Soaring Student Debt Prompts Calls for Relief

Just looked into this myself, and yeah, they quite literally just released some new figures.

I think the point still stands, but it's good to have more accurate data.

> It may be unfeasible to claw back what they got from massively inflating the cost of higher education, but it's more than feasible to cap the damages and force a reckoning that will almost certainly lead to vastly more efficient administrations and more economically healthy graduates.

Sure, I could see being in favour of loan forgiveness if at the same time we completely eliminated federally-subsidised loans. But I don't see that happening: I see us forgiving outstanding loans, then granting even more loans, with absolutely no pressure for students to economise.

True fact: one doesn't need a single-occupancy bedroom or a multi-room suite in order to get a good education. One doesn't need a winning football team. One doesn't need a fancy cafe with subsidised prices; one doesn't need a climbing wall. All one needs for a good education is food, shelter and good professors.

But as long as someone else is (or appears to be) footing the bill, students will angle for the nicest possible way to spend their four, or six, or more, years.

Fairness is an irrelevant point of discussion here. The Fed doesn't pay reserve interest because it's fair. They pay the interest that they expect will drive desired market behavior. If fairness were the goal, they'd pay zero interest for the excess reserves that they don't require.

Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really.

This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.

> The case in point was for a 'wealthy person' (not my term, I don't like it but let's roll with it) who holds the debt of a student borrower.

This is not a real scenario. Virtually no one's education is funded by direct loans from wealthy individuals. Student loans are issued by banks.

When you pay a dollar on your student loans' principal, that dollar ceases to exist. The bank might turn around and make another loan that recreates that dollar, but they are not obliged to do so. Banks are under no obligation to loan out everything they can. If they were, there'd have been no talk about "tight lending" after the housing crash.

> If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy".

This model of banking assumes a fixed monetary supply, which is not the case. Banks literally create money when they issue loans. If they didn't, the monetary supply would be fixed except in rare instances where the Fed creates money ex nihilo. As you are doubtless aware, the money supply fluctuates constantly. Where you imagine those fluctuations in supply come from?

The article I linked from the Bank of England also covered this, in bold, at the beginning. "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."

> Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold.

Deposits in this context are money. Loans are not. The bank gives you a loan for $100k. This creates an asset and a liability. (Double entry accounting is still mercifully intact.) The $100k sitting in your account now is literally money. You can spend it, transfer it, withdraw it, roll around on the floor in it, whatever you like. It's money. The $100k loan the bank marks down as an asset is not money. It can't be spent, only paid back. It can't be withdrawn, only sold.

The liability increased the monetary supply. The asset does not reduce it except when it's paid back, which is why banks literally create money when they issue loans and why paying off a loan literally destroys money.

The fixed supply model of banking is intuitive but it's also insufficient describe how modern banking actually works. Everyone agrees that monetary supply is not fixed.

> Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding?

It is a money machine.

I don't know what percentage of Chase's capital comes in the form of deposits.

> Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault?

You're forgetting that the Fed pays 0.5% on reserves, which covers that $4000 cost. Obviously breaking even still isn't a functioning business strategy. The point is that banks do not have to lend every dollar possible in order to be profitable, not even close.

And yes, unloaned deposits are either held in the vault or transferred to the Fed. In either case the bank earns 0.5% on them.

> Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :)

I'll decline to mock up a balance sheet for you. I'm not denying double entry accounting.

The "moral hazard" argument holds very little water with me in this era. We've bailed out big banks despite the moral hazard, because it was necessary or else the consequences would have been ever worse. I think a similar argument is applicable to student loan debt, except that student debtors are a much more sympathetic and deserving beneficiary than big banks ever were.

The simple truth is that the world isn't a fair place and doing the right thing is not the same thing as doing the fair thing. Fair is "everybody gets treated equally". That just isn't how things work in the real world. Right is "to the best of our ability, we try to help people get what they need." That's something we can really aspire to. Doing the right thing.