In my morning rounds though the headlines I came across a blog entry from Mark Cuban comparing the impending student loan debt crisis to the mortgage crisis. I agree with his piece. I argued on the same grounds in a similar piece on my blog. Here is my piece as it appeared in Sept. 2011:
September 29, 2011
The next great American bubble is as American an institution as, well bubbles. Our economy follows a boom and bust cycle that American’s have grown familiar with. We’ve had the sub-prime mortgage bubble preceded by the tech bubble which was itself preceded by S&L, all within the span of my small shred of existence. The next American bubble to burst will be the higher education bubble. It has been building since 1980 and has now replicated many of the conditions of the recent sub-prime bubble. Allow me to make my case.
Besides predatory lending practices what fueled the sub-prime mortgage bubble? The American Dream of home ownership. The message we send to every man woman and child in this country is that their ultimate end is to own a home. That platitude drove the housing boom. In trying to attain the American Dream more and more people took on debt in buying a home. As more and more money enters the market you see more money competing for fewer assets which causes both good and bad assets to appreciate at a rate disproportional to value. Now a bubble has been formed. The financial sector was well aware that this was very risky debt and expertly packaged it and moved it off their balance sheets and out of our consciousness.
The same players have been at work in the higher education bubble. It is our American dream and those who finance it who are to blame for this bubble. Maybe as universal as our indoctrination toward home ownership is our indoctrination to attend college. While a college degree still secures a better rate of employment and income for the individual we are dangerously in debt financing college education collectively as tuition costs have inflated 440% since 1980. Student loan debt now represents a larger segment of debt that credit card debt approaching the trillion dollar mark with no end to rising costs in sight. This is the prime conditions for a bubble: more money has entered this market, and with all resources being finite, there is more competition for the same asset causing it to appreciate at a rate disproportional to value. This is not a sustainable model. Similarly to the sub-prime bubble we see a larger share of debt families are taking on devoted to an asset who’s value is stagnating. Driving demand is an outdated platitude peddled by the same financial wizards who financed our last bubble. What they are really selling is the economic subjugation of all who buy into a broken system.
Value of a college degree has not been able to keep pace cost inflation and has indirectly compromised the integrity of our colleges and universities. How has this happened you ask? Simple, when real value of an asset is not increasing one must increase perceived value to keep demand high. This is exactly what our colleges and universities have done as they now function as youth camps more than rigorous scholarly institutions. Rather than improving the quality of education money is spent on multi-million dollar recreational facilities, dormitories that resemble what they call here in L.A. luxury resort style apartments, and big money football. All this while aptitude tests are showing that the quality of education has degenerated to the point there is little difference in the aptitude of someone with a Bachelors degree and a high school degree. Students report spending less time studying, are reading far less and grades are somehow going up. It is because college has become a luxury good and they are giving us what we pay for in an attempt to make us feel as if we have gotten some value from the exorbitant fees incurred. Four years of structured entertainment, good marks, a substance abuse problem, and loads of debt to make a subservient working class are our spoils.
It seems to me we are being swindled with bread and circus and by false promises. It worked to distract Romans as their empire was collapsing around them and it is working on us now. In all honesty it may be too late to counter the damage that has been done. A high percentage of our unemployed are educated and bound to begin defaulting on their student loans if things don’t change very quickly. This will begin the same chain of selling off over-valued securities that we witnessed in the sub-prime mortgage bubble, only this time the grift will be on the backs of our youth at a time when we are depending on our youth to provide the tax base to support an aging population. The reality that selling and financing the American Dream is a ponzi scheme will hopefully wake us up before it is too late.