Ben Bernanke came out with a statement yesterday that student loans won’t cause a crisis. Bernanke, of course, is a great judge of crises, considering his statements from 2005-2007 that housing was fine and the bubble was manageable. I particularly enjoyed his statement that “The Federal Reserve is not currently forecasting a recession” in January of 2008, when we were actually in the midst of a recession that began the previous quarter.
So he’s not the go-to guy for determination of crises. Still, his description of what constitutes a crisis bears reading:
“I don’t think it’s a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government,” Bernanke said today at a town hall meeting with teachers at the Fed in Washington.
First of all, I would define “crisis” a situation of $1 trillion in mounting debt that causes widespread anxiety, defaults and economic hardship for those struggling to make the payments. This is exacerbated by mass unemployment, particularly among the young people with the highest amount of student loan commitments.
But this also ignores the knock-on economic effects of $1 trillion in student debt. Someone drowning in debt will not be able to access the funding for their first car or their first home. To the extent that we have data on this, it shows that this is a persistent problem that has elongated the economic crisis. This depresses household formation, which has a direct effect on housing and construction. It hurts consumer spending, particularly on durable goods, but also on other necessities (someone drowning in debt is less likely to spend on much of anything until they deleverage).
So when Bernanke says he’s not worried about student debt becoming a “crisis,” he betrays his worldview. It may not register beyond a blip in the financial markets, but in the real economy, to hundreds of thousands of debt holders and millions of American workers, it matters a great deal. What’s more, the solutions are out there and available, including one involving the Federal Reserve renegotiating debt at a discount window rate. It’s just that the financial elites don’t like that very much, so Bernanke can’t possibly see it as a solution.