Michael Hudson: Are Students a Class?

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Yves here. Matt Stoller anticipated the situation Michael Hudson describes, the use of debt as a primary weapon in class warfare. From a 2010 post:

A lot of people forget that having debt you can’t pay back really sucks. Debt is not just a credit instrument, it is an instrument of political and economic control.

It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers.

They were in hock to the man, and eventually became slaves to him. This structure, of sharecropping and usury, held together by political violence, continued into the 1960s in some areas of the South. As late as the 1960s, Kennedy would see rural poverty in Arkansas and pronounce it ’shocking’. These were the fruits of usury, a society built on unsustainable debt peonage.

Today, we are in the midst of creating a second sharecropper society…

Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages. All of these are hard to pay back, often bringing with them impenetrable contracts and illegal fees. Credit card debt is difficult to discharge in bankruptcy and a default on a home loan can leave you homeless. A student loan debt is literally a claim against a life — you cannot discharge it in bankruptcy, and if you die, your parents are obligated to pay it. If the banks have their way, mortgages and deficiency judgments will follow you around forever, as they do in Spain.

Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights. Think about this when you hear the calls from ex-Morgan Stanley banker and current World Bank President Robert Zoellick and his nebulous mutterings pining for the gold standard. Or when you hear Warren Buffett partner Charlie Munger talk about how the bailouts of the wealthy were patriotic, but we mustn’t bail out homeowners for fear of ‘moral hazard’. Or when you hear Pete Peterson Foundation President and former Comptroller General David Walker yearn nostalgically for debtor’s prisons.

Focusing on students, Hudson shows how much “progress” has been made in a mere seven years.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is J is for Junk Economics

Students usually don’t think of themselves as a class. They seem “pre-class,” because they have not yet entered the labor force. They can only hope to become part of the middle class after they graduate. And that means becoming a wage earner – what impolitely is called the working class.

But as soon as they take out a student debt, they become part of the economy. They are in this sense a debtor class. But to be a debtor, one needs a means to pay – and the student’s means to pay is out of the wages and salaries they may earn after they graduate. And after all, the reason most students get an education is so that they can qualify for a middle-class job.

The middle class in America consists of the widening sector of the working class that qualifies for bank loans – not merely usurious short-term payday loans, but a lifetime of debt. So the middle class today is a debtor class.

Shedding crocodile tears for the slow growth of U.S. employment in the post-2008 doldrums (the “permanent Obama economy” in which only the banks were bailed out, not the economy), the financial class views the role industry and the economy at large as being to pay its employees enough so that they can take on an exponentially rising volume of debt. Interest and fees (late fees and penalties now yield credit card companies more than they receive in interest charges) are soaring, leaving the economy of goods and services languishing.

Although money and banking textbooks say that all interest (and fees) are a compensation for risk, any banker who actually takes a risk is quickly fired. Banks don’t take risks. That’s what the governments are for. (Socializing the risk, privatizing the profits.) Anticipating that the U.S. economy may be unable to recover under the weight of the junk mortgages and other bad debts that the Obama administration left on the books in 2008, banks insisted that the government guarantee all student debt. They also insisted that the government guarantees the financial gold-mine buried in such indebtedness: the late fees that accumulate. So whether students actually succeed in becoming wage-earners or not, the banks will receive payments in today’s emerging fictitious “as if” economy. The government will pay the banks “as if” there is actually a recovery.

And if there were to be a recovery, then it would mean that the banks were taking a risk – a big enough risk to justify the high interest rates charge on student loans.

This is simply a replay of what banks have negotiated for real estate mortgage lending. Students who do succeed in getting a job hope to start a family, or at least joining the middle class. The most typical criterion of middle-class life in today’s world (apart from having a college education) is to own a home. But almost nobody can buy a home without getting a mortgage. And the price of such a mortgage is to pay up to 43 percent of one’s income for thirty years, that is, one’s prospective working life (in today’s as-if world that assumes full employment, not just a gig economy).

Banks know how unlikely it is that workers actually will be able to earn enough to carry the costs of their education and real estate debt. The costs of housing are so high, the price of education is so high, the amount of debt that workers must pay off the top of every paycheck is so high that American labor is priced out of world markets (except for military hardware sold to the Saudis and other U.S. protectorates). So the banks insist that the government pretends that housing as well as education loans not involve any risk for bankers.

The Federal Housing Authority guarantees mortgages that absorb up to the afore-mentioned 43 percent of the applicant’s income. Income is not growing these days, but job-loss is. Formerly middle-class labor is being downsized to minimum-wage labor (MacDonald’s and other fast foods) or “gig” labor (Uber). Here too, the fees mount up rapidly when there are defaults – all covered by the government, as if it is this compensates the banks for risks that the government itself bears.

From Debt Peons to Wage Slaves 

In view of the fact that a college education is a precondition for joining the working class (except for billionaire dropouts), the middle class is a debtor class – so deep in debt that once they manage to get a job, they have no leeway to go on strike, much less to protest against bad working conditions. This is what Alan Greenspan described as the “traumatized worker effect” of debt.

Do students think about their future in these terms? How do they think of their place in the world?

Students are the new NINJAs: No Income, No Jobs, No Assets. But their parents have assets, and these are now being grabbed, even from retirees. Most of all, the government has assets – the power to tax (mainly labor these days), and something even better: the power to simply print money (mainly Quantitative Easing to try and re-inflate housing, stock and bond prices these days). Most students hope to become independent of their parents. But burdened by debt and facing a tough job market, they are left even more dependent. That’s why so many have to keep living at home.

The problem is that as they do get a job and become independent, they remain dependent on the banks. And to pay the banks, they must be even more abjectly dependent on their employers.

It may be enlightening to view matters from the vantage point of bankers. After all, they have $1.3 trillion in student loan claims. In fact, despite the fact that college tuitions are soaring throughout the United States even more than health care (financialized health care, not socialized health care), the banks often end up with more education expense than the colleges. That is because any interest rate is a doubling time, and student loan rates of, say, 7 percent mean that the interest payments double the original loan value in just 10 years. (The Rule of 72 provides an easy way to calculate doubling times of interest-bearing debt. Just divide 72 by the interest rate, and you get the doubling time.)

A fatal symbiosis has emerged between banking and higher education in America. Bankers sit on the boards of the leading universities – not simply by buying their way in as donors, but because they finance the transformation of universities into real estate companies. Columbia and New York University are major real estate holders in New York City. Like the churches, they pay no property or income tax, being considered to play a vital social role. But from the bankers’ vantage point, their role is to provide a market for debt whose magnitude now outstrips even that of credit card debt!

Citibank in New York City made what has been accused of being a sweetheart deal with New York University, which steers incoming students to it to finance their studies with loans. In today’s world a school can charge as much for an education as banks are willing to lend students – and banks are willing to lend as much as governments will guarantee to cover, no questions asked. So the bankers on the school boards endorse bloated costs of education, knowing that however much more universities make, the bankers will receive just as much in interest and penalties.

It is the same thing with housing, of course. However much the owner of a home receives when he sells it, the bank will make an even larger sum of money on the interest charges on the mortgage. That is why all the growth in the U.S. economy is going to the FIRE sector, owned mainly by the One Percent.

Under these terms, a “more educated society” does not mean a more employable labor force. It means a less employable society, because more and more wage and consumer income is used not to buy goods and services, not to eat out in restaurants or buy the products of labor, but to pay the financial sector and its allied rentier class. A more educated society under these rules is simply a more indebted society, an economy succumbing to debt deflation, austerity and unemployment except at minimum-wage levels.

For half a century Americans imagined themselves getting richer and richer by going into debt to buy their own homes and educate their children. Their riches have turned out to be riches for the banks, bondholders and other creditors, not for the debtors. What used to be applauded as “the middle class” turns out to be simply an indebted working class.

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  1. HBE

    In today’s world a school can charge as much for an education as banks are willing to lend students – and banks are willing to lend as much as governments will guarantee to cover, no questions asked.

    Banks are (debt) slave owners, but universities are the (debt) slave merchants and overseers. Which is probably why campuses aren’t filled with groups fighting for labor rights or discussing the abysmal economic reality they face.

    Instead virtue signalling, woke IdPol is the dominant focus, which is just fine with the overseer, and nurtured by the comfortable tenured faculty, who are often quite happy having little debt slave house servants of their own (grad students, adjuncts).

    And even worse the overseers (universities) don’t put the revenue generated by slaves into improving classes, hiring more full time faculty, or a host of other factors that improve the quality of education.

    They funnel it into aesthetics to make things look more appealing on tours, and materials, they use to attract more slaves, all the while crapifying quality of education. Which is the moat odious aspect of their role, they arent using the slaves to build a better educational system, but to get more slaves. The number of useless PowerPoint lectures I sat through makes me angry when I think about it.

    Universities are the wives (or husbands) that look on and enable child abuse Almost, if not more disgusting than the abuser (banks).

    And this is coming from a lucky grad who managed to stay out of the gig economy.

    1. nycTerrierist

      Well put.

      Outstanding posts by Stoller and Hudson.
      A must-read primer on debt peonage and how universities are basically real estate hoarders and debtor magnets for the banks.

      1. hemeantwell

        Credit where it’s due: I’m a fan of both Stoller and Hudson, but I believe Hudson has been emphasizing debt in his writings far longer than Stoller. From Wikipedia:

        Hudson [aged 78] devoted his entire scientific career to the study of debts: both domestic (loans, mortgages, interest payments) and external. In his works he consistently advocates the idea that loans and exponentially growing debts that outstrip profits from the economy of the “real” sphere are disastrous for both the government and the people of the borrowing state: they are washing money (going to payments to usurers and rentiers) from turnover, not leaving them to buy goods and services, and thus lead to “debt deflation” of the economy…”

    2. nycTerrierist

      Well put.

      Great posts by Stoller and Hudson.
      A must read primer on debt peonage and how universities have become
      debt-magnets for the banks and real estate hoarders. Sad!

  2. Roger Smith

    Well… I guess you don’t “earn what you learn”… oops! Bill sends his apologies.

  3. Stephen Gardner

    The rentier class is just a bit out over its skis on this. First, college debt is not “out of sight our of mind” the way rural poverty in the deep south is and was. The victims of the banks are geographically well distributed and numerically much greater than southern sharecroppers. I don’t think the demographics of the Bernie Sanders movement is any accident. Young people in this country are not illiterate farmers. They often are well educated. Furthermore an education is something that cannot be confiscated by a bank in lieu of payment on a loan. Geographic distribution of victims is very important from the point of view of networking. As much as we have become more isolated as individuals due to some of the forces present in American society, victims of the rentier class are in close proximity to one another and in contact. They are also present all over the US. Like a fire fed by uncut underbrush in a forest the flames may spread quickly. When it happens, none of the prognosticators will have seen it coming–not even those of the left.

    1. justanotherprogressive

      While I agree with your post, I quibble with your first line. I don’t think the rentier class is “over its skis” with this one any more than the airline industry is “over its skis” with what it has been doing. As long as people are willing to put up with these tactics, they will continue….and get worse. There is no incentive for them to stop or slow down….

      1. UserFriendly

        It’s not that people put up with it… I know dozens that just have no hope, faith, or sense that change is even possible; so crippled with anxiety over their finances that they are utterly useless, myself included. When there is no light at the end of the tunnel it is almost impossible to muster the effort to do anything.

    2. David

      “Furthermore an education is something that cannot be confiscated by a bank in lieu of payment on a loan.”

      …..which is why the government guarantee exists – coupled with the fact that the “education” for most is largely a myth – a degree is not an education.

      As widely reported in NYC public schools last year – the graduation rate is 86%, but tests show less than 4% comprehension for math and english as reported in the NYP last year –
      same is largely true for higher education except for the price tag.

      The sharecroppers at least had tangibles to show from the financing exercise however meager they might be at the end of the day – the degree is largely worthless.

      The banks will do….. fine

      1. Allegorio

        Not to mention the incredible amount of cheating that goes on at universities. I guess cheating at college is training for joining the Kleptocracy.

    3. DanB

      The question to ask, I think, is about the sustainability of this inversion of the dream of education as the path to upward mobility. People do not need to fully, or even partially, intellectually grasp the causes of their misery and sense of failure and futility to overthrow the status quo. This is the ideal -typically coming from the left- where informed citizens will recognize class conflict in its current form, neoliberal policies enriching the 1% and impoverishing most of the rest, and take over the government by voting out corrupt and captured politicians. What is far more likely is that scapegoats are offered -a la Trump or some other demagogue. (But scapegoating leaves exploitation unresolved.) Whichever occurs, the current system of exploitation cannot go on, especially when all the other factors associated with hitting the limits to growth are considered.

    4. LT

      Once the difference between education and indoctrination is learned, thee student and debtors in general can be “woke.”
      How many students even think they should put themselves through a process of de-institutionalization, especially if they’ve followed the course of 1st grade to college graduation without a break?

    5. madame de farge

      Stephen Excellent points about Bernie and the Millenials. I also think that the Millenials are awake to the fact that their grandparents have been screwed over the last 40 years while the Oligarchs stole pensions, replaced pensions by 401ks, healthcare (bought and owned by Wall Street) is out of control. and that the Real Estate Market has been a joke (Fraudulent Appraisals Demanded by the Banks, Banks forging Liars Loans and Foreclosure Documentation, and Banks paying off the Ratings Agencies to Fraudulently approve horse manure…) They also realize the chickens are going to come home to roost and peoples pensions will be cut because Wall Street has been SO INSANELY GREEDY…and I am including Silicon Valley as wall as Buffett and Gates…..

  4. Dead Dog

    Thank you Michael. I studied economics at ANU and went through the period when Australia considered the cost of a university education, which back in the early 80s was free (I think we paid around $150 by way of Union subs). One of the new questions for students was the issue of education being a private or public good.

    The Labor Treasurer at the time (and later Prime Minister), Paul Keating, made it quite clear that education had more of the characteristics of a private good and the benefits (public good aspect) of a quality education for the country were erased and have never been seen (discussed) again.

    Money changed university and that change has not been positive for the institutions or the citizens they serve.

  5. Grumpy Engineer

    This article is a little misguided. I absolutely agree that excess student debt is becoming a major problem in American society that is causing all sorts of real problems, but to blame “the bankers” is to point a finger at the wrong culprit.

    The true culprit is grotesque symbiosis between the colleges & universities and the US Department of Education, which issues over 90% of student loans. If you want to know who the predatory lender is here, look to Washington. The banks are just participating at the edges of our student loan fiasco.

    Part of the problem is the popular concept of “good debt” vs. “bad debt”, as espoused by economists such as Jared Bernstein. “Good debt” helps increase your earning potential, so the more good debt the government pushes on the populace, the better. Right? It’s a popular concept in DC.

    And it’s crap. And the government is crushing an entire generation of students with excess debt in the process. I think Michelle Singletary summarized it well: Yes, All Debt is Bad Debt.

    1. diptherio

      So you think that the banksters are only profiting on this by accident? Who do you think is lobbying to have student loan debt made non-dischargeable? Who do you think is lobbying the Dept. of Ed. to guarantee all those loans?

      For sure, there is more than enough blame to go around, and multiple actors have earned their share. But to place the majority of the blame outside the financial sector that, as Hudson points out, always profits MORE from debt than the people whose products that debt is used to buy, is a bit on the bizarre side.

      Banks make money by creating debt and getting their victims…er, customers…to take that debt on. Therefore, bankers have an interest in increasing the overall level of debt in an economy. When you see debt skyrocketing, look around for an unscrupulous banker.

      1. Grumpy Engineer

        Your understanding of student loans is behind the times. The federal government hasn’t guaranteed any privately-issued student loans since June of 2010. That was seven years ago.

        This was Obama’s great “improvement” to student lending. Cut the bankers out of the loop and have the government issue loans directly. And somehow the total amount of debt being carried by students managed to skyrocket anyway. It actually accelerated. And the government routinely employs debt collection practices (like seizing Social Security checks) that were rightly outlawed in the private sector. Those evil debt-collection companies that you regularly hear about in the news? Hired by our government for purposes of collecting on federal student loans.

        Private banks only hold $150 billion out of $1.44 trillion in total student debt. That’s barely 10%. Sure, the banks make some profit here. But the bulk of the problem is the federal loans. It’s our own government that is crushing an entire generation of students with excess debt.

        1. Eleanor Rigby

          If I understand correctly, this change was implemented as a part of Obamacare. “We won’t know what is in it until we pass it.” I wonder what else is in that bill.

        2. Allegorio

          Your comment does not contradict Hudson’s assertion that student debt creates compliant employees, making it difficult to change employment or stand up to employers. Likewise all the surveillance makes people afraid to protest and demonstrate, in case they lose their jobs.

          The true evil is compound interest where the interest on a loan far exceeds the original loan. Economic activity increases linearly, interest geometrically. Does risking x dollars entitle you to x^n compensation. It is interesting to note, that in the ancient world the majority of slaves were not due to conquest but default on debt. The revival of slavery and serfdom is an obsession with the .001%ers. No robot can ever match the service of a subjugated human being. This country is ruled by murderers and thieves, sad to say.

          1. Left in Wisconsin

            Someone else may know better but I believe the govt hired 4 of the former loan originators/servicers to do all of the servicing nationwide.

      2. Sam Adams

        Uncle Joe Biden.
        Contribute to the Joe Biden (student debt peonage fund) 2020 PAC.

      3. Paul art

        Marvelous hijack of the thread here buddy. Start talking about lousy Government instead of everything else. Brilliant move. You should apply to some Right Wing Think Tanks. I reckon they will pay handsomely for a brain like yours.

        1. PhilM

          Yeah, buster, don’t be going and confusing people with interesting facts and points of view that haven’t already been expressed thousands of times! What do you think this is, an anechoic chamber?

      4. MaroonBulldog

        “Who do you think is lobbying to have student loan debt made non-dischargeable?”

        No one is lobbying to have student loan debt made non-dischargeable. Student loan debt is already non-dischargeable; it has been non-dischargeable for many years.

    2. djrichard

      the US Department of Education, which issues over 90% of student loans

      Usually something like this would trigger hand waving about the Fed Gov crowding out the private sector. But in this case, crickets. I wonder why.

      In a related note, presumably any loans issued by the Fed Gov do not actually increase the monetary base. So in a way, the Fed Gov is at cross purposes with the Fed Reserve which is doing everything in its power to create private debt inflation (increase of the monetary base). Banks to indebted students: “wake me up when you paid off Uncle Sam and we can do bidness.”

      Which triggers my suspicion on why the banks are pro immigration – because I believe immigrants would more or less be free of debt. Banks to themselves: “what’s not to love? Oops, I mean give us your down-trodden, your poor”.

      1. MaroonBulldog

        The Federal government’s act of issuing a loan would not have the effect of increasing the monetary base. The borrower’s act of drawing on the loan would have the effect of increasing the monetary base, though. Money is created when drafts on the Federal government’s account are negotiated, not when the drafts are issued.

    3. madame de farge

      Its NOT THE DEBT per se, IT is the DEBT and INTEREST…..and since the debt is guaranteed by the TAXPAYERS, why in the FFFFF are we even allowing INTEREST…..Oh I forgot, the Oligarchs have to ‘EARN’ their money some way….. It has to fall out of trees on them, it is not enough for them to inherit UNTAXED money…..

  6. Lynne

    Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages

    Hard to say just how angry this makes me. I know most of the county likes to sneer at farmers, even more than others in flyover country. But to read this statement in a supposedly thoughtful article makes my blood boil. Given the vast consolidation in land ownership (Zuckerberg’s attempt to strong arm Hawaiians was merely an attempt to follow the example of Ted Turner, after all), and the way Tyson destroyed whole segments of the market, crops are a large lever. Used to be crops and equipment, but John Deere has done its best to make farmers captives as well. But no, they don’t exist (except to pay outrageous tuition to ag and vo-tech colleges) and MODERN Americans eat food that springs magically into existence in Trader Joe’s. Bah, a plague on their houses. /sarc

    Maybe the student loan debtors should start picketing the home of that Democratic hero, Joe Biden. Or take a look at just why post grad tuition has skyrocketed.

    1. Grumpy Engineer

      Why has post-graduate tuition skyrocketed? Because federal loan limits for graduate school are higher:

      $57,500 for undergraduates and $138,500 for graduate or professional students, per https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized.

      The objective of this game is for schools to extract as much money as possible from the government, with the students being held responsible for paying it back. Higher loan limits are the cause of higher tuition rates, not the effect.

    2. diptherio

      Being from MT and a (one-time) ag family, I hear you on the issue of farmer indebtedness that is a serious problem, as it always has been. I’ve been hearing forever about the realities of farming — go into debt during planting and hope you get enough at harvest to pay it off and still have a little left over to live on.

      However, as you point out, land consolidation by the likes of Cargill and their ilk has greatly reduced the number of family farms…and the amount of family farm debt along with it. Total student loan debt right now is over $1.4T, whereas total ag debt is only $395B…i.e. there is 4 times as much student loan debt as ag debt.

      I’m pretty sure that Hudson wasn’t trying to downplay the plight of family farmers in this country, or the crushing amounts of debt that they, individually, often end up taking on. I think he’s just pointing out that on the macro-level, student debt has become the main contributor to overall indebtedness (along with mortgages).

    3. Allegorio

      Not that all that money goes to hiring teaching staff. The majority of courses are taught by poorly paid adjutants and grad students. There is however an ever burgeoning class of college administrators all with six figure incomes pensions and medical care. It is jobs program for the well connected and ethnically privileged. Try getting a job at a university, not if you don’t know somebody. The level of corruption at universities is truly astounding. I guess it is par for the course in our mafia culture. Free tuition would certainly increase pressure on cleansing the Stygian Stables, but until the electoral system is reformed and publicly financed there can be no reform of our education system. Finally, I second the emotion, may Joe Biden rot in hell.

  7. shinola

    I am reminded of an old coal miners song:

    Ya load 16 tons and what do ya get
    Another day older and deeper in debt
    St. Peter don’t ya call me ’cause I can’t go
    I owe my soul to the company store

    1. Off The Street

      I came across the term leet-man the other day. That was in reference to John Locke, yes, that John Locke. He used the term in reference to his work on the South Carolina constitution of a few centuries ago. That was a bad idea then, and has gotten worse in the current context.
      Meet the new boss, same as the old boss.

      Locke’s preamble stated: “that we may avoid erecting a numerous democracy;” Locke’s “constitution” established the eight lords proprietors as a hereditary nobility, with absolute control over their serfs, called “leet-men”:

      “XIX: Any lord of a manor may alienate, sell, or dispose to any other person and his heirs forever, his manor, all entirely together, with all the privileges and leet-men there unto belonging….

      “XXII: In every signory, barony and manor, all the leet-men shall be under the jurisdiction of the respective lords of the said signory, barony, or manor, without appeal from him. Nor shall any leet-man, or leet-woman, have liberty to go off from the land of their particular lord, and live anywhere else, without license from their said lord, under hand and seal.

      “XXIII: All the children of leet-men shall be leet-men, and so to all generations.”

    2. Stephen Gardner

      Not that old. It was written by Merle Travis in 1946. It has the form of a folk song but it is quite modern, relatively speaking.

  8. Jesper

    & the risk versus reward is completely skewed…. The risk of default is (should be) based on the best credit rating of the borrower or the guarantor. In this case it seems that the risk premium is based on the worst credit rating so difference between risk and reward is completely off.
    Personally I’d never ever guarantee someone elses debt – I’d rather borrow the money and lend it myself to whoever wanted me to be guarantor as in effect the risk would be the same as being a guarantor and the costs would be less as the middle man would be cut out.
    Therefore I consider this:

    banks insisted that the government guarantee all student debt

    an unsurprising ask by banks but agreeing to it is idiocy. “Yes we can” does (or should not) mean saying yes to everything…

    1. Grumpy Engineer

      Aye. Saying “yes” to somebody who wants to borrow $120k for a masters in “motivational speaking” from a crappy knockoff of Trump University isn’t exactly doing them a favor. But the US government will do it anyway. They pretty much say “yes” to everything when it comes to student borrowing, regardless of how likely it is that the student will be able to repay.

      Assessing a potential borrower’s ability to repay (a.k.a., underwriting) and sometimes saying “no” is an important part of lending. Keeps people from getting in over their heads. Well, it used to be. Nobody seems to bother these days. Especially the US government.

      1. Allegorio

        The point being that the banks and the government want people to get in over their heads to feed the beast and to marginalize them with debt.

        1. PhilM

          There’s another way to look at it. If the government takes on all this debt, then forgives it, hasn’t it given a tuition-free education “by the back door”? This could have been an outrageously ingenious move by Obama to slide free education in via the MMT back door.

      2. Yves Smith Post author

        Coming off as an ideologue isn’t a way to persuade people.

        No one here likes making students borrow to pay for education. Even the Fed has found tuition subsides will lower default rates. But you don’t get what the objective is. It is ostensibly to get more people educated, which of course allows for the continued inflation of college costs.

        The Fed article pointed the issue of what the apparent real aims are:

        Our results suggest that if the goal of education policy is to improve aggregate welfare, then merit-based tuition subsidies are preferable to both need-based subsidies and higher government borrowing limits, as merit-based subsidies promote college investment without increasing default rates in the student loan market. However, if the goal is to deliver high college enrollment rates, then need-based subsidies are preferable to merit-based subsidies and higher government borrowing limits, but come at the cost of higher default rates on student loans.


        And the payoff to having a degree is even higher than before given rising income inequality (one of my buddies was just at an investment conference where this was a prominent point made). So if you can’t get a college education, you will be left out of what is left of the middle class. But one of many problems is only something like 57% of the students complete their degrees even in 6 years.


  9. jerry

    Any bankruptcy attorneys out there who can give me a good reason not to declare chapter 7 with 10-15k in unsecured debt, low income, and no medium term (5-10 years) prospects of needing a good credit score? Seems like the only tool left in the toolkit for us wage slaves these days?

  10. LT

    In the 90s, a radio promotion man from a music label was the first person to explain the the sharecropper analogy to me during a discussion about recording artist contracts. And the internet (or the information people give in service of it) has not changed the dynamic in music or any other industry because it concentrated power and made creditors and credit reporting agencies more powerful.

  11. WeakenedSquire

    A student loan debt is literally a claim against a life — you cannot discharge it in bankruptcy, and if you die, your parents are obligated to pay it.

    No. The second half of that is a flat-out wrong statement. Student loans are discharged upon the borrower’s death.

    Every time I read Hudson, I find myself incredibly frustrated that a man of such brilliance resorts to lazy and hyperbolic exaggerations to make a point when there is no bloody need to do so. Reality is grotesque enough.

    1. JustAnObserver

      Perhaps Michael Hudson is – somewhat sloppily – referring to the IIRC typical case where getting the loan requires someone to sign on as guarantor, normally the student’s parents.

      Q for those who know: Am I right in thinking this ?

    2. bob

      There are stories where “student loans” aren’t discharged. I’ve seen the bank seeking congratulations in the press for “forgiving” these loans, when they are pushed to it.

      What “student loan” means is an area I don’t follow as closely as I used to. There seems to be many, many more varieties recently.

      1. MaroonBulldog

        When a bank forgives a student loan, the bank is obligated to issue an IRS Form 1099, which shows the amount forgiven by the bank as taxable income to the debtor. So, having a $100,000 loan forgiven results in recognition of $100,000 in taxable income, unaccompanied by any infusion of cash to pay the resulting tax.


        There may be an exception for loans forgiven because the debtor has fulfilled an obligation to work in a given profession (teaching, for example) under the terms of the loan.

  12. Gordon

    Here in the UK today’s undergraduates are graduating with a debt in the high £40ks. That is getting on for twice the per capita national debt (around £27k if memory serves) so, given that about half now go to university, that will in time nearly double the national debt – except it will have been privatised so that’s ok (/sarc).

    Actually, it’s not ok. After buying or renting (mostly renting) ridiculously expensive houses and paying off their student loans, today’s graduates will not/cannot possibly generate enough economic surplus to pay the pensions of their parents. Somehow/sometime this is going to break.

  13. Wisdom Seeker

    One aspect of this needs additional consideration: one person’s debt is another person’s asset. But whose asset? Blaming “rentiers” is insufficiently precise; we ought to know who lent the money. Demand for “bonds” comes from many sources, including retiree pensions, 401Ks, and so on.

    Most of the student loans are federally guaranteed, but are the principal and interest payments actually going to Uncle Sam, or to Sallie Mae bond tranche owners? Are the boomers – at least those with pensions and 401ks – enslaving students through their ravenous demand for income-producing assets to fund their retirements?

    Most people are blindly funding “life cycle” retirement funds, not realizing that those very “investments” are enabling all the behavior they decry as exploitative. The huge national debt, student loan, housing and auto loan bubbles are all funded by people who think of themselves as “investors”, but are actually ENABLERS.

    I fear the abuses won’t end until people wake up and realize that their 401K retirement fund is abetting all the evils they abhor, and start demanding better investment options. But many simply won’t care, and the finance industry will fight tooth and claw to prevent reform of their gravy train…

    P.S. In past years, when I searched I was not able to easily find a single bond mutual fund or ETF of any size that doesn’t fund either the national debt, the TBTF banks, the housing, student loan or auto bubbles. One would think there would be some funds investing in bonds issued by non financial productive corporations; are there any? I would give good coin to a 401K or IRA-compatible fund or ETF which indexed non-financial corporate bonds, especially if it used a socially-responsible overlay to screen out the other forms of corporate abuse (monopolies, pollution, slave-labor practices etc.).

    1. bob

      Are the boomers – at least those with pensions and 401ks – enslaving students through their ravenous demand for income-producing assets to fund their retirements?

      – YES –

  14. VietnamVet

    Two industries not yet outsourced are education and healthcare. Rural college towns are the only oases of prosperity in mid-America. This article explains why. All the money being spent there is coming from the student’s future earnings. It is unsustainable. The percentage of middle class families have fallen from 62% in 1970 to 43% in 2014. This is why government took over student loans. To keep the scam going. Debt that can’t be paid back won’t be. Healthcare has likewise been finanicizlized. Housing is well into its second bubble blown in part by Chinese flight capital. Something will pop. The prick could be as simple as a successful soft coup by the global media and the intelligence community that forces Donald J Trump to resign.

  15. financial matters

    Stephan Gowans highlights the difference between Marxism (struggle between an exploiting owner class and exploited worker class) and Arab socialism (the struggle between exploiting and exploited nations).

    “While these two different socialisms operated at different levels of exploitation, the distinctions were of no moment for Western banks. Socialism was against the profit-making interests of the U.S. industrial and financial elite.”

    Both Libya and Syria in their attempts at not being part of globalization which emphasizes debt to Western banks were interested in things like free education and medical care, good employment and social security.

    These goals don’t make socialism sound so bad. :)

  16. Qui estis nil, Omnia vite

    Thanks Michael’ very informative.

    How much of this will it take for the students and graduates to be out marching on the streets singing:-

    The law oppresses us and tricks us,
    The wage slave system drains our blood;
    The rich are free from obligation,
    The laws the poor delude.
    Too long we’ve languished in subjection,
    Equality has other laws;
    “No rights”, says she “without their duties,
    No claims on equals without cause.”

    ’Tis the final conflict
    Let each stand in his place
    The Internationale
    Unites the human race.

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