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Soaring Student Debt Prompts Calls for Relief

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Re: Soaring Student Debt Prompts Calls for Relief

#511

Post by dpark »

WalterBright wrote: post #509
dpark wrote: post #498

Earlier quoted context omitted.

> 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 loa…

> Student loans are issued by banks. Which comes from depositors supposedly "hoarding" money in banks. (In fact, banks loan out a >1 multiple of deposits, called fractional reserve banking. So "hoarding" money in banks results in more money being spent, not less!)

This gets us back to the original comment by Zanny that a dollar handed to a poor person has a different net effect than one handed to its richest. A poor person will spend the money. A wealthy person will deposit it, and it will have a smaller overall impact.

Even in a hypothetical scenario where banks always loan the maximum amount they can, a dollar in the bank would result in less money in the economy than simply handing the dollar to someone on the street. Fractional reserve lending means that the bank can issue a 90 cent loan after receiving a 1 dollar deposit. And we assume that the 90 cent loan will stay in the bank as a deposit so that they can issue another loan for 81 cents. And so on. In this model, a dollar in the bank actually results in ZERO net money entering the economy. It's all deposits in the bank that can't be withdrawn because it would cause a cascading loan call.

At any point in this lending chain, if someone decides to withdraw the money they were loaned, it stops the chain and some amount of money less than 1 dollar enters the economy. It might be 90 cents, 81 cents, or 15 cents, but it will always be less than the dollar that was initially deposited. So even in the model where banks always lend as much as possible, there's still less money entering the economy than was deposited.

And of course, banks are aware of the cascading loan call problem and therefore keep more reserves in aggregate than the minimum so that they don't end up in this situation. Which means that the impact of a dollar deposited scales back even further.

Re: Soaring Student Debt Prompts Calls for Relief

#512

Post by n72 »

clifanatic wrote: post #91
n72 wrote: post #73

Earlier quoted context omitted.

I absolutely understand the sentiment, but if there is legislation to forgive student loans it will not have actually hurt you. In other words, such anger at the forgiveness of student loans really just comes down to envy - namely that other people received a benefit you didn't.

> that other people received a benefit you didn't Actually, probably not. That's part of it, but if student loan debts are forgiven, the banks aren't going to eat all of that cost - the government is going to step in and help recoup some of that cost. So not only did I have to pay for my own college education, I'll be taxed to help pay for thousands of others, as well.

Okay, yes, but then everyone else is paying that too. I.e. as a society we're all chipping in to create a good. The fact is, the forgiveness of student loans is overall a good thing. Because of timing you didn't get to participate in that good thing. Should that make you pissed? In other words, if you had veto power over the loans being forgiven would do so since you had pay marginally higher taxes?

Re: Soaring Student Debt Prompts Calls for Relief

#513

Post by n72 »

clifanatic wrote: post #55

I'm going to be so pissed off if a whole generation of students gets their students loans forgiven two decades after I paid mine off.

So, let's see, if you were a black person in 1863 who'd been enslaved but bought your freedom prior to the Emacipation Proclamation, you'd resent the Emancipation Proclamation since from then on other wouldn't have to buy their freedom?

Re: Soaring Student Debt Prompts Calls for Relief

#514

Post by WalterBright »

dpark wrote: post #511
WalterBright wrote: post #509

Earlier quoted context omitted.

> Student loans are issued by banks. Which comes from depositors supposedly "hoarding" money in banks. (In fact, banks loan out a >1 multiple of deposits, called fractional reserve banking. So "hoarding" money in banks results in more money being spent, not less!)

This gets us back to the original comment by Zanny that a dollar handed to a poor person has a different net effect than one handed to its richest. A poor person will spend the money. A wealthy person will deposit it, and it will have a smaller overall impact. Even in a hypothetical scenario where banks always loan the maximum amount they can, a dollar in the bank would result in less money in the economy than simply…

> ZERO net money entering the economy

If I borrow money from the bank, they simply list it as a credit to my checking account. I can then write checks to buy things. The vendor deposits my checks in his checking account. The money never left the bank, but it still resulted in commerce - for all intents and purposes, it "entered the economy".

Re: Soaring Student Debt Prompts Calls for Relief

#515

Post by dpark »

WalterBright wrote: post #514
dpark wrote: post #511

Earlier quoted context omitted.

This gets us back to the original comment by Zanny that a dollar handed to a poor person has a different net effect than one handed to its richest. A poor person will spend the money. A wealthy person will deposit it, and it will have a smaller overall impact. Even in a hypothetical scenario where banks always loan the maximum amount they can, a dollar in the bank would result in less money in the economy than simply…

> ZERO net money entering the economy If I borrow money from the bank, they simply list it as a credit to my checking account. I can then write checks to buy things. The vendor deposits my checks in his checking account. The money never left the bank, but it still resulted in commerce - for all intents and purposes, it "entered the economy".

Right. And the instant the vendor cashes your check, it's no longer available as a deposit at your bank, so the bank can't use it for lending. The point at which your loan "enters the economy" is the same point at which the bank can no longer use it for fractional lending. And in all cases, the amount that enters the economy is less than the amount that was originally deposited.

There is no scenario in which you depositing a dollar in the bank "results in more money being spent, not less" in comparison with you spending a dollar. It quite obviously cannot be the case, because a spent dollar is economic activity of its own plus whatever economic activity occurs as the result of depositing the dollar, because the spent dollar is most certainly on its way to the bank as well.

Re: Soaring Student Debt Prompts Calls for Relief

#516

Post by nstj »

dpark wrote: post #498
nstj wrote: post #480

Earlier quoted context omitted.

>> So if you're wealthy and that dollar goes to pay off the loan - where does it go? >It gets wiped off the books and a dollar leaves the 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. The hypothesis of an above poster was that money repaid on loan service (from the borrower student to the rentier) would not result…

> 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 loa…

>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.

Where exactly do the banks obtain the capital which funds their balance sheet? From something other than individuals with investable (deposits/debt/equity) funds?

> 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."

Indeed, if a bank makes a loan on its own book then there's a credit in the deposits account and a debit in the loans account. This has created commercial bank money. It's part of the M1 monetary aggregate.

Now as for the creation of high powered central bank money, I'll point you to the Federal Reserve Balance Sheet[0] where you can see that the Fed has created "around" 2.5 trillion dollars "ex nihilo" since 2008. Literally, they have printed that much money (it's reserve balances, but I'm sure the member banks could cash them in for physical if they asked Janet nicely). Now you might be surprised that the Fed (and other central banks) create money every single day. They also destroy it too. They do this by buying and selling securities which expand or contract their balance sheet.

> 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.

If the bank creates a $100k loan "out of thin air" how can you withdraw it or roll around the floor in it? Do they print it out on notes which have the bank's name and logo on them?

> 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.

I'm not sure anyone ever said the money supply is fixed? That would be really problematic. The money supply changes by the second, you can see weekly numbers displaying fluctuations in central bank money and commercial bank money (ie: M0/M1/M2 etc) at the St Louis Fed[1]. It would be pretty weird for there to be a fixed money supply (even on the gold standard, after loss and destruction of the metal there's a ~3% annual expansion in supply iirc).

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

54% in 2015[2]. Where do you think they get the rest of their capital? And how much would they have to pay for it?

> 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.

So depositing money with the Fed isn't lending it? Does that mean it doesn't show up on the left side of a bank's balance sheet?

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

You'd be amazed at how simple it makes a discussion when you have a balance sheet and income statement. There's no conjecture, it's just facts. And thanks for the in depth debate! It's been a while since I TA'd this stuff in college.

[0]: https://fred.stlouisfed.org/series/WRESBAL [1]: https://fred.stlouisfed.org/categories/25 [2]: http://www.marketwatch.com/investing/stock/jpm/financials/ba...

Re: Soaring Student Debt Prompts Calls for Relief

#517

Post by pjlegato »

gozur88 wrote: post #464
pjlegato wrote: post #447

Earlier quoted context omitted.

It's a moral hazard for the banks and schools, not for the students. It induces banks to knowingly make loans that are unlikely to be repayable. It induces schools to tell students to take loans to attend programs that are very unlikely to ever lead to employment that will pay enough to be able to pay back the loans.

I don't agree. The whole point of the program is to get banks to lend money to students when the spreadsheet says it's a bad idea. And the schools should not be in the business of telling students what they can afford. For one thing, they probably can't know.

But you just repeated my exact points. Those reasons are precisely what makes it a moral hazard to have this structure.

Without the government guarantees, banks would think hard about whether a loan was repayable, and schools wouldn't have nearly as many anthropology or art history programs cranking out unemployable specialists year after year.

The government guarantee removes economic consequences for certain actors -- for the school and the bank, but NOT for the student. The student with an art history degree is now stuck with a massive loan that is not even dischargeable in bankruptcy, whereas the bank and the school suffer no consequences for having trained someone in an unemployable specialty of little to no economic value.

On the contrary, they are incentivized to do that.

Re: Soaring Student Debt Prompts Calls for Relief

#518

Post by Neeek »

h4nkoslo wrote: post #462
Neeek wrote: post #436

Earlier quoted context omitted.

But it does have to do with you? All of this affects the world you live in, the world that you interact with directly every single day. The house you live in, the wage you're paid, the food you eat, the medicine you receive, everything in your life depends on other people. Whether you agree with the way your government is handling this or not, it all still has everything to do with you.

Yeah man, like, butterfly effect, you know? Rather more direct when they're taking my money to do so. This isn't an abstract "ask not for whom the bell tolls, it tolls for thee" scenario, and the alternative is not personal autarky. OP is proposing a direct transfer, from me to a stranger, to which I am opposed, and therefore one which must be imposed by force. The alternative is not imposing such a transfer. Cut a c…

Please note, I'm not taking sides in this. Your last sentence was all I had issue with.

Re: Soaring Student Debt Prompts Calls for Relief

#519

Post by dpark »

nstj wrote: post #516
dpark wrote: post #498

Earlier quoted context omitted.

> 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 loa…

>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. Where exactly do the banks obtain the capital which funds their balance sheet? From something other than individuals with investable (deposits/debt/equity) funds? > This model of banking assumes a fixed monetary supply, which is not the case. Banks literally create money wh…

You seem to hold conflicting viewpoints. You agree that loans create money but you don't agree that repaying a loan destroys that same money?

Indeed, if a bank makes a loan on its own book then there's a credit in the deposits account and a debit in the loans account. This has created commercial bank money. It's part of the M1 monetary aggregate.

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".

I'm not sure if we're talking past each other or what.

> If the bank creates a $100k loan "out of thin air" how can you withdraw it or roll around the floor in it? Do they print it out on notes which have the bank's name and logo on them?

I'm not sure why you're pretending to have trouble understanding this concept. This is you being disingenuous.

The rest of this seems to be us definitely talking past each other. I'm not super interested in how Chase's assets and liabilities break out. I engaged in the conversation specifically because you seemed to be asserting that loan repayment doesn't destroy money. I'm not sure what you're asserting anymore, and the rest is tangential anyway.

There's also the discussion around fractional reserve lending, but I don't think we actually disagree much about the mechanics except that you think banks are essentially obliged to loan every deposited dollar and I don't, but I don't know this this is an interesting point to continue.

Re: Soaring Student Debt Prompts Calls for Relief

#520

Post by x2398dh1 »

jknoepfler wrote: post #373

Having deliberately attended the University of Minnesota - Twin Cities rather than an expensive private college, and having paid for it with a combination of savings, work, and some loans which I paid off immediately after graduating, I find the idea of loan relief morally reprehensible. Some ideas to improve the "situation on the ground": - reduce the demand for college education - reduce the cost of attending colle…

I also went to the University of Minnesota...same story. That being said - do you remember those ads on daytime TV for ITT Technical Institute? Well it turns out that they shut that school down last month, for basically being a fraud school. The people who went to that school still owe federal debt. So, it's more complicated than that. Also, by saying, "dead average intellect and dead average work ethic," I think you're building a construct, which doesn't really exist. There are all sorts of reasons why people may have chosen a place like ITTTI - desperation, a family to support, lack of a proper background information on what education can do, lack of information, etc. You and I are lucky. Also, if you were presumably white, let's keep in mind that there is a massive educational gap in the Twin Cities...the largest in the nation. So we can get on our moral John Lockeian high horse about how responsible we are, talk about property rights, etc, but there have been many injustices perpetrated in all sorts of directions in the past, and we have a duty as members of society to improve that society, by whatever means make the most sense.

Source: https://en.wikipedia.org/wiki/ITT_Technical_Institute

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