Since the Great Recession of 2008-09 the total amount of consumer borrowing overall has dropped 1%, according to figures from the New York Federal Reserve Bank.
Mortgages and home equity lines of credit, the two debt instruments that allowed Americans to use their homes as an ATM after the Internet bubble popped in 2000, have seen 8% and 33% drop respectively, mostly due to regulation, not the banks regulating themselves.
So where did the banks go to make up for these losses. The went to the unregulated arena of student loans and “Ninja” auto borrowing.
Banks have seen a 105% rise in student loans totals since 2008, as the narrative of the time was to stay in school since no one was hiring anyway. This data means that the banks piled into education loans with more than doubling the amount lent prior to the Great Recession.
Now, we see record numbers of defaults and loans more than 60 days late from this cohort of master-degree touting 20-somethings who still can’t find meaningful work. More than 25% of these loans are currently in default, according to the latest Fed data.
Unlike the subprime mortgages of the 2000s, these loans have no assets backing them, except the blood, sweat and tears of the students and their families perhaps. These “noteholders” cannot receive forgiveness on the loan even in a bankruptcy, since Wall Street took that option away years ago.
So, existing student loans are now total $1.4 trillion according to the Federal Reserve in DC or $1.3 trillion for the New York Fed and growing as a new batch of incoming freshman find out where they will be attending school in September. These first-year students will be paying 2-4 percent more than last year’s incoming class, because there is plenty of liquidity in the market for new loans.
When these first-year accepted students open their financial aid package, their families will notice that part of the aid package includes loans. This is how universities and colleges grease the wheels for Wall Street banks.
In my book a loan is not financial aid, it’s a debt that has to be repaid, but the schools use them in their aid packages to reduce the initial sticker shock.
Now on the back of this news, I see where the market cap of Wall Street’s largest commercial banks recently exceeded $1 trillion for the fist time ever.
JPMorgan up 29% since the election, Wells Fargo +27%, Bank of America 44%, and Citigroup +19%, have all enjoyed the Trump bump and its expectation of business growth or at the very least a reduction in regulations governing their actions.
Investors believe Dodd/Frank and the Consumer Financial Protection Bureau may be going away or being at the very least deeply defanged through funding cutbacks. So what could go wrong here?
Tomorrow, I’ll look at the subprime auto loans and how repo men with tow trucks are creating the next bubble to pop.