The Housing Bubble Reincarnated: The Student Loan Bubble | Alessio Lidozzi

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Information about The Housing Bubble Reincarnated: The Student Loan Bubble | Alessio Lidozzi
Economy & Finance

Published on October 15, 2014

Author: alessiolidozzi

Source: slideshare.net

Description

The mid-2000s saw a United States economy experience a burst in the housing bubble, effectively causing an economic shudder. Dr. Alessio Lidozzi explains and demonstrates what policies have lead to these economic issues, including risky mortgages and government-backed loans.

This slideshow will be informational for anyone who wants to understand either of these situations and consider potential solutions for the future.

1. THE HOUSING BUBBLE REINCARNATED The Student Loan Bubble by Dr. Alessio Lidozzi

2. Question: Is the United States’ student loan debt bubble headed towards the same burst that the housing bubble experienced in the last ten years?

3. In an interview with CNBC, Mark Cuban echoed a widespread sentiment that there is virtually no difference in the two bubbles.

4. THE HOUSING BUBBLE Many will remember how the United States government took a big turn in mortgage lending in the mid-1990s, telling government-backed firms Fannie Mae and Freddie Mac that 40% of their loans had to go to low-income borrowers. On top of this requirement, the government issued tax breaks and the Federal Reserve dropped interest rates to historically low levels, increasing the “affordability” of these mortgages.

5. THE HOUSING BUBBLE Because the government was essentially taking on the risk for the housing loans, mortgage lenders were not cautioned by the potential risk of these low-income borrowers defaulting and approved loans to more people than ever before. This surge in funds caused housing prices to skyrocket, which then increased the size of the mortgages being issued and made it more difficult for low-income borrowers to pay off debt or spend their money anywhere else. The rest is history.

6. THE EDUCATION BUBBLE Student loans are headed in the same direction, perhaps to a more debilitating end. To put things in perspective: home prices rose 400% in the last 40 years…

7. THE EDUCATION BUBBLE In the same time span, the price of a private education has launched into orbit, increasing by over 1,000%.

8. THE LOGIC The argument is that the two bubbles are the same because the government’s policy to provide low-interest loans to students increases tuition just as housing loans wound up increasing the price of a home. If students’ purchasing power is crippled by onerous debt, they cannot participate in the economy, which effectively holds it back.

9. PROBLEMS. Another problem is that these increased tuitions serve the administration of a university rather than the quality of education. It’s for the same reason that the donation of a wing or building serves little to no philanthropic purpose: the administration feels a release from the pressure to use school funds to recruit better faculty or invest in more resources for students.

10. PROBLEMS. Instead, the administration winds up reallocating the funds to themselves, another enormous issue. As Cuban said, you know there’s something not quite right when there are more administrators than professors pulling in over $200k per year.

11. SOLUTION? A potential solution to this problem would be to put a limit on the amount of the loan guaranteed by the government. ! However, any trade off at the expense of greater access to higher education will certainly be a difficult one to promote.

12. THANK YOU FOR VIEWING! To Learn more about Alessio Lidozzi, please visit ! AlessioLidozzi.com

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