Shamelessly copying a comment by /u/MasterCookSwag on reddit:
THIS is the major piece everyone misses. Mortgages were such a disaster because banks held the debt securities thinking they were safe assets and they weren't. This caused a chain reaction of devaluation of balance sheet assets and paper losses which resulted in the collapse of some major institutions. It then caused credit to dry up so businesses couldn't borrow and a crisis of confidence in the fundamentals of the economy.
Student debt won't do any of these things because the underlying structure is not even remotely similar. What student debt will do is represent a long term suck on the taxpayer both directly(through payments) and indirectly(through defaults). This will result in a drag on GDP. There is no way to short this and there won't be a collapse. That doesn't make it not a bad thing.
This isn't a strong argument to me. Student debt might not be collateralized the same way mortgages are (i.e. there's no house to repossess), but student debt is still an asset on a bank's book. If anything, student debt default seems to me more troublesome, as defaulted debt without collateral is more damaging to a balance sheet than debt with collateral.
I was just thinking the other day, that it would be logical for there to exist something like a mortgage-backed security for student debt. Call it a millenial-backed security. You'd bundle up a bunch of student student loans into a security, then sell shares, paying out the interest as dividends. It'd be like 2007 all over again! What could possibly go wrong?
In a sense, I suppose that's not much different than buying stock in a bank that's heavily invested in student loans. You can invest in or short those as you see fit.
chadzawistowski|10 years ago
Shamelessly copying a comment by /u/MasterCookSwag on reddit:
THIS is the major piece everyone misses. Mortgages were such a disaster because banks held the debt securities thinking they were safe assets and they weren't. This caused a chain reaction of devaluation of balance sheet assets and paper losses which resulted in the collapse of some major institutions. It then caused credit to dry up so businesses couldn't borrow and a crisis of confidence in the fundamentals of the economy.
Student debt won't do any of these things because the underlying structure is not even remotely similar. What student debt will do is represent a long term suck on the taxpayer both directly(through payments) and indirectly(through defaults). This will result in a drag on GDP. There is no way to short this and there won't be a collapse. That doesn't make it not a bad thing.
https://www.reddit.com/r/explainlikeimfive/comments/4cj937/e...
thegasman|10 years ago
elihu|10 years ago
In a sense, I suppose that's not much different than buying stock in a bank that's heavily invested in student loans. You can invest in or short those as you see fit.
ndesaulniers|10 years ago
manav|10 years ago
shogun21|10 years ago