Failing Econ 101

Special thanks to Chobemaster, Petr Weifen and mula bocf for their assistance with this post.

Business Week recently seized on a facebook group that has turned into a bit of a phenomenon -- the Cancel Student Loan Debt to Stimulate the Economy group.

In just two short months, Robert Applebaum has become something of a spokesman for a generation of people burdened with student loan debt. Applebaum, a 35-year-old attorney in New York, started a Facebook group in January called "Cancel Student Loan Debt to Stimulate the Economy," fed up with news reports about bank executives spending millions to redecorate their offices and receiving hefty bonuses. "I wanted to rant, so instead of sending an e-mail to a couple of my friends, I decided to start a Facebook group."

[...]

By the end of the second week 2,500 people had joined, and the group now has more than 138,500 members, many of whom are pressing their representatives in Congress for legislation that would forgive student loan debt. "It's just snowballed," says Applebaum.

Student loan repayment can be difficult for young people starting off their careers and has become even more challenging now with the economic downturn, as recent graduates lose their jobs or struggle to land one. Groups like Applebaum's on Facebook, and other organizations such as StudentLoanJustice.org, are part of a new movement advocating for an overhaul of the country's troubled student loan system. Frustrated with often unaffordable monthly payments, loans that are nearly impossible to discharge, and restrictive loan repayment plans, student borrowers are pushing the government and private loan companies to devise new solutions.

Devise new solutions? Is that really what they are saying?

No, it isn't.

Look at the name of the group. They want to stop paying their student loans. It's that simple.

Now, I get their motivation (secondary to wanting free money, of course). They believe younger people would take the money to be spent on paying their loans and instead spend it into the economy.

Would it really help? In the article, it's stated that outstanding loan debt is at $131 billion. Now, let's say about $90 billion of it is spent into the economy within a year. Based on 2007 numbers, $90 billion would account for only %1.5 of total consumer spending in this country. How much of a real effect would that have on stimulating our economy?

Now, onto the most important point -- how would the government forgive the debt?

There are only two possible mechanisms of "forgiveness":

1. Federal government borrows money itself and pays off the lenders.

2. Federal government declares the debts satisfied by fiat, as if discharged in a bankruptcy, let's say.

It's pretty obvious why #2 is bad -- the losses would be concentrated in the financial sector, which can hardly take another hit. It's asinine to legislate losses for them while we're also bailing them out and constructing toxic asset relief plans...it would end up being a messier, more expensive version of #1 anyway.

In regards to #1, with the massive borrowing we are already doing, this is just more of the same...where does the capital come from? Ignoring inflation generally, and the increased cost of capital for business expansion specifically that come from massive new borrowings and inflated rates, just the principal itself has to come from somewhere. What are the options?

• China, perhaps? If so, this is capital they won't end up using to buy American products or invest in advancing the Chinese as consumers -- and, in turn, not helping the U.S. economy.

• Domestic investment in treasuries? Anything invested in treasuries is NOT spent in new plants, new technology, new products (i.e. jobs). And since jobs requiring degrees are more of America's job growth sectors than those that do not, we end up making it harder for these debt-burdened college students, as well as college students who have worked harder or made do with less, to get jobs.

And what about principle? What about responsibility?

Personally, I still have student loans to pay out the wazoo. Going to a small, private liberal arts college will do that. But that was my choice and I made it with the understanding that I'd have to pay back whatever loans I took out.

If we do this, where does it end? The slippery slope is downright frightening.

But I do have a suggestion.

A facebook Breast Augmentation Loan Forgiveness Group.

You're welcome, fellas.