They are just loans. Right? No way! The two government programs that have done the most economic damage to the USA are the Student Loan program and the the government backed home loan programs. You may ask how two such "good" programs could do damage to the USA economy. That is my job to show the facts and then tell me if you agree or not. Some of this may be a repeat because I have blogged on some of this before.
First, let's take the government involvement in home loans. Home ownership was almost 50% during the Great Depression of the 1930's. During the 1930's families "doubled up" much like they are starting to do again today. The "doubling up" actually increased the rate of home ownership. No one liked the idea of having to live with their parents, even when married. When having kids, it was an advantage to be living with ones parents. After WWII, we were in a very special period. The USA was the only economic power standing and we could sell anything that we made, no matter the price or the quality. We were riding high. Some how we got the idea that we were "rich" and would continue to be "rich". Like most successes, everyone wants to claim that they were responsible for that success. The facts are that it was an accident of history that the USA ended up on top after WWII. I will ask again, was the period from 1930 to 1940 normal or was the period from 1950 to 1960 normal? We have been spending like 1950 to 1960 was normal. What do you think?
After WWII due to the "doubling up" that occurred from 1930 to 1945, there was a boom in new housing. Every thing seemed to work OK, because we had all the money after WWII during the period from 1945 to 1960. Most people concluded that our government did the right thing when they tried to "increase" home ownership from +/- 45% to +/- 70%. There is no free lunch, but we tried to do it any way. We pumped tax money and the "credit" of the USA to back these home loans. If a little was good, more was better. That is how it worked. Our government did not have to spend much because we were using our "credit", not our cash. It is like co-signing a car loan for one of your kids. It does not hurt to sign and everyone wins. That is true until the "worm turns". Do you know anyone who has had second thoughts about co-signing for someone? Most of us do and that is exactly what our government did for home loans. It was not the fault of the banks. The banks were making loans just like our government wanted since the government was co-signing 90% of those loans. If our government was not co-signing those loans, the banks would never have made them. I ask banker friends of mine if they would have made those loans with "bank" money and all say "no". If you can't follow this, vote for Obama and he will keep the music going. Bottom line, the home loan problem was the result of our government co-signing those home loans thru all kinds of alphabet soup agencies.
Now student loans. It is exactly the same as home loans. The banks are the ones who make the student loans, just like they do for home loans. The banks would "not" make the student loans if our government did not co-sign the notes. Why do you think that banks would not make the student loans without the government co-signing? If our government is involved, we would want them to be "fair". What does that mean? It means that no one should be turned down and that they student can use the borrowed money for anything. That means they can use it to go on spring break in Mexico or Skiing in the Rockies. Even though we have a shortage of engineers and doctors, to be "fair" our government allows students to use the money for any major they want. Many of the college majors have zero chances of ever earning enough to pay the money back, but to be "fair" these can not be exempted. We also have a lot of kids who did not take the right or harder classes in high school, but they can take these same classes in college at several times the cost of taking those same classes in high school. Most colleges want to grow and have more teachers so they need more students and welcome unqualified students and with the student loans money. This has caused the tuition to go up faster than oil or most anything else. The qualified students who use their own money have to pay much more for college than if there was no student loan program. The bottom line is that when someone else is co-signing your loans there is a lot less concern about making good use of that borrowed money. Now when the student wakes up and realized that the money has to be paid back, they feel they are "victims". They want to get out of paying back the loans. Student loans can be the worst type of investment because with it comes time to pay the piper, there is nothing to foreclose on. It is not like a car that can be repossessed or a house that can be foreclosed on. Even if the asset is not worth the amount of the loan, at least it is worth some thing. In the case of many college degrees, they can be worth zero.
It is the old "free lunch" thing or birthday money. When you are spending someone elses money, it is like no one is watching the piggy bank. You know what I mean and that is what has been happening with both the home loan and student loan co-signing policy of our government. You let it happen and now it is time to pay the piper.
