A reader pointed me to an important article regarding college debt and the possibility of a debt bubble. The pattern of college debt, with a simultaneous freeing up of costs and lending to meet those costs is strapping a burden to some of our most vulnerable workers: those who have recently graduated and must find a job with zero experience and a debt hanging over their heads. This goes hand in hand with the growing market share of for-profit colleges, which offer the "enticing" combination of sky-high tuition rates, questionable results, predatory recruiting practices, and low bars for admission. It has become so bad that legislatures have begun considering limiting governmental financial aid to these institutions.
The point of this post isn't to dissuade people from going to college, but it does bring up a good topic. What do debt bubbles look like? How can they be recognized?
Nouriel Roubini is probably one of the best experts to turn to on this subject, since he predicted the '08 meltdown in 2006, and was laughed at. Except it turned out he was right, not only on the general event, but also on the minute details of what would happen. He wrote a book, Crisis Economics, which I will draw from here.
A major thesis of his is that economic crises are not "black swan" events, in direct opposition to the theory of Nassin Taleb. A black swan event is something unpredictable and game-changing. However, Roubini contends that economic crises are actually "white swan" events--wholly predictable, following a pattern, consistent over time.
1. An asset rises in value based on some solid fundamentals.
2. Occasionally it will continue to rise and overshoot the fair value of the asset, as an optimistic buyer psychology takes hold.
3. Soon the popularity of this asset will spread into neighboring assets which are, on a superficial level, similar; yet which are, in practice, of dubious quality.
4. The prices are volleyed up as these assets are traded, and foreign money is brought in to feed on the upswing. Liquidity is brought to market even as the price soars out of the reach of most incomes.
5. A mentality takes hold that this asset class is different from the others, that some new rule or development makes it follow a new paradigm which does not leave crashing as an option.
6. In the frenzy, it becomes difficult to tell the good assets from the bad, sometimes intentionally.
7. Some accident or hiccup casts a sudden sense of doubt, and just that quickly investor liquidity is pulled from the system.
8. The prices, unable to sustain themselves, collapse. First the dubious auxiliary assets drop, but because it is difficult to separate the good from the bad, the whole lot collapses.
I probably do not do it justice, but that is my brief summary of the pattern.
So, how much of this can be tracked in the education situation? The first point is definitely met. Education is hailed as not only an investment, but as enrichment. The second point possibly is met as well, as it takes 14 years on average to recoup the cost of a college education. Then again, the ability to stick out one's pinky with distinction as hir drinks tea might be an intangible investment in and of itself. So what about the third? This could be what the for-profits are: a poor imitation of the genuine article, of dubious quality yet higher cost. And 4? For the time being, there is a lot of liquidity to meet the rising prices, both in terms of ever increasing student loans and also the gusto with which students are advised to take them. 5? It has been argued that college is a worthwhile debt, that pays for itself, that is intrinsically valuable and worthwhile at any cost, that can never be taken from anyone once obtained, that is valuable even if it cannot pay the bills--and given that about 40% of the population is college-educated, it would seem the argument has caught on.
And then we hit the resistance. For the time being, it is fairly easy to tell apart the for-profits from the non-profits. The non-profits have solid reputations that can be discerned with a quick google search, while the for-profits are mostly bottom-feeders. So it could be, if the for-profits are selectively deflated at this stage, they could quietly waste away without bringing the non-profits with them.
But that doesn't deal with the problem of price among the non-profits. Many of these points stand true for them as well. It only takes a reduction in liquidity for advanced education to become suddenly unattainable. But what does a collapsing educational system look like? Does it look like an aristocracy, where only people who can pay up front or in short-term loans can attend? Does it look like a race to the bottom, where quality and price of education undertake a dual spiral downward? Does it look like a massive privatization of advanced education, where institutions are sold to investors and thereby reorganized like businesses?
Or does it just take on the more subtle, quietly devastating form that it has already started to take, where bachelor's degrees become so diluted that they do not provide an advantage, and instead just become the new baseline.
I'm not sure, but I suspect it's the latter.
I should note that, despite the anti-education slant of this post, I am actually playing fairly extreme devil's advocate here. As I am currently in my 9th year of education after graduating high school, I certainly cannot credibly claim to be a opposed to advanced education, even with its high price tag. That said, this is a serious question that must be addressed in the next several years. One way or another, a serious rethink is going to impose itself on us. The question is whether our politicians, at that time, will be forward thinking enough to make the right decisions.
Here's a link to my blog: Link