster....but we kind of all know in our hearts that one day it will.  It might be next week, next month or next year. It might pop and not be as damaging as we thought!  Who knows?!

But followers of Christ should start to understand that this current financial system is not going to go on forever.  We should all be able to look at the world and understand that we can ONLY LAY UP TREASURE IN HEAVEN while we are on earth!

Once we are in heaven...we can no longer lay up treasure in heaven.


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