The Education Bubble

As I wrote the title to this blog I realized the double entendre and that you could have a lengthy discussion also, on how our universities live inside of social bubbles and are isolated from the "real world".  But for this blog I will concentrate on the economic bubble meaning.

All  economic bubbles are the product of easy access to money through credit.  For example, the stock market crash of the 1930's was caused much in part by the use of credit to invest in the stock market through a process called "buying on margin"  ( I just love how things like this are given such innocuous names like "buying on margin" or "qualitative easing" that sound so "blazay" instead of calling it something like "highly risky investing using other peoples money" or "devaluing our countries savings") .  This easy access to money allowed people to be reckless and in the end they lost billions of other people's money.   In our decade, easy access to credit allowed people to purchase larger and larger homes even though their incomes did not match their desires.  Many people thought they could just own the house for a year or two and then sell the house for a tidy profit all the time hoping that they (like a game of musical chairs) would not be the last one out.

Also, credit contributed to the stock market crash as well. Some economists that I have read don't believe it did, but I think when you look beyond the numbers and into the "psychological factors" you do see it played a very big role.  Normally a person who invests their own money into an investment is more willing to stay with a stock over the long hall despite the ups and downs of the market.  Margin calls do not have that luxury.  In fact, a brokerage may put an automatic sell on a stock called a "margin call" when the stock dips below a set value at which point the person who took out the loan must pay back the amount of the loan.  This influx of sell orders triggers more sellers as the stock price drops further due to the influx of sell orders.  Even if the stock is not automatically sold, margin buyers might be more quick to hit the sell button than those who bought their stock without credit as they do not want to be put on the hook for too much money.

Now today, education is thought to be the NEXT bubble.  The total outstanding student loan debt stands at 1 TRILLION DOLLARS.  For comparison, all credit card debt stands at 400 billion dollars.   And with many college graduates unable to find jobs one must wonder if that debt will be repaid.  Following the same pattern, the access to easy credit is the culprit to why college costs so much.  Like the mortgage debt, where we OVER VALUED our homes,  student loan debt causes us to OVER VALUE our college education.   Is college worth ANY PRICE?   Of course, Obama and other democrats want us to believe it is, and they are more than willing to help subsidize our greed.  As they pile more money onto the university "table", don't be surprised that our nations universities want to consume that money.

They consume that money in one of two ways.  The first is they expand their universities and add more and more useless programs.  They see no need to cut staff or programs, because that is counter productive because by keeping course availability limited, students need to stay longer than the normal 4 year schedule and therefore pay more to the college in order to get their desire degree.  Additionally,  adding programs and buildings takes time and many colleges are land-locked and expanding becomes almost impossible. Therefore many colleges resort to the second method of consuming student loan debt and that is: raising tuition.   This is the easiest of the two ways and takes the least amount of time.  All one has to do is change a few amounts on the college website and the poor student "lemmings" will go out and retrieve all the money you need.  No questions asked.  This is where the college economics does not follow real-world economics.  While some students may drop out because they cannot afford the increase in tuition.  Most students, once they have begun their college degree, feel obligated to bring it to completion.  College students in fact, are almost treated like "hostages" and parents are willing to pay whatever fee their "kidnappers" ask to get their child out.

The answer to bringing down college tuition is not making loans more accessible, but instead the opposite.  By getting rid of the student loan and other government grant programs, parents will not be able to pay their kidnappers ransom (tuition) and colleges will need to bring down their tuition levels to meet the REAL VALUE parents can afford. To do so, colleges will need to come to grips with their bloated programs and remove unneeded ones. ( Do we really need a degree in 19th century East European Fascist Literature? ).

In short, more credit never fixes the problem since more money leads to higher (over-valued) prices every time.