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    CorgitisHamilton Nolan
    8/19/13 12:26pm

    2 questions here:

    1. How would the student loan bubble burst? I don't understand what that means.

    2. What would happen if that market collapsed?

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      katie24Corgitis
      8/19/13 12:36pm

      Think about the housing crisis: Easy credit inflated the value of homes and lead to over-building (the 'bubble'). A "correcting" dip in housing prices lead to a lot of people owing more money on their homes than the houses were actually worth, combined with a lack of liquidity (since this was all done on credit). That meant widespread default, which lead to banks losing a lot of money on paper, which lead to banks not lending anymore money and needing federal bailouts.

      Student loan bubble: Easy credit inflates the value of college degrees and leads to a lot of people getting college degrees (i.e. overbuilding in the housing analogy, or the growth of a 'bubble'). This means people are taking credit to buy an asset that is not worth the amount of credit they took. Widespread default is the next step...

      There are differences: student loan debt is not dischargeable like mortgages. Also it is unclear to me if the loans are direct federal money or private bank money, so a bailout may be "built into" the federal loan bubble as opposed to the housing crisis. A "college degree" is also not really an asset like a house. It is probably more likely that college grads/young professionals in huge debt will just slowly bring down the economy by not having disposable income to spend on goods/services as opposed to a crash...

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      Hamilton NolanCorgitis
      8/19/13 12:39pm

      It would look like mass loan defaults. I imagine a collapse of that market wouldn't be as bad as the real estate collapse was because student loans aren't as securitized and threaded throughout the entire financial system as mortgage loans were. But with $1 trillion in student loans outstanding, it could still be bad.

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    TruthHamilton Nolan
    8/19/13 12:57pm

    Although I think that student loans are very unhealthy in terms of defaults, they will not lead to economic collapse in the traditional sense. Most of these loans are sourced through the government and the amount of loans securitized are substantially lower than housing loans.

    My call for the next big crash is municipalities. If you look at pension liabilities versus the amount currently funded, there are a lot of places that could be in trouble as the boomers retire. The issue is probably even worse than advertised, as pension funds aren't assuming a conservative rate of return to reach their funded number. However, if these municipalities adjusted their expected return to a more realistic number, they would likely have to make additional contributions with money that they don't have.

    The outcome of a bunch of failing pension systems wouldn't be pretty - municipalities declaring bankruptcy, people fighting to keep their non existant retirement funds, cats and dogs living together, mass hysteria.

    To sum it up, government workers in generations X and later better figure out a way to fund their own retirement, because current retirees are gonna get whatever is left in the coffers.

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      AndrewTruth
      8/19/13 1:23pm

      I'm actually impressed that a commentator on one of HamNo's (rather better than average) efforts has such an intelligent post in response. I disagree (municipal woes are overrated for a variety of reasons), but actual intelligent thought about economic problems is refreshing.

      Problems will continue to mount for the time being, though a growing economy may mitigate most of the doom-sayers, and as long as local electeds don't start debt financing everything again or overpromising to civil service workers (unlikely, I admit) things should be fine.

      When the whole municipal debt crisis comes to a head, my guess is pensions will take a haircut, bond holders will as well, and taxpayers will see a minor raise of their taxes. Which is exactly what should happen.

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      SwitzersLeftNostrilTruth
      8/19/13 1:43pm

      A few municipalities have already declared bankruptcy (whattup Detroit!!!). But, I'd bet for the most part this wouldn't happen. state/fed gov't would push to change the rules before they'd let banks take a haircut on bond returns (legislators being paid by banks). the general public is getting a bit more wise on the tactics of banks at the municipality level. those sweetheart deals may get harder to find.

      put a good amount of money in rental property. in the crash, rentals did very well. and they are still doing very well. considering wages are staying low, and don't seem to be rising, there are going to be a lot of people out there who can't afford a big mortgage. and when housing crashes again, all of those foreclosed people will need a place to live. if you can have $50k banked up for the next one, you stand to get very wealthy (buying nice property for cheap once the market tanks). if you start saving now, here in a few years, you should be primed and ready, as we are still a few years away. a LOT of people were smart and cashed out their 401k and emptied their bank accounts on cheap property in 2009, and many are now sitting very pretty.

      and 'health care' is another bubble. i'm not quite sure how it will bust, but it is the most heavily inflated industry.

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    Ken LayneHamilton Nolan
    8/19/13 2:44pm

    My guess is "crime." Not Wall Street and Silicon Valley crime, which is increasing, but regular old crime that fell for 25 years and has baffled The Experts. Violent crime is still surprisingly low, but property crime is inching up again after two decades of decline.

    It was "crime"—including politically motivated riots—that was used as the excuse for government (state and federal) to abandon municipalities in the late 1960s and 1970s, leading to an abandonment of infrastructure and property that at least some historians blame for the 1970s nightmare of stagflation and the death of a large middle class. A new surge in crime (including race and class-fueled riots) could make this happen again. NYC is all pretty and wonderful now, but go across the river to Newark and take a good look around. Most of that was new when everyone left 40 years ago.

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      LarsKen Layne
      8/20/13 9:09am

      I haven't read historians take on the root causes of 1970s stagflation, but my understanding from two Canadian authors featured on Doug Henwood's radio show "Behind the News" is that the Federal Reserve played a huge role in breaking labors back by raising interest rates sky high. Labor had enormous power until the 1970s when corporate interests decided to orchestrate efforts to put capital back in the drivers seat again. I highly recommend the podcast and their book.

      The Making of Global Capitalism: The Political Economy Of American Empire The Making of Global Capitalism: The Political Economy Of American Empire The Making of Global Capitalism: The Political…

      Amazon.com

      Buy now

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      araucaniadLars
      8/20/13 1:47pm

      Volcker's recession was indeed intended to break labor militancy, but that happened in the 80s. I don't have a simple answer for what caused stagflation in the 70s, although regulation (e.g. in the trucking industry) may have slowed productivity growth, while labor kept pushing for pay rises. Plus the oil shock?

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    PootCarrHamilton Nolan
    8/19/13 12:20pm

    I'm rooting for student loans. WIPE THEM OUT, COLLAPSE.

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      WestEggPootCarr
      8/19/13 12:24pm

      As if the actual loan balances would be wiped out for average jerks like you and me. LOLOL

      Nah, we'll have the same loans we did before, we just won't be able to repay them and Sallie Mae will swoop in and snatch away our cold ramen approximately 36 hours after our first missed payment.

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      PootCarrWestEgg
      8/19/13 12:26pm

      Sallie Mae is such a cunt.

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    SwitzersLeftNostrilHamilton Nolan
    8/19/13 12:50pm

    Next bubbles:

    - Social Media

    - Cell Phones

    - Student Loans

    - Housing

    Enough people will get burned through a FaceBook experience that they will quit using it. People will realize that LinkedIn hasn't gotten them a better job, and that Twitter is simply a game where no one wins.

    Everyone now has a nice smartphone. The cell industry's growth is becoming more stagnant. When people finally realize that they can send email instead of text, because everyone now has data coverage, cell companies are going to take a big hit.

    Student loans because, well, of the obvious.

    And housing is going down because everyone who had a home that they could not forfeit to the bank has already refinanced to a super low rate. Why go out and buy another house for higher interest? And people with cash already went out and bought those dream-homes in the crash, getting a lot bang for their buck. The low interest rates have kept the numbers high for the past few years, but everyone's gone out and got that new home, or got that refi. Those numbers are going to trickle off very quickly.

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      Ms.WorryWartHamilton Nolan
      8/19/13 12:39pm

      My two cents (worth about 1.5 cents) is that if you are well diversified, have an emergency fund and a decent amount in cash, don't day-trade and minimize your risk as much as you can, you should be fine.

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        A. Nonie MeusMs.WorryWart
        8/19/13 1:25pm

        No no, it's still worth two cents, things aren't that devalued yet. And if you invest it, in a few years you might have 2.000000001 cents!

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        DozeMs.WorryWart
        8/19/13 1:31pm

        I think part of the problem for most people is getting to that point. You're basically just saying "if you're financially well off, then you shouldn't have a problem".

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      Lucid0neHamilton Nolan
      8/19/13 12:50pm

      Considering most of the markets have only recently returned to pre-recession levels, I wouldn't call that evidence of a bubble unto itself.

      While there is a lot of talk about a new Tech bubble, I just don't see that reflected in reality. The current startup investment mentality still pales in comparison to pre-2000. You dont see the same number of IPOs, and most companies that issue IPOs are actually profitable this time around.

      I also don't think the large outstanding student loan balance is an issue, as long as most people are paying on their debts. Its not like housing, where you can be underwater, and you can't discharge student loan debt in bankruptcy. Instead, it will just be a long term drag on the economy.

      The greatest risks are twofold. One, that all the monetary stimulus finally works its way through system and after enjoying a short prosperous period, there is a period of significant inflation that prices many out of the luxuries and basics in modern life. This could be aggravated by continued structural changes in labor market that keep unemployment high and wages low.

      Two, there is another financial crisis, pick your poison. However, this time, the Fed does not have the firepower to combat the crisis, due to its massive balance sheet. Faith in the Fed will be eroded and there will no longer be a guarantee that it can backstop the economy. Interest rates would rise on Treasuries and other state debt, making it impossible to issue debt and thereby causing any impacted country to default. If there was a chain reaction of defaults of large economies, ie US, a couple Europeans, and Japan, well then modern life as we know it would be over.

      A cataclysmic world war would likely be just on the horizon. After widespread chaos and destruction, the slate would be wiped clean, and we would start the whole cycle anew.

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        AndyFromTucsonLucid0ne
        8/19/13 8:18pm

        "One, that all the monetary stimulus finally works its way through system and after enjoying a short prosperous period, there is a period of significant inflation that prices many out of the luxuries and basics in modern life. "

        How exactly do you see the massive reserves in the banking system escaping from the vaults and getting into the hands of ordinary folks to be spent? There can be no sustained inflation without sustained wage increases. People who live paycheck to paycheck (most Americans) will have no choice but to buy less if prices start rising, and if people respond to rising prices by buying less then inflation will quickly lose momentum. Do you really see a scenario in the foreseeable future where employers are handing out generous raises every year?

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        Lucid0neAndyFromTucson
        8/20/13 9:38am

        No, while wages may increase some, the greatest influence on inflation, will be more and easier credit. This certainly influenced inflation of asset prices in the past. Its the only way for the banks to make money on the money in the vaults.

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      doorHamilton Nolan
      8/19/13 12:32pm

      It has to be the tech industry led by a collapse in the business model of Facebook, Twitter, etc. Eventually enough people will realize all the data collected on the user networks is essentially useless because you can cherry pick ANY outcome you want when you have so much to choose from. Once that tipping point is reached, the whole facade crumbles.

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        A. Nonie Meusdoor
        8/19/13 1:27pm

        I totally agree. The amount of money being flung around in this industry just to invest in the 39th company with the exact same "disruptive" idea to accept online payments or book car sharing services is just mind boggling.

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      sweett310Hamilton Nolan
      8/19/13 12:22pm

      Housing. Next Year.

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        bunnywatsonsweett310
        8/19/13 1:20pm

        Please please please no. I need to sell my house next year. Should I sell it now and move to a rental? What is your info? (Reaches for Xanax.....)

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        sweett310bunnywatson
        8/19/13 1:43pm

        The fact that I just bought my house. I only use scientific methods.

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      CardinalVicesHamilton Nolan
      8/19/13 12:19pm

      I'd bet that it's real estate again. From what I've gathered, they're selling the same crappy bundles of mortgages again, and I can't see any result other than another housing crash. I kind of wish I'd never read The Big Short now—at least I could be blissfully ignorant about it all. Well, until they come to exchange my house for a cardboard box.

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        ChocolateCakeAndBeerForBreakfastCardinalVices
        8/19/13 12:30pm

        Blissful ignorance is where it is at...

        Upside with the cardboard box? You can place your windows where you want!

        Personally, I am going with student loans for the next bubble. I think the next real estate collapse is scheduled for 2022.

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        CardinalVicesChocolateCakeAndBeerForBreakfast
        8/19/13 12:37pm

        Fair enough—I'm biased as I bought my house 7 years ago, but my student loans (which, to be fair, were not large) are all paid off. It makes me glad I went to a state school, honestly. I can't imagine the loans you have to pull for private schools.

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