Counterparties: Misspent youth

March 5, 2013

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There’s a reason why we think America’s young generation is doomed (besides the rise of the emoji, that is). The FT and the WSJ both report that the young are no longer partaking in the great American sacraments of bingeing on credit card and mortgage debt. Instead, they’re racking up record amounts of student loans.

The number of student loan borrowers and the average balance have both jumped by 70% in the last eight years, according to new data from the New York Fed; what’s more, as Pew Research also shows, student loan debt was the only major type of debt to increase during the downturn. Delinquency rates on student loans are also soaring — for all age groups.

The problem with this turn to student debt, the Center for College Affordability and Productivity reports, is that there simply aren’t enough good jobs. Specifically, there are roughly 28 million jobs requiring a college degree in America, but some 41 million employed college graduates in the workforce. This is partly why the NYT recently said “the college degree is becoming the new high school diploma.”

Investors are snatching up securities backed by student loans, and SecondMarket will soon let issuers sell securitized loans directly to investors. But does this mean there’s a student loan bubble? Not quite, says Lisa Pollack. She points to a few aspects of the market which might make it prone to overheating: debt-to-income ratios for new college graduates are too high, lenders could rush into the student loan market knowing that student loans can’t be discharged in bankruptcy, and colleges are in a perpetual race to raise tuition.

But Pollack also notes that college is still largely a good investment: Fed research has shown the cost college education can usually be recouped in 10 years or less. If there is a student debt bubble, it probably won’t put clusters of companies out of business, as the dotcom and mortgage bubbles did. Some 85% of student loans are owned by the government — private student loans are still a small part of the market. Which means that the approximately $1 trillion outstanding student debt looks less like a quick-bursting bubble and more like a slow, constant drag on the economy. And, arguably, on youth itself. — Ryan McCarthy

On to today’s links:

Crisis Retro
How a crisis-era CDO blessed by S&P blew up in less than a year – Bloomberg

Tax Arcana
The tax-free, “stealth subsidy” that’s going to finance stadiums, offices, and wineries – NYT

A day in the life of a freelance journalist: Telling people you can’t work for free – Nate Thayer
The problem with online freelance journalism – Felix
The Washington Post is going to try sponsored posts – Digiday

“We rely upon the financial sector to tell us sweet lies” – Steve Waldman

Financial Arcana
Wall Street’s newest old idea: turning illiquid securities into high quality collateral – Tracy Alloway

Must Read
“The seventh circle of bureaucratic hell” – Inside the Kafkaesque Dodd-Frank rulemaking process – Washington Monthly

Senate report blames JPMorgan execs — not just a single trader — for $6 billion trading loss – Dealbook
“Dimon has tried to create a one-man show that he is able to micro-manage” – Euromoney

Says Science
Americans find love in a hopeless place: Walmart – CBS Houston

Useless market indicator hits an all-time high (if you discount inflation) – Ezra Klein

There’s nothing intrinsically wrong with bonuses – Chris Dillow
Heinz CEO’s “golden parachute” could be worth $213 million – Dealbook

Billionaire Whimsy
Does a Saudi prince exaggerate his net worth just for the Forbes Billionaire list? – Forbes

New Normal
The solution to the sequester’s job cuts is simple: force rich Americans to hire a butler – Bradenton Herald

Fair Points
The payday lending industry would like you to know it’s not as sketchy as its online competition – American Banker

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