Tag Archives: debt

These Quotes Should Really Worry You About The Debt Ceiling

House Speaker John Boehner

Let’s start with this doozy from freshman GOP Rep. Ted Yoho over the weekend: “I think we need to have that moment where we realize [we’re] going broke. If the debt ceiling isn’t raised, that will sure as heck be a moment. I think, personally, it would bring stability to the world markets.

Oh good, now we have a Congressman who actually believes that breaching the debt ceiling will bring “stability to world markets”. Because nothing says stability and confidence quite like defaulting on one’s debts and obligations.

These next two quotes can work in tandem, but only because they come from mutually exclusive positions:

House Speaker John Boehner on [not] raising the debt ceiling: “We are not going to pass a ‘clean’ debt-limit increase.”

And from the White House we have Treasury Secretary Jack Lew: “[Republicans] need to open the government. They need to fund our ability to pay our bills. And then we’re open to negotiation.”

So we have The White House refusing to sign anything but a clean increase in the debt-ceiling, and Boehner signalling his party’s intent to refuse to pass a clean increase in the debt-ceiling.

Compounded by the fact that Rep. Yoho is not the only member of his party to actually believe that defaulting on the debt-ceiling is a good thing — and good for the economy!! — and you start to wonder if these people can figure this out in the next 10 days. Probably not.

Photo: Medill DC

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Spain’s Tax On The Sun Reveals Dilemma Of Prioritization Under Debt

PS10

By Mnemosyne:

Despite having the ninth largest external debt in the world, Spain’s capacity for solar energy ranks as one of the highest, often receiving a nod of approval by environmentally concerned critics. But the onset of the debt crisis in 2008 resulted in difficulties with carrying out the government’s subsidy program for the panels, as well as a decreased demand for energy.

With debt continually growing, some estimating by nearly 26 billion euros, that decrease in demand has only persisted, if not worsened. Spain’s generation of solar power is now estimated to be 60% greater than any demand. Industry Minister Jose Manuel Soria defends the proposal to fine private users up to €30 million if their solar panels are not hooked to the national grid in order to be taxed and measured by claiming that these users benefit from having a back-up power system from the grid.

“The decree is an attack to market freedom that aims to prevent people from competing with established utilities,” Jose Donoso, managing director of Spain’s solar lobby group UNEF, said in an interview. “It’s like if they charged you when you turn off electric heaters and use a wood stove.”

Initial subsidizing of the solar industry incentivized individuals to pursue environmentally friendly means of self-generated energy. Opponents, however, argue that implementation would make self-generated solar energy more expensive, thus pushing more people back into the arms of its electrical grid counterpart. Spain’s shift in being the forerunner for supporting a clean, natural source of energy, to eradicating economic incentives, depicts the prioritization shifts that nations under debt undergo.

Perhaps a few years down the line, once a larger number of people were incentivized to turn towards solar energy in Spain, it would be a more viable means of steady income. But to play the hand too early results in at least two losses for the state: less trends towards clean energy, and less income in the long run. As individuals switch to the cheaper electrical grid once more, Spain’s capacity to utilize it as an export diminishes.

Debt destroys a nation’s priorities. Spain joins a long list of states that have essentially shown how fiscal desperation can lead to bad policy. The kind that does as much damage to the environment as it does a nation’s long-term well-being.

(Photo: Marco Cevat)

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Bring Back Bankruptcy For Student Loans?

graduation caps

Prior to 1976, student loans were dischargeable in bankruptcy. Since then, the only way to get out from paying back your student loans — if you don’t have the money — is to default, or die. And even then, the debt remains.

The total student loan debt in this country stands at more than $1 trillion — that’s more than either auto loans or credit card debt. Spurned on by the fact that in the very near future, the country will be thrown into chaos because millions of young Americans will default on paying back exorbitantly high student loans, the Center for American Progress issued a new report, calling for a combination of reasonable standards for ensuring the repayment of student loans, backed by a carefully crafted bankruptcy option for those who realistically cannot meet their debt:

Congress should move to make some student loans dischargeable in bankruptcy. Given the persistent myth of the young borrower declaring bankruptcy at the start of his or her career, it is understandable that no one wants to be seen as opening the floodgates to potential abuse. The way to approach this issue, however, is to establish clear and public standards for what we at the Center for American Progress refer to as Qualified Student Loans, or loans that cannot be easily discharged in bankruptcy, which has been done for other types of financial products as a way to identify safer financial products. Qualified Student Loans would include loans, both federal and private, that have reasonable repayment conditions such as low interest rates and access to favorable forbearance, deferment, and income-based repayment options. These loans would also be qualified based on the successful track records of the institutions and programs receiving the proceeds as a way to ensure that these are programs that—by virtue of their graduate employment rates—give graduates a reasonable chance to repay. Loans not meeting both standards—borrower-friendly terms and some evidence that graduates, based on their employability, are likely going to be able to repay these loans—would be eligible for discharge in bankruptcy just as credit cards are. Other loans—Qualified Student Loans—would maintain the undue-hardship provision while at the same time benefiting from greater borrower protections.

Considering the amount of lobbyist influence that went into getting rid of student loan bankruptcy in 76′, I can only imagine the kind of onslaught the banks would unleash on members on Congress if this ever became a serious talking point. It probably never will, mind you. Very likely, we’ll get to a point in this country where we’re staring down the face of another recession, only this time, the ones most affected will be those who have not even begun to establish themselves.

But if President Obama is serious about helping defaulting college students and graduates, this is certainly the place to start.

(Photo: Flickr user John Walker)

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Detroit Plans To File Bankruptcy Friday; Will Be Largest In History

Detroit

Even the dystopian future-Detroit depicted in “Robocop” never got this bad. The Detroit Free Press reports that the city is set to file for federal protection tomorrow, making it “the largest municipal bankruptcy in U.S. history”:

The filing would begin a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.

Detroit Emergency Manager Kevyn Orr, who in June released a plan to restructure the city’s debt and obligations that would leave many creditors with much less than they are owed, has warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.

Gov. Rick Snyder would have to sign off on the filing. A spokeswoman did not immediately return telephone calls today.

Jefferson County, Ala., and Stockton, CA., have also filed for federal bankruptcy protection, and were — prior to Detroit — the largest municipal counties to do so. But with roughly 700,000 residents and nearly $20 billion in debts and liabilities, Detroit will undoubtedly set the benchmark for the way failed cities nationwide decide to take care of their financial woes.

UPDATE

Forget Friday, Detroit has officially filed for chapter 9 bankruptcy, making it the largest city in history to do so.

(photo by Laughlin Elkind)

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Everything You Need To Know About Oregon’s “Pay It Forward” College Program

Oregon State University by air

Desperate times call for desperate measures, but sometimes desperation can lead to real legislative ingenuity. Oregon recently passed a bill that will afford students the ability to attend its state colleges for free if they agree to repay the state roughly 3 percent of their future earnings over an estimated 20 year period:

It began last fall in a class at Portland State University called “Student Debt: Economics, Policy and Advocacy,” taught by Barbara Dudley, a longtime political activist who teaches in the school of urban and public affairs, and Mary C. King, a professor of economics. Ms. Dudley was referred to John R. Burbank, executive director of the Economic Opportunity Institute, a liberal policy group based in Seattle, who had studied the no-tuition approach.

She, in turn, referred the students to him, and they adopted the idea as their group project for the semester.

The students and Ms. Dudley later made a presentation to state lawmakers, including state Representative Michael Dembrow, Democrat of Portland and chairman of the higher education committee. The Working Families Party of Oregon — of which Ms. Dudley was a co-founder — put the proposal at the top of its legislative agenda, and Mr. Dembrow and others ran with it.

Already, other states are taking notice, with Washington State, Vermont, NY, Penn and Wisconsin expressing interest in this “Pay it Forward” program.

Could this be the next step in financing college education? Would this alleviate the burgeoning and crippling state of student loan debt which threatens to cast the U.S. back into recession?

The program isn’t expected to kick in until 2015, but for the students currently taking out massive loans, or graduating with a mountain of debt and no job offers to speak of, its implementation can’t come soon enough. Expectedly, the program’s enforcement is getting a heck of a lot of resistance from Wall Street and Sallie Mae, who would effectively be cut out of the student loan business all together, assuming other states adopt this concept.

But the program is not without its share of faults, and one could/should expect some changes to be made before it goes into effect. Critics argue that it will unduly harm students with higher incomes after graduation, since it’s a flat tax of 3 percent. So a student with a more advanced degree earning $70,000 per year after college will have to repay more over a 20 year period than say a student graduating with a liberal arts degree pulling in $30,000 per year.

Also, the program is set to only cover tuition and fees, which usually accounts for less than half of the total cost necessary to attend college, meaning taking on student loans will still likely persist. And if students are expected to repay the school 3 percent of their earnings, universities may tighten their admissions standards based on future employability, thus having a negative impact on lower-income and/or minority students.

But even critics agree that the Oregon plan is a step in the right direction. It doesn’t eliminate debt, or student loan reliance, but it at least helps some students avoid over-burdening themselves in a job market which is less than stellar.

(photo by flickr user sami123)

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Some good news out of Washington: the US is no longer going broke!

Breath a nice long sigh of relief friends, it’s not all scandals and bad news out of Washington. The Congressional Budget Office released its latest budget projections, and guess what? It looks like the debt disaster that every single political wonk in America has obsessed over is solved for. Well, at least until 2023.

When the CBO estimated future deficits back in February of this year, they found that deficits were falling smoothly and health care costs were slowing overall. The difference between that report, and this report, is that now they found that the deficit is falling even faster than they accounted for and health care costs are decreasing quicker as well. The CBO cut their projections of US debt in 2013 by about $200 billion, and the overall deficit over the next 10 years by $600 billion. Translation: this is good news.

But with all good news, comes a little bad news. If you’re wondering why this will only last about a decade before deficits rise again – not by much, mind you – it’s because by 2023, baby boomers will be mostly retiring and interest rates will rise. Our parents strike again.

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Say goodbye to Austerity?

It didn’t all begin with an excel error. We can debate until our cheeks turn blue whether or not the entire Carmen Reinhart and Kenneth Rogoff macroeconomic saga dealt a massive blow to the global austerity experiment, but it’s not their error that’s making the world move away from the practice. There’s no one reason, rather, there are a number of reasons. Through Reinhart and Rogoff we’ve learned much about the methodological approaches to macroeconomic data analysis, and yes, the entire incident has contributed to an already present shift in ideology that holds that government debt isn’t always a bad thing. But there’s also the example of the USA, where deficits have been steadily falling while job growth remains stagnant. There’s the much more harrowing example of Europe, where austerity measures have been aggressively implemented resulting in a not-so-secret depression in the European periphery.

But in talking with a friend over Facebook a few days ago I realized that very few people know what “austerity” means. Here’s the very basic, extremely vague definition:

In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies can include spending cuts, tax increases, or a mixture of the two. Austerity policies may be attempts to demonstrate governments’ liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure.

Neil Irwin’s new book details how, in February of 2010, the era of austerity truly began. In the remote Arctic village of Iqaluit, Canada, finance ministers and prominent central bankers from the seven major industrial powers met under the moniker “Group of Seven” and came to a consensus that bringing down deficits and unwinding expansive monetary interventions was to be priority number 1 moving forward. The meeting came at the moment when massive financial rescues like the bank bailouts in the States and other fiscal and monetary stimulus that were necessary due to the crisis in 2008, seemed to have done their job and mended the much maligned world economy.

But a week ago, in Washington, we may have been witness to a similar turning point. What the IMF and World Bank spring meetings that ended last week told us was that, if anything, austerity measures were widely premature. Notice the difference in language and priority from this statement released by the finance communique, ““We reaffirmed our determination to raise growth and create jobs.” And it’s really those choice of words calling for the refocusing on jobs for the jobless and growth for the stagnant, rather than risks from debt and inflation, that marks the possible turning point for the global economy away from measures of deficit reduction (austerity).

None of this means that austerity measures will be cut out from policy measures within these countries as quickly as they were enacted. US sequestration looks like it’ll be around for a while and European nations are still engaged in aggressive reforms aimed to cut spending and reduce debt. But surely the point to take away from all of this is that world leaders are aware that the policy decisions regarding the world economy that were enacted a few years ago, didn’t turn out so well.

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What the student loan burden means for the economy, and the students

The Federal Reserve bank of New York released a new study today showing that student loans are now the second largest debt of US households, following home mortgages. The more harrowing part of the study holds that younger workers with student debt are less likely than their unburdened peers to have home mortgages, or other loans — the first time that has been observed in at least 10 years and a worrying development for policymakers who have traditionally associated student debt with college education and higher incomes.

The question that the NY fed is trying to account for is whether or not having extensive debt early on in life will affect the borrower and future worker after schooling has commenced. They decided to address the question by examining homeownership trends, auto debt, and total aggregate borrowing at the standard ages of entry into each of the marketplaces for workers.

…the share of twenty-five-year-olds with student debt has increased from just 25 percent in 2003 to 43 percent in 2012. Further, the average student loan balance among those twenty-five-year-olds with student debt grew by 91 percent over the period, from $10,649 in 2003 to $20,326 in 2012. Student loan delinquencies have also been growing…

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On student debt and subsequent homeownership:

The chart below details that for the first time in 10 years, thirty year olds with no history of student loan burden are more likely to secure home mortgage loans, as opposed to those with student loans needing to be paid off.

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On student debt and vehicle purchases:

Pretty much the same applies for vehicle purchasing.

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On student debt and total borrowing:

As the researchers found, consumers with student debt may be less likely to take on additional debt obligations, limiting future credit creation and perhaps hurting financial institutions that rely on making loans in order to stay in business. While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace.

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