> Larry Summers warned against “moral hazard lectures” and demanded SVB depositors be made whole immediately in 2023, months after calling student loan relief inflationary and unfair. Moral hazard for borrowers, bailouts for banks. Not lost on the public.
I can't believe I'm about to say something that could be construed as a defense of Larry Summers, but here goes: bank depositors are not engaging in risky behavior, they are putting cash in a bank. SVB did not get bailed out, it failed.
And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Combine this with the "need" for nuclear (a perfectly cromulent but excessively expensive power source which has cheaper zero-carbon options), in the first paragraph, these comments that are not about the main topic severely undermine my ability to trust the rest of the essay.
The lesson to myself is to be narrow when I write, so as not to bring in a bunch of other positions that also need to be defended.
Ok, but forgiving student loans doesn't do that. It signals to borrowers that they don't have to repay high loans if their career can't support it. It tells borrowers that they can make risky loans without a chance of default. It tells universities that they can keep charging exorbitant tuitions because kids can still get loans to pay them.
The solution is to allow judges the discretion to default them in bankruptcy after X number of years after graduation. Lenders need to accept the risk. With no risk, they can loan as much as they want and have guaranteed repayment. This drives tuition higher and higher.
I’m always surprised that student loan forgiveness appeals to anyone who should otherwise be able to think about all of the bad second order effects.
The more we inject money into the education system, the higher prices go. Setting a precedent that the government will just pay off your loans if you don’t pay them off only encourages more people to take out loans without thinking about paying them back.
There are so many things wrong with this idea that I can’t believe it continues to be popular. The only thing I can think of is that it’s a litmus test for who can and cannot consider second order effects of economic decisions, or who believes money can spent en masse without altering the system.
If this were done in a less ridiculous manner, it might actually have the desired effect. Make student loans dischargable in bankruptcy (just like any other loan) and don’t give them government backing. Then private lenders could decide how much money to lend out, and the answer might well be “not very much.”
Maybe, but that precedent has been set before for other types of loans, and in a limited way for student loans, and the sky didn’t fall. The upward price pressure on university prices is far more influenced by other factors (which should be fixed!). Loan forgiveness probably is a drop in the bucket, I suspect.
What are the second-order effects of a subclass of citizens permanently encumbered by debt that (with rare exceptions) cannot be discharged through bankruptcy?
Perhaps your analysis of second-order effects is not thorough and complete? Have you really considered all of them?
I don't really think we need to forgive student loans - I think they should absolutely be dischargeable through bankruptcy, though.
Bankruptcy isn't a "get out of jail free" card - it puts a huge burden on a student relatively soon after graduating that makes it harder to start a family or buy a home. So it incentives are still aligned for the students taking the loans.
But the option that a student defaults brings some real light and transparency into a loan system that just feels wildly disconnected from reality right now. If a student can't pay the loan back with the job options in the field and is like to default... don't issue the loan.
I think it's absolutely abusive that student debt can't be discharged, and is pretty heinous as policy.
Yeah it's pretty amazing that we have loans which you can never escape and yet have high interest rates in spite of that. If I cannot declare bankruptcy, then at the least the interest rate should be 0%, appropriately reflecting the risk.
> I don't really think we need to forgive student loans.
Neither do I. I was happy with the status quo ante Trump where many classes of public servant could get their student debts forgiven after on the order of ten years of service. (An imperfect program with too many disqualifying loopholes, but it was better than nothing. Now, almost no one qualifies.) The Overton window has foreclosed on that kind of solution to the problem, however. Even military personnel have been disqualified from attending certain schools as part of their meager education benefit.
> Bankruptcy isn't a "get out of jail free" card
Indeed. One’s mid-twenties are arguably the worst period of one’s life to live with damaged credit.
> I think it's absolutely abusive that student debt can't be discharged, and is pretty heinous as policy.
The reason that you can't (default) discharge student loan debt in bankruptcy is that your degree can't be seized and sold off, so there's a pretty weak incentive to not declare bankruptcy as soon as you're handed your degree.
What if a degree could be seized? For example, what if bankruptcy courts could require a debtor to stop "representing themselves" as having a degree as a condition for discharging debt. If a court revoked a degree, it would effectively reset the graduate to the status of a dropout removing a significant amount of the degree's value (I know knowledge has its own value, but credentialism is a big part of a degree's value too).Universities already have the infrastructure to flag students. For example, many institutions withhold official transcripts or diplomas for academic fraud, moral infringements etc. Could this create enough of an incentive to pay back loans and not declare bankruptcy?
I don't think that would fly, since it would provide no benefit to the owner of the debt and would just be enormously punitive and feel pointlessly cruel.
It would be like if instead of a foreclosure they just took a bulldozer to the house, then salted the earth with asbestos and lead so nobody could ever build a house there again. What's the (acute) benefit in just destroying the value? Plus, it turns the four years into a complete waste of time, no matter how hard you worked to get the degree, just because you couldn't find employment after.
I know we're talking about tweaking incentives to make it not worth it to game the system, but this would also screw over people that found themselves in that position through no fault of their own, plus it would waste all the time and work of everyone that taught that person and contributed to their education (even though they got paid, people largely aren't in education for the cash).
I don't know, I think it would be too much of a bummer to work.
When student debt becomes dischargeable, market forces will finally price degrees according to their actual economic value relative to the risk of poor returns. Currently, that price discovery is broken; the cost of a degree bears almost no relationship to its real-world payoff. No need for degree seizure to correct it. Lenders can decide for themselves which degrees lead to returns, which in turn provides degree seekers with actual financial signals instead of vibes-based "go into programming" propaganda from FAANG.
> What are the second-order effects of a subclass of citizens permanently encumbered by debt that (with rare exceptions) cannot be discharged through bankruptcy?
A harsh lesson in personal responsibility. If you went to an out-of-state school to major in criminology hoping to be the next CSI, and you borrowed 180k to do it, you've learned a valuable lesson.
Don't give me "they're only kids, they aren't able to make these decisions!"
Allowing student debt to be canceled during bankruptcy would be a good first step (possibly even better than canceling student debt across the board).
To your point, making it easy to cancel debt teaches borrowers that debt isn’t a serious thing.
Requiring someone go through bankruptcy (and all of the associated negatives on your credit score, etc) seems like a good tradeoff. Allows you to get out from under the debt (the entire purpose of bankruptcy in the first place..) while not letting everyone pretend the debt never existed (need to live with the impact of bankruptcy on your ability to borrow in the future)
I don’t know why we don’t hear more people lobbying for this. I guess it’s because the sound bite isn’t as sexy.
Bankruptcy affects your credit score for 7-10 years. Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
There is also the obvious drawback that if more people can discharge the debt, the interest rate goes up, and then everyone else has to pay for the people who took out loans they didn't pay back.
> Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
So change the bankruptcy law? It’s a pretty easy fix. Create a whole new chapter if that’s what it takes. Make it dischargeable only after 7 years of nonpayment, do means testing… bankruptcy law already has these kinds of nuances built in.
> Make it dischargeable only after 7 years of nonpayment
You don't really want to give people an incentive for nonpayment.
> do means testing
Bankruptcy already does that. But what are your "means" the day you graduate from college and haven't yet found a job, or temporarily take a low-paying one on purpose to meet the eligibility requirements?
You would need something like, deferred payments while you're unemployed but if you subsequently find a job then you have to pay, instead of one-time permanently discharging the loans. Except that's how it already works.
> The law is not meant to cover every possible permutation of circumstances and motivations.
This isn't a permutations issue. We know the specific shape of the problem: 18 year olds from poor and lower middle class families don't typically have existing assets with which to secure a loan, so if they can't secure it with their future earnings, they can't get one, and then they can't afford to go to college.
> If student loans are dischargeable in bankruptcy, lenders will price it in or refuse to lend without a gurantor.
That's the problem. The inability to discharge them allows the borrower to get a much lower interest rate than they otherwise could for unsecured debt issued to someone with minimal credit history, or find someone willing to loan them the money to begin with.
It was set up this way so that people could go to college.
Imagine a world where lenders charged different interest rates depending on the risk profile of each school.
Lower interest rates for schools where graduates repay their debt, higher interest for schools where many people default.
Assuming it wouldn’t disproportionately affect disadvantaged populations, that could be an interesting way to incentivize schools to get their shit together and prepare students for starting their career
Don't have a dollar amount that you repay. Rather, your student loan payment is x% of (your income minus the average rate for those with a high school diploma) for y years. Forgiveness programs for certain fields go away--instead, the tab gets picked up perhaps with a multiplier. Disability, death? Irrelevant--a dead person generally makes nothing, the amount owed is $0. (Generally makes nothing because there can be ongoing income from something they produced. That would be subject to the loan repayment.)
Devils advocate: I don’t think this would work due to the cash flow uncertainty the models causes.
If universities don’t know how much they’re going to bring in over the next few years, they won’t be able to budget effectively.
And then there’s the question of whether it’s acceptable for the lender to collect more than what was borrowed. E.g. if I graduate college, start a company, and sell it for $100 million.. am I then paying my alma mater (or lender) millions? If so, would universities make more money from the commons or are they banking on a very small percent landing extremely lucrative gigs post-graduation? I don’t think we want the model to resemble startup financing, where nearly all fail and a small handful pay for the rest (that works for startups, doesn’t work for people’s careers)
I like the concept though. In 2010’s when I was entering college, I actually made a website trying to solicit someone to pay for my education in exchange for a percentage of my future earnings. I found no takers at the time.
That effect would be drowned out by all the people defaulting en masse because getting out of a six figure unsecured debt is worth more than a temporary hit to your credit score.
If that’s true, why isn’t everyone already doing it? Especially if 87% of student loans are forgiven during bankruptcy - maybe people just aren’t aware it’s possible.
"Possible" and "easy" are two different things. 87% is of the people who applied for it, but they would be the ones most likely to have it granted because there is little reason to pay lawyers to file a form which is likely to be rejected. But the more you relax the requirements, the more people do it, which is of course the problem.
People who start lobbying for it quickly discover that 87% of people who petition for their student debt to be cancelled in bankruptcy get it (https://www.cnbc.com/2025/12/29/bankruptcy-student-loan-borr...). I support removing the special treatment entirely, but ultimately most student debt holders don’t go bankrupt.
> Still, few people pursue the option because of a “pervasive” myth that the loans can’t be included in the proceeding
It also says nothing about whether the person actually goes bankrupt, just which debts are discharged, which is one of the key parts of the bankruptcy process. Certain debts are discharged because the person can’t pay them back, which is the point of going into bankruptcy court.
> The solution is to allow judges the discretion to default them in bankruptcy after X number of years after graduation. Lenders need to accept the risk. With no risk, they can loan as much as they want and have guaranteed repayment. This drives tuition higher and higher.
This. The whole student loan mess is a direct result of their special treatment during bankruptcy.
> It tells universities that they can keep charging exorbitant tuitions because kids can still get loans to pay them.
I wouldn't be opposed to some kind of tuition claw-back from schools, when a student loan goes into default (but only by the government, not private lenders). The universities need more skin in the game to keep tuition under control.
That's why it should be a one time event in conjunction with reworking the whole system.
Why can I, as an 18 year old, sign for a loan that _cannot_ be forgiven, graduate into a crashed economy, and still be held accountable for choices that impact me when I only had a small part in them? The system needs reformed, and we need to do something for the people still on the hook of the old system (and I say this as someone who has paid off all my student loans).
Same reason you can sign up for war, or ride a bike without a helmet (in some places). The world is a dangerous place and the less legislation we have blocking people from making decisions, the more likely they are to be capable of making their own. In 2009 when I graduated, it was common knowledge that any private colleges or abnormal degrees were an oddity only for rich people to buy a piece of paper for their more disappointing kids. I don't know what changed (or if it was just localized), but whoever convinced you to go for the scam is at fault here in your circumstance- not the "system" for allowing other people to benefit.
It's a bunch of able-bodied people who took the elevator instead of stairs thinking it was a shortcut, but the effort put in was the whole point. Anyone who told you otherwise is to blame. Punishing people who took the stairs sends a clear message to everyone else deciding which way to go.
> Why can I, as an 18 year old, sign for a loan that _cannot_ be forgiven, graduate into a crashed economy, and still be held accountable for choices that impact me when I only had a small part in them?
Because you took the money promising to pay it back, spent it on something you wanted, and now it's gone and someone has to pay the money you spent.
It's like saying why can I, as an 18 year old, purposely drive a car into someone else's house, cause six figures in costs, and then be expected to be on the hook for that because auto liability insurance doesn't cover intentional acts? You're the one who chose to do that.
The price of tuition and the expectation that you pay back the money are not secrets kept from you until after you've already signed, or if they somehow are then maybe fix that.
The money can't be spent on a house or any useful asset that could be resold. They wouldn't give you a loan for that at 18 because it'd be irresponsible since they know you don't know anything about finance or economics as you likely don't have an education yet. They'll give you a high interest credit card with a 500 dollar limit to buy what you want though.
They give you the loan because the asset is you. In general if you get a degree, your future earnings increase by more than the cost of the degree.
The "problem" is that if you don't pay a mortgage the bank takes the house, but the only thing for them to take if you don't pay your student loans is your future earnings, which is just the thing where you have to pay back the loan.
> Because you took the money promising to pay it back, spent it on something you wanted, and now it's gone and someone has to pay the money you spent.
How are they supposed to pay it back with a crashed economy? Look, I get it with personal responsibility and all that but these people were following the rules, did their part and now are burdened to their death while Big Co gets bailed out over and over and never learns responsibility. Why the double standard?
Bailing out corporations went very poorly. They reinflated the housing bubble like they wanted to see how big they could make the balloon this time. I mean look at this:
Except that no one has been preaching at you for your entire academic life that you MUST drive a car into someone's house at 18 in order to be able to get more than a minimum wage hard labor job.
But now we've arrived at the source of the trouble. Why are people being preached at to get a degree in subterranean cat washing instead of engineering or nursing, or for that matter forego a degree and pursue a trade?
As a parent of a 16 and almost 14 year old i'm effectively home schooling personal finance with them. My wife and I got none from our parents and were preyed upon constantly. I think I was 45 when i finally got my student loans paid off. My wife did many years in a dangerous, low-performing, HS as a teacher to get hers forgiven. Sending an 18 year old off to college without a solid understanding of finance is like throwing an 18 year old in the ocean while bleeding profusely and tasking them with swimming to shore, maybe a couple make it but the sharks will get the rest.
so take the money back from the universities in all cases where they negligently misrepresented the future job market of the field of study to the borrowers or what?
Student loans currently carry no risk. They can't be discharged. Interest is the payment to the lender to accept risk. There is no risk in the current state of student loans. Therefore they should never-ever charge interest.
Also schools need to be reigned in, if GA et al can pay each student athlete $40,000 a month, they MUST be held accountable for burdening the students and the state with unscrupulous debt.
> Student loans currently carry no risk. They can't be discharged. Interest is the payment to the lender to accept risk.
you make a good point, if there's no risk there should be no interest. Or at worst, the interest rate should track COLA adjustments to social security. Some basic adjustment relative to inflation so the lender gets back what they lent out.
Now that schools can pay their athletes I hope the rest of the student body take notice and start asking questions about school funds allocation. It should make it plain as day to the average student that their school has plenty of cash and choses to force them into debt.
>you make a good point, if there's no risk there should be no interest.
Even loans to the US government pays interest. If you meant "no premium beyond the risk-free rate", why would anyone want to lend to students, when they have to deal with the hassle of dealing with lenders and the political risk of it getting discharged, when they can just led to the federal government instead?
They should charge rate. But rate should be similar to say interbank rate. Maybe plus something like 0.5%. This is how standard loaning often operates. You have risk free lending so you get loan from somewhere else and then take some margin.
Interest also compensates for the other things that money could be doing. If I didn't loan it to you (or a student), then I would be doing something else with the money, even if just buying a government bond.
I'm not sure that is accurate. You need a borrower to do that. If there were other low risk borrowers they would also lend them money, it's not a zero sum game. I'm no banker, but pretty sure the bank doesn't lend itself fractionally reserved loans and buy t-bonds.
One downside is that money lent for a student loan cannot otherwise be invested. If paid back later with no interest, the money will likely have lost value to inflation in the meantime.
I think I agree with your broader point - just quibbling, here.
That's not a solution at all, because it will price out way too many students.
The solution is to do what Germany and most of the EU does - pay universities with tax money and do not charge students anything at all (or maybe a few hundred to thousand euros).
> The solution is to do what Germany and most of the EU does - pay universities with tax money and do not charge students anything at all (or maybe a few hundred to thousand euros).
This is a totally fine system, but would change US tertiary education massively. Much of the state university increases in tuition since the GFC have been driven by exactly the opposite behaviour (cut state funding, make it up in tuition).
Most states already have affordable tuition for in-state residents. California is middle of the pack, and CSU tuition is less than $10k/year. (Nationwide, public in-state 4-year tuition ranges from ~$5k/yr to ~$15k/yr.)
For most students at public 4-year universities in the US, room & board costs significantly more than tuition. Even in those EU countries where tuition is free, average student loan debt is often >$20k USD because of this. By way of comparison, average student loan debt in the US is ~$40k USD, and that includes private school and out-of-state student tuition as well as room & board. Note that at least for the US, $40k is the mean; the median debt is <$30k. And these numbers are totals, not per year.
Perhaps one of the best ways to address the college affordability "crisis" would be to build more dormitories. The capital expenses could be publicly funded, and then charge students maintenance costs. But for various reasons, including NIMBY development barriers as well as modern expectations (see, e.g., the vitriol spewed about the windowless UCSB Munger Hall bedrooms), schools have long ago neglected this aspect.
That is what we did in the past, and why my undergrad degree didn't cost me nearly as much as someone would pay to get the same degree today from the same university. We've decimated state funding for public universities.
> How many German universities are ranked top 40 globally? How many American?
University rankings are mostly nonsense. They generally over-weight English speaking universities because most of the "high impact" journals are in English. The UK also does well by these metrics, but fundamentally academic research and teaching are very different things, and incentivising high output research institutions to focus on the research breaks the social purpose of universities which is to turn out educated undergraduates.
The German model is to focus more on teaching, which is a more sustainable approach than chasing the finite research dollars.
Great example of narrow rationality. Huge amount of Americas current problems can be traced back to a poorly educated population. Universal access to third level education, combined with a school system designed to educate - in direct opposition to current goal of producing labour units for corporate; would massively improve pretty much ever aspect of American life.
The market lens is myopic, the market cannot be expected to produce social goods in proportion to necessity - that's not any part of its function.
I agree that the student loan system is insane. Students need grants to cover cost of living while they focus on learning, education itself of course should be free.
>combined with a school system designed to educate - in direct opposition to current goal of producing labour units for corporate; would massively improve pretty much ever aspect of American life.
"producing labour units for corporate" at least pays the bills. What's the alternative? Education is for "finding yourself" or whatever? That's a nice platitude, but "finding yourself" with a film studies course doesn't pay the bills, and is arguably the reason why there's a student loan crisis in the first place.
A liberal education serves a social function. It makes human beings.
There's a student loan crisis because US education is dominated by for profit colleges (in start contrast to most other countries) and because student loans lack ordinary consumer productions (in stark contrast to all other countries).
In the US students act as guarantors for debt obligations between the government and commercial institutions. The reverse of the usual arrangement.
> in direct opposition to current goal of producing labour units for corporate
I never understood this characterization. How do the schools implement a goal for producing labor units?
> education itself of course should be free
People don't value what they get for free. If you sign up for a course in welding, are you going to be more or less diligent in learning it if you have to pay the tuition?
No education is free, it's paid in time and effort. I value my degree because it was difficult, not because it had a cost attached. One that could be purchased without effort would have no value.
The German model is pretty good. Tuition prices are reasonable. If you're studying something statistically considered a good investment - you get free tuition. If not, you pay for it.
The American model is terrible. The tuition prices are insane because no one pays for it now, and there's endless appetite to lend because your borrower is a systemically non-financially literate CHILD who is signing away their future wages with no right to default EVER.
No one would ever lend to the majority of these at these insane tuition prices. We'd quickly end up with reasonable tuitions like in Germany. And then most of the problem goes away.
Suddenly schools and degrees that WEREN'T good investments become good investments again.
I agree with you about student loan forgiveness, but disagree with your assessment of universities as a system. The humanities (which are highly profitable for the university) are suffering an existential crisis because their funding keeps getting cut, while STEM programs (which have low or even negative ROI after lab/equipment/resource costs) keep getting expanded. There's obviously more nuance to that, but at a high level, universities are prioritizing majors which have higher job placement at the expense of their own bottom line.
Seems massively unconstitutional to retroactively impose penalties, especially if the previous behavior didn't violate any laws. Not to mention the reputational risk on the trustworthiness of US as a place to do business and the risk of abuse from future administrations. You might cheer that universities are getting their just desserts for scamming students, but your political adversaries might use it to claw back funding from universities for being too "woke" or whatever.
> Seems massively unconstitutional to retroactively impose penalties
For existing agreements, of course.
Going forward, for those who are the real beneficiaries of the loans, they should have a skin in the game.
Why aren't universities standing behind their product and offering financing without the unusual non-dischargeable nature of the loans? Do they not stand behind their products?
I think about my lab classes and typically these were separate credit hours. More money to the university. Outside chemistry, we were using outdated equipment that wasn't getting refreshed/bought new.
If what you are saying is true, Humanities needs to cut costs of their credit hours or double down. For entertainment degrees (art, music), its prohibitively expensive to casually obtain the education. For business/politics/psychology, there is at least some sort of return on investment to be expected.
"Labs" as in the physical facilities, not the class credits. Computer labs are one example - my school had a Linux lab that, uh, wasn't much used outside of CS/IT/maybe EE. There's also lab equipment for research professors - a nice oscilloscope can cost more than a new car, and students won't ever actually get to use that. Not saying it's wrong - I really appreciated that Linux lab - but it's definitely not equality between departments.
For your second point, I've never heard of a university that charges different credit rates for different majors (outside of special stuff like paying for certain PE classes), but that seems like it would be a university policy, not a department policy.
If universities should take on that risk, should they also receive some share of the student's future earnings? Do you want all schools to work like the US military colleges, where is admitted you get free tuition but also are agreed to work for the school's parent organization for a period?
It’s interesting that not being able to discharge the loan in bankruptcy is because “you can’t take back the knowledge.” While true, you can still make the credential mostly useless. Everyone needs to do certain verification in a new job (e.g. I-9). If a job was posted that requires some degree, and a new hire used the degree they discharged in bankruptcy to get that job, the debt can come roaring back into existence when it’s caught during onboarding. Like anything, there are edge cases (e.g. starting a new company). But even there you might be able to have gates at financing stages that would trip the debt resurrection.
if college education produces a public good (a more competent workforce), then it should be funded through public funds-- government should pay for education.
If it does in fact lead to better outcomes, then the higher tax will cover the cost.
running it through the private system builds in too many perverse incentives.
In theory that sounds good, but in practice our private system has created the best universities in the world and educates an immense number of students to highly employable levels.
>if college education produces a public good (a more competent workforce)
It doesn't achieve this; the % of college graduates has vastly increased over the past few decades, but this hasn't contributed to any significant improvements in standardised measures of graduate knowledge or intelligence. From a business perspective the primarily usage of college is as a filter, a proxy for intelligence and willingness to follow instructions, but its usefulness as a filter has been steadily decreasing as it becomes easier and easier to attend and graduate from college.
That doesn't work, because the Universities benefitting from the high-risk student loans are not the ones making bank from their grants and endowments. This is an imagined enemy fallacy. What you're really doing is demanding that Harvard somehow make whole the defrauded students of the University of Phoenix.
Now, sure, there's a genuine argument that those diploma factory schools aren't providing valuable service and are just parasites subsisting on public loan guarantees while their students bear the risk. But that's not a financial argument, it's a regulatory one.
No one thinks that people shouldn't be allowed to float a Stanford degree on loans, and "dismantling the entire system" just guarantees that we return to the era where only the rich could afford Ivy degrees.
If you had a choice between nothing being done and forgiving student loans which would you pick?
Second. Let's say universities did take on the burden of loans, of course that would be via a bank right?
If that's the case. How would they enforce risk? Based on certain majors? Who would give a loan with no collateral to young people with no credit on the hopes the major they picked had a viable job market years from that point?
> Who would give a loan with no collateral to young people with no credit on the hopes the major they picked had a viable job market years from that point?
Who gives out scholarships now?
Let's also note that the obvious response to the risk of the job market shifting after several years is to shorten the number of years required to pad out the degree, which is pure societal upside. The standard model of a four-year college degree only has you taking classes from your major during the final two years.
So you believe universities have taken advantage of students by crafting, encouraging and financing education programs with an understanding that those programs would not result in jobs which would be sufficient to repay the debt needed to complete them, but you think the 18 year olds who were taken advantage of should be forced to suffer for their failure to make perfect decisions at 18.
It's a question of supply and demand though. Sure we should fund science post grad, I'm not so sure about humanities (supply already outstrips demand there). Saying we should fund "post grad" in general elides this complexity.
Public school is as much about providing babysitters for parents that have to work as it is about education. Notice how hard it is to be expelled from public school. Grades are irrelevant. This is very different from how post secondary education operates.
When compulsory education became a thing it met resistance from families that didn't wanna lose another pair of working hands on the farm. Babysitting is a 20th century post agrarian phenomenon.
The decision to invent a new special type of debt for student loans was a political decision made by our representatives. To the extent that the voters/taxpayers are responsible for anything: this is our shared mess.
I mean, the whole premise of representative democracy is that we’re responsible for the messes we send representatives to make. If we don’t want that responsibility, I guess we’d have to look at alternatives to representative democracy, but that’s a pretty big topic.
I’d probably pause loan repayments (no need to dig a deeper hole), make student loans dischargable via bankruptcy, wait a bit for the market to figure itself out. Once we’ve figured out what the value of each degree is, we can refund the difference to everyone who’s paid.
There’d be a bit of fudging as we’d need to adjust for inflation and the reputation of colleges fluctuate over time, but this seems like the fairest way to do it.
Do I believe in community, empathy, kindness toward my fellow human beings? Why, yes. Yes I do. Am I willing to pay a few bucks to put my money where my mouth yes. Why yes, yes I am.
The unfortunate reality is that your kindness and empathy is a resource that is being exploited by unseen actors.
You are being taken for a ride and you feel good about it.
I absolutely support maximizing access to education and I'm willing to pay for it. I'm not willing to prop up a giant unsecured-loan grift that transfers financial risk onto those least able to bear it, while universities jack up their tuition to grab their slice of this new pie.
You are correct and I am making a conscious choice. I'm not being taken for a ride, I'm willingly offering one, even to those who would rob me blind given the chance.
Of course there are those who would exploit. But I'm not going to punish the well-deserving masses because of the unscrupulous few. It's a very small sacrifice I can make each year, which has the potential to positively impact the lives of thousands of families, and for generations to come.
Were I to refuse participation in such an opportunity to "protect" myself, I'd be no less selfish and greedy than those you warned me about.
We don't have the option to "refuse participation," so that's not really the point. We can feel better or worse about it, and you feel good about it, and that's great. I feel good for the individual students who benefit but do not feel good about the institutional corruption that this system represents.
If we were to finally reform the student loan process without any protections for the students themselves, it'd be a painful correction for everyone. But the current system has massive pain in the form of students taking on massive debt to go to places like the University of Phoenix, and they often don't even end up with a degree. Some of them do, of course, so maybe under the current system we end up better off as a whole. It's hard for me to know one way or the other.
But it is painfully obvious who the winners and losers are. The winners are the universities, debt collectors and loan servicing companies. The losers are some percentage of low-income students who get screwed and saddled with debt, the well-meaning taxpayers who fund the loan scheme, and the middle-class parents who pay ever-rising tuition that is fueled by loan money that they don't even qualify for.
What if someone else thinks that there are better (more kind, empathetic) uses of that money than funding someone's college? Why is "free college" the most kind and empathetic thing we can do with this money?
You take on the risk every time you pay the local school district's real estate taxes. Well to be fair that's even riskier. After all you have no idea if the kindergartner will go on to get a college degree and start paying taxes. It's actually riskier than student loan bail outs.
> And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Being slightly inflationary is a strawman concern. Student loan forgiveness has a major problem in that it’s a large reward the goes only to a specific slice of society who match some arbitrary criteria and who have useful degrees. It also fails to address the root cause of the problem, letting current generations accumulate debt in the same way.
It’s an idea that appeals to a subset of the voter base for whom a college graduate with loan debt represents the prototypical struggling young person, but ignores all of the young people who are even worse off and don’t have college degrees either.
Spending a huge amount of money to forgive student loans would be politically catastrophic in ways that a lot of people who live in highly educated middle class bubbles don’t realize. There are a lot of people struggling out there, but college graduates are not at the top of the list of people who need the most help.
Exactly. I don’t know who decided we should spend our limited redistribution dollars on young middle class individuals with above average human capital instead of say on working class people?
> bank depositors are not engaging in risky behavior
Supposedly intelligent investors leaving money in accounts above FDIC limits ($250k per holder per bank, so $500k for joint account) were engaging in risky laziness.
So what do you do when your payroll is more than $200k? The depositors were not treating SVB as investment, they were bank accounts for doing transactions.
That's not our problem to solve, but seeing how millions of other businesses were able to pay people maybe it's SVB that needs to figure out how to do this and not lowly commentators.
Millions of other businesses do not have a secret strategy to pay people without ever landing >>$200k in a single account. Their banks just didn’t fail so it wasn’t a problem.
Sweeps and obo accounts are the bone simple answer to this that every mainline treasury has used for this problem for at least 30 years.
Further the banking ecosystem in the US is predicated on the idea that depositors, especially large ones, are doing their own diligence on the health of the bank.
Indeed, most of SVBs customers were those who had almost zero business finance experience. There were lots of startups but there were also lots of normal businesses and non-profits in the Bay Area that used SVB.
Perhaps the slow depositors should be punished for not being sufficiently sophisticated, or as quick as the Thiel-backed startups that got the bat-signal to do a bank run. But the "moral" value of letting all those organizations lose their deposits is very low. The moral value of letting SVB fail, which it did, seems high to me!
> Indeed, most of SVBs customers were those who had almost zero business finance experience. There were lots of startups but there were also lots of normal businesses and non-profits in the Bay Area that used SVB.
The thing is that you don't need to be a financially sophisticated. Why are they making companies without talking to a CPA? They can get an account with PayChex and they will literally handle everything related with payroll. If your average mom and pop restaurant didn't do this we would fault them for being irresponsible.
The depositors were using SVB because SVB was willing to hand out loans to startups with no revenue that other creditors wouldn't fund, right? Using a less reliable vendor to get a better rate is a risk, whether that vendor is supplying labor or parts or banking services.
One could argue that the depositors didn't know SVB was unreliable, but that's kind of undercut by the fact that there was a run on the bank in the first place.
A corporation can hold t-bills and cash equivalents instead of relying on a bank account where the $250K FDIC limit will bite them.
This notion that the $250K FDIC insurance limit is an acceptable part of our system, except in cases where a bank fails and the depositors are... sympathetic? It's incredibly silly.
Buy insurance for this type of situation. It's not like Silicon Valley lacks the funds to buy insurance. The rest of us are MANDATED to buy insurance for our cars and our healthcare, and many of us live paycheck to paycheck.
Silicon Valley, however, home to the world's greatest concentrations of private wealth? Oh no, thats a too much to ask that they play by the same rules.
Yeah, bailing out bank depositors is nowhere near the same as forgiving a loan. The bank failed as it should and depositors were made whole as they should. I'm not sure how this has any bearing on forgiving student loans.
One round of loan forgiveness is fine, but it builds an expectation of it in the future. All of the loans, growing larger and larger, just encourage universities to grow fatter and raise costs to students.
If students could not borrow enough to attend, they would be forced to lower costs (not necessarily the very top universities, but all the rest).
The student loan system is fucked up, so what should happen is an acknowledgement that it's fucked up, forgiving the fucked up loans, and also changing the system to be less fucked up so it won't have to happen again.
A major part of why it's so expensive is because of government subsidies to private healthcare insurance. No or little public option is exactly what allows insurance companies to go hog wild on their premiums.
The ACA subsidies are simply a bandaid on a broken system which allows insurance to further break the system as they adapt to what people are willing to pay for a necessity.
Healthcare is really complicated. No one factor makes up a majority of the excess (compared to other rich nations) cost.
The ACA is a bandaid, and may be making things worse over time, at least in some areas. But Americans don't see to have the appetite to really change anything. Probably because most voters are insulated from this by good (enough) employees plans.
A big part of that is also the transfers between private insurance and Medicare, with health care providers accepting far lower rates for Medicare and then subsidizing operations with the rates charged to private insurers. Hospital administration is pretty hellish. As is administering payments!
Any functioning health care system is going to have a "band-aid" exactly ACA subsidies: make sure that those with the lowest incomes can still afford health care. Something in between Medicaid and the full cost. But as we rein in the costs and get healthcare to be a smaller fraction of GDP, the size of the band-aid can shrink.
There has, for 30+ years, been a real problem with politicians refusing to speak truth, or anything close to it. They tell voters what they want to hear. This is often "truth adjacent", and they thus offer partial solutions that tend to not work out.
The US has real problem that require real changes, but the political system is not responding.
IMO, people sense this, grow frustrated, and become willing to take a chance on someone who seems to speak (more) truth, and claims to be willing to pursue real changes.
We are starting to see more moderate mainstream politicians willing to speak more truthfully, and propose policy changes that may not appeal to everyone. But I'm not sure it's happening fast enough.
Population trends are a pretty big factor in enrollment. Most enrollment is by fresh high school grads. And there are significantly fewer of those then there were 10 years ago; you can make up some of that by expanding eligibility and encouraging more young people to go to college (even those that would be better served doing something else), or expanding international admissions (but maybe not in this administration).
Cost is certainly also a factor, but I suspect population is a bigger factor.
The solution to that is rebuilding the state and federal funding for higher education with added regulations on where and how that money can be spent (perhaps even putting tuition caps in play).
The reason universities are so expensive is there is no limit on how much they can charge for tuition and no requirements on how much they pay their professors. It allows them to dump a huge portion of their funds into the marketing and athletic departments.
I know of a few religious universities who's mission is mainly to educate (so their well educated members can pay back more money to the church). While they do subsidize the educational costs, it isn't by as much as you'd think and it does result in some very cheap education.
There's no reason the government couldn't do exactly the same thing. It did right up until reagan.
I'm not an expert, but a lot has been written on this.
Some areas:
- more and more administrative staff and "middle management". The assistant to the assistant vice chancellor for elm trees.
- Building and running very expensive science research operations. These may well be worthwhile efforts, but conflating them with undergraduate educations is a problem.
- more and more student amenities. Fancy dorms, student centers, rec centers, etc
- competitive athletics
A big part of this, is that they need to attract students, ideally ones who can pay or borrow. And students are putting a lot of weight on the research programs (they impact public ratings), fancy dorms, rec centers, football teams, etc. And they are spending loan money, and don't seem to fully grasp the economics. But even if they did, the highest rated schools are the ones spending all this money, and thus charging more, it's a cycle. And this propagates down to mid- and lower tier schools.
And then people in the leadership ranks of these schools are in part evaluated on how the ranking of their school changes. So if you can go from spot 150 to 140 by raising fees to build stuff you don't really need to teach (but improve your ranking), that is good for you.
Also, I should mention: highly competitive employers do filter based on school ranking, both in recruiting (acting looking for people), but also in hiring. For example, requiring extra approvals to hire someone who did not attend a top N school for their major. So it can be rational for a student to stretch hard to get into a higher ranked school.
(I know this from being personally involved in this at more then one company)
Just can't help humming in my head reg yoo la toe ree cap chur
Any system that can juice itself by increasing both funding and cost will scale both until the natural incentive gradients (are you smart? do you actually want to do stuff or do you just want a desk job?) vanish into the noise. When everyone went to college, nobody learned anything.
University is one of those things you always want to be capability rather than means gated, but those of means will always want their kids to get in regardless of how they were raised. After all, they worked hard. Why should their kids? They will ally with every convenient rationalization in order to moralize for the politics, taking advantage of arguments about "disadvantaged backgrounds" etc to treat everything as a means problem, but the goal is to dilute the capability aspect, and that robs talent.
If you have exceptional talent, you need to know the truth. Systems naturally try to optimize the dumb-rich to smart ratio so that there's a lot of subsidy available for anyone who actually needs to be there, but consequent GPA inflation demands that we make the education somewhat meaningless, so you're really on your own to set goals, and any good ones are way higher. Check the boxes, take the free lunch, and then treat the overall coddling like a charade that must be ignored. Then again, isn't self direction always that way?
I think the point wound be to eliminate all borrowing for tuition. It would be drastic and universities would complain the whole time but band-aid has to be ripped off at some point. I don't think a solution other than welding shut the money font will have a meaningful effect.
* Eliminate the entire federal student loan program. Just gone. No more loans.
* Make it so that private loans for tuition and related expenses can be trivially discharged. Like just fill out a form and it's auto-approved. You can just decide to not pay your student loans with no repercussions whatsoever. There's probably a better way to accomplish this legally but make it so that they're toxic to private lenders.
Once the money officially dries up and less than 1% of families could pay out of pocket for current tuition rates then we watch as jobs stop requiring degrees, apprenticeships become popular, and schools belt-tighten to focus on student ROI. Watch magically as GE requirements evaporate and we find out they weren't ever necessary in the first place. Watch as high schools get pressured to teach actually useful things instead of being grade school the sequel.
Your argument is basically that current university costs are intrinsic and can't possibly be reduced but we know that isn't true. We have not two generations ago people paying for their college tuition with money from their part time jobs.
My grandpa paid his way to a PhD as a line cook. Got no financial support from family who were only slightly above dirt poor.
Like I don't want to be completely reductive but a good chunk of university classes are 30-100 people paying for a single dude and a room with chairs to lecture for 5 hours a week. This doesn't have to be ruinously expensive.
Right, so broadly the solution you're proposing is subsidies. University will be cheaper from the perspective of the student but we don't actually undergo any meaningful cost cutting it's just the money comes from somewhere else. I don't know about you but I don't think this actually solves the problem of the cost of university ballooning out of control and becoming unaffordable to almost every American if they had to pay for it with what was in their bank account.
I mean it can work so long as the government can bully the university into keeping a lid on the per student costs but large public universities have massive amounts of political capital to sell the cost increases to the government.
Forgive me, are you not proposing to roll these subsidies out everywhere? Because yeah, someone can afford their tuition on minimum wage if they get a full ride scholarship too but that's hardly a solution to the student loan crisis unless we're handing them out to all our undergrads.
My PhD program, in CS (top 20 school), for an American, was basically free back in the early 2000s. At times it seemed like there were more fellowships than students. I'm not sure if that has changed.
My CS PhD was not only free, I got a decent stipend, and that's still common, but it often depends on grant funding, which has been less stable lately.
I feel like I maybe should've been more explicit about him having gone all the way from undergrad to a PhD was all paid for by being a line cook. Yeah, he didn't actually pay for his PhD program because he got a fellowship but that's also not really the point. He was still able to pay for the expensive part on what was barely over minimum wage for the time.
I think this is the strongest disagreement I have gotten from someone who understands my point completely and agrees with it.
This is exactly why I'm saying that university can be made orders of magnitude less expensive is because the primary educational value you get which comes from professors lecturers, and TA's is not expensive at all. Everything else is negotiable and an opportunity to make cuts.
This is true, state gov does own many universities, though there was a concerted effort to bring the idea of privatization and deregulation there too since at least the 1990s by cutting subsidies.
I met a Polish student a number of years ago who was attending a U.S. Ivy League institution. She said people made fun of her back home for "buying her degree". That has stuck with me ever since.
Is there a lower risk, lower interest option with the same capabilities (ability to use the money to pay others)?
Genuine question, I have no idea, but I didn't choose my bank based on interest rate. I can't pay bills or transfer money if it's cash under the mattress.
In the US, depositors are insured by the FDIC (Federal Depositors Insurance Fund) up to $250000 per institution. This doesn't apply to investment accounts, but would cover standard checking and savings accounts, even if they pay interest. The interest on those accounts is usually negligible at most banks, anyway - not even close to offsetting inflation.
Edited to add: not my area of expertise, but I did research it a couple years ago when I was acting as executor for the estate of a deceased person. So take what you will from that. I do notice banks usually have a sign up saying they are FDIC insured. I think it's required, but I don't know for sure. I suppose a shady investment firm could try to suggest they are an insured bank without actually saying so.
There is, it's called a narrow bank and it would probably pay more interest than normal banks. Unfortunately they have been mostly outlawed thanks to lobbying by the banking industry(see also the current lawsuits about usd stablecoins paying yield).
Yeah that quote fundamentally misunderstands what it meant to make depositors whole. That's not bailing out the bank, it's bailing out the depositors, which is exactly what the FDIC is for. In the case of SVB most of the depositors were businesses, but in any case depositing money in a bank is intended to not be a risky activity at all, and FDIC is part of how the government acts to ensure that is so.
Over the last 30 years the primary role of economists seems mainly to be providing justification for the enormous concentration of wealth that has occurred.
As someone who supports education loan forgiveness, I say we do as our elders have and just take from them without a whiff of concern for their grandstanding about morality.
What obligation to the generation that's been aware of physical evidence of climate change for decades and ignored it?
The old dying and the youth rewriting social and political custom and truism is a physical constant of the universe.
> bank depositors are not engaging in risky behavior,
Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not being risky if I knew taxpayers would bail it out.
More importantly, if there is no risk, what purpose does a bank serve? They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. The government should be able to offer that service for free.
Banking is a basic utility. Penalizing customers of a business for the business going under is bonkers. We learned this lesson during the Great Depression.
Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.
I dislike that the SVB bailout happened without a revision to FDIC insurance rules. It felt like a good time to reevaluate those rules (if the limit needs to be raised then lets raise it) and encode the new version to ensure consistency of insurance going forward. SVB accounts getting a full bailout without any formal shift towards that being the future policy felt arbitrary - either we want that policy or we don't - lets not just change the rules for a single case.
My apologies on the imprecise language - maybe "extension of FDIC account insurance beyond the standard 250k limit to depositors" is better terming?
SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
It's not a question of terminology. As you say, SVB came out of it broke, but their stuff didn't burn to the ground - their operations and assets were taken over by a bridge institution Silicon Valley Bridge Bank, which was then quickly acquired by First Citizens Bank. Where's the point where the depositors should have lost money? Would it have been fair for First Citizens to tell every customer who had over $250k in their account "sorry, we've taken the rest as an acquisition bonus"?
Depositors are lending their money to the bank at low interest. They may seek risk in terms of increased yield on their savings account, but FDIC insured banks will have trouble meeting their requirements while offering high yields on their accounts.
Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure.
Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.
Unsophisticated depositors are not holding more than $250k of cash in bank accounts. The problem is not that depositors were made whole, the problem is that the FDIC insurance prices are based on limited losses, when for all intents and purposes, the depositors' risk is completely based on their political influence.
This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules.
Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.
There has been a lot of discussion about how the basic setup of banks (borrow short, lend long, collect the spread) is probably not a great idea, and we should just separate these two activities (see Money Stuff). People who want to lend long should do that with their own money, and people who just want to save should be able to do that.
But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.
So I read the Matt Levine article on this and a couple other pieces, and I'm not getting the impression Levine or other mainstream economists think this is a good idea as it currently stands? I don't necessarily think they are suggesting its clearly bad either, but it didn't seem as positive on it as I was expecting from your comment.
Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
When you deposit money in a US regulated bank, there are basically two places that can end up:
- on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at)
- loaned out by your bank (or again, a bank your bank uses)
The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans.
The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing.
Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.
Yes, I understand all of this. What I don't understand is why the Fed "putting their finger on the scale" (which I don't dispute they are doing, as it's part of their job) is a problem, and I still did not really pick up on Levine arguing for or against this, just saying (this is me paraphrasing, not intended to be a direct quote) "we could operate differently in theory due to all these alternative lenders that now exist in parallel with the traditional, regulated banking system, which would have some benefits and some drawbacks."
I can see some upsides (in addition to matching bank creditor and debtor duration expectations), like the implication that it would be easier in some sense to safely manage large amounts of cash because said cash is invested in T-bills instead of who knows what, but there are some obvious downsides as well concerning risk management. To quote Levine directly here, "How will the NDFIs find an extra $100 of loans to make? One obvious possibility is by making much worse loans. Another is by making fake loans."
> Because the taxpayers (and all users of USD) repeatedly bail them out.
The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay.
> They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow.
Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.
It is supposed to be if the amounts are above $250,000. I have no problem with the first $250k being risk free, that is a policy that is well published and that we all "agree" on. Making arbitrary policy decisions that in some cases depositors should be made whole when risky behavior (such as depositing above the insurance limit) bites them is problematic. Stick to the policy or change the policy don't make one off exceptions because that sets weird expectations.
Businesses can use deposit management services to spread cash among many banks. Bonus points they also are less impacted by the poor business practices of one bank.
Individuals can do this too with investment brokers or wealth management providers.
Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
> depositing funds in a bank is considered risky behaviour?
of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.
No, the bank pays you interest on your deposit to entice you to deposit money there so they can lend it out. There is literally zero risk involved (other than something on the scale of the collapse of the US government, which no one is really considering here) because of the FDIC, and yet interest rates on FDIC protected assets are not 0%.
Insurance priced for damages capped at $250k per person per bank or whatever it is. If the insurance covered unlimited damages, then this wouldn’t be a discussion.
>In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure.
I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years.
>And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong?
The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
>The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
You mean like FedNow[0], which many banks are eschewing in favor of services life Zelle[1]?
All this demonstrates is that you don't understand how the US banking system works. Bank failures != taxpayer funded bailouts.
Also, I don't know what you have been reading, but a comprehensive list of times that depositors have been bailed out by taxpayers (or anyone else, as the FDIC is not bailing out anyone by definition) would be quite short.
Lastly, there is a huge distinction between regulating banks and directly controlling access to an individual's funds. If you really can't see any theoretical problems there, I suggest you work on your creativity.
The FDIC insures $200k of deposits because banks are not supposed to be risky. Thats taxpayers bailing out everybody in order to keep banks as "not risky"
In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions.
The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement.
When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.
> When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement.
I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it.
1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning.
2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday".
Also, not for nothing, causing a bank run is a federal felony.
I don't think you can credit Thiel with smelling smoke, he lit the fire. He heard the same statements from SVB leadership about the problems with T-bills and higher fed rates, realized that there was a huge spread between current market value and long market value of SVBs T-bills, and threw a match on it.
What about banking regulations that mandated that SBC put those deposits into treasury bonds?
The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off.
Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
From first principles public pension funds are broken.
The "Safe Withdrawal Rate" assumed by many private individuals planning for their own retirement assumes a withdrawal rate in the 3 - 4% range based on the "trinity study" - https://en.wikipedia.org/wiki/Trinity_study
Meanwhile, American public pensions are structurally engineered around a 7%+ SWR - this was recently confirmed again by the median goal by the National Association of State Retirement Administrators.
The perpetual "under funded" nature, and all the return hunting etc in pension fund management can be explained by that disconnect.
But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place requiring us to either:
Individuals saving for retirement must deal with the risk that they live to an old age and their savings must last for decades. Pension plans have a higher safe withdrawal rate, because people on the average have average lifespans. When a plan member dies early, their remaining contributions can be used (partially or in full) to fund other members' pensions.
But mortality credits (pooling) don't solve the math of the discount rate - they add 100 - 150 basis points of reduction so retarget to 5.5% vs 4% if generous
So they are still structurally designed where they HAVE to allocate towards risk to meet their targets which is at core of issue
It feels like you're missing the whole point of the whole article, which is that treating public pensions like a bunch of 401ks misses the opportunity to invest all that money in something that benefits the retirees collectively. I'd rather retire on 4% from a bond to improve the school my grandkids go to than 5.5% from a PE firm that intends to "more efficiently manage" the retirement home I live in.
Only taxpayer funded defined benefit pension plans get to use 7%+. Because they have the power to use future taxpayers’ money to pay for underfunding/underperformance/corruption from the past. And obviously, politicians that would choose to increase taxes today for something that could but punted to the future would lose elections.
The Pension Protection Act of 2006 mandates that non taxpayer funded defined benefit pension plans use discount rates from high grade corporate bond yield curves, which are much lower.
Yet that is the modus operandi of governments worldwide that need to secure the votes of the old. There is no reason the US explicit has different rules for taxpayer funded and non taxpayer funded defined benefit pensions. They are the same liabilities, the same cash flows, the same probabilities, just different political entities on the hook.
Even some non taxpayer funded defined benefit pension plans are more privy than others, depending on the political power of their beneficiaries.
Yup, this is the real problem. What he's talking about isn't the real problem. The real problem is we have gone to a "model" of fund less, pretend we can make it up by increasing risk. And rather than face a big problem it gets swept under the rug until it can't be any more.
We also have the problem that paying pensions becomes somebody else's problem. Thus in contract negotiations pushing benefits into pensions rather than current wages becomes attractive. You can agree to more without breaking the current budget.
The old rules worked better because limiting what pension funds could be in also limited the shenanigans that were possible.
Well we tried the "burn it all down" approach with DOGE and the BBB and we got... -2 trillion in savings? Really? Wow, okay.
The truth is nobody wants to solve the deficit. It's a self eating beast at this point and simply cutting funding for a bunch of shit won't solve it. A lot of these things are fundamentally the federal governments concern, whether people admit it or not.
What does it mean for something to be broken from first principles? I would expect some that just cannot work on a fundamental level, like faster-than-light travel or a lightbulb that powers it’s own via solar panel.
3% vs 7% doesn’t seem broken on principle, just, a tuning parameter is off.
> But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place
It's not just the government. It's all of the other stuff seniors buy. It used to be that you just kind of stuck around and retired in the area where you had worked. You had paid off that house, so you retired in it. Maybe you went to the Shriners' hall and played bingo with a core group of friends until you couldn't anymore. Then you moved into a retirement home and they found activities for you to do there until Father Time came to collect his due. Maybe you spoiled yourself with a Buick or Lincoln sometime between getting your gold watch from the plant manager and croaking.
Now, that's not enough. We need entire retirement communities hundreds of miles away in warmer climes where they can play golf several months out of the year. We need cruises and travel packages. We need cosmetic procedures to look younger. We need more advanced surgeries that extend life, though not participation in the workforce. And of course, now that Lincoln is a Mercedes.
And that's great, because we've told everyone that they deserve it after a long, hard career. There's only one problem: we never addressed where that retirement income was actually coming from. They're coming from that 7% SWR, which must be funded somehow. Otherwise the retirees might have to stay in-town, be cold during the winter, and provide childcare for the grandkids because preschool now costs as much as a year of college tuition. And that makes them cranky and they start calling investment advisors and politicians demanding answers.
Ah, a classic paperclip maximizer. Pension plans got the goal of multiplying the money so pensioners have more of it. Nobody bothered to mention that they should also make sure there's a world the pensioners can live in, so now that gets slowly sacrificed in the pursuit of the only explicitly stated goal
If multiplying money is the goal why does the article say they're doing a worse job of that than just buying index funds? If that claim is true, then clearly there are other issues at play than just that.
Pension funds have a different time horizon / cash flow needs than individual investors (namely, they need to meet their liabilities every month) and so are going to have a more conservative asset mix (read: lower expected returns w/ lower volatility) than your average S&P500 index funds.
For example, CaLPERS has ~45% of their assets under management in debt / real estate.
Is high volatility really such a concern when you're dealing with a large pool of funds over such a long timeframe? Sure, if you need to withdraw funds during a downturn that's bad, but over the long term isn't that statistically balanced out by other months where you get lucky and withdraw during a peak?
Further, I know it goes against economic orthodoxy, but I am a big fan of buying low and selling high. When the market is bad, I become more frugal, I might even run on debt instead of selling. When the market is at all time highs, I'll sell some from riskier and move that into other things.
Another oddity in this situation... People die slightly more often during flu season, so you could game this and plan to withdraw less.
Longbets: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” - https://longbets.org/362/ (won by Warren Buffett)
Should New York’s $270B pension fund abandon Wall Street? - https://www.semafor.com/article/08/07/2025/new-york-comptrol... - August 7th, 2025 ("Drew Warshaw is running for New York state comptroller, a job most voters would struggle to define but one that includes oversight of the state’s pension fund. If he unseats 18-year incumbent Thomas DiNapoli, Warshaw’s plan is to move much of its nearly $300 billion of investments into ultra-cheap, passive index funds. The New York State and Local Retirement System has more than $90 billion invested in private equity, private credit, real estate, and other complex assets. All promise high returns — catnip for pension managers facing future payouts to retirees — but charge high fees, too. The question facing New York and hundreds of other state and local pension funds, charitable endowments, universities, and government funds around the world: Are these high-priced managers worth the fees they’re charging?")
The management fees are, broadly speaking, a grift/rake of capital flows and economically inefficient, based on the evidence and the data. The issue at play is that the capital market ecosystem has become a bureaucracy that demands to continue to grow, versus cannibalizing itself in the name of economically efficient capital allocation.
Tangentially, the markets are moving to more trading (24/7/5) versus less because when trades are made, money is made in a Parable of the Broken Window sort of way by the capital market industry.
Yes, that's my point. That bet ended 8 years ago. If "multiplying money" is really the sole goal then why didn't all the pension funds switch to investing in index funds back then? There are clearly some structural issues here which don't align well with the idea that pensions are a "paperclip maximizer" with the goal of maximizing returns.
I find it interesting that the OP isn't arguing pensions should switch to investing in index funds, but rather into other projects the OP considers morally superior and that he personally believes will give better returns then hedge funds. To me that just feels like trading one set of hedge fund managers for another.
Why would it matter what they want? I'm making a rhetorical point that "multiplying the money" is de facto not the sole goal of these funds, there's clearly something else at play.
CalPers, the largest public employee retirement system in the US was not getting the kind of returns that they needed. They were restricted from purchasing stocks in certain industries, such as oil, weapons, etc.. However, they recently switched to investing in private equity funds and now they are getting much better returns, without all the pesky moral issues involved with it.
Washing what, exactly? If you are suggesting that pension funds are investing via PE funds in assets that the pension funds themselves are prohibited from investing in, that's not how it works. The mandate between a pension fund and the PE fund will be quite clear on what assets the PE fund may or may not invest in on behalf of the pension fund, and will mirror the restrictions that apply to the pension fund.
> However, they recently switched to investing in private equity funds and now they are getting much better returns, without all the pesky moral issues involved with it.
Isn't the main problem with pensions today the dramatic increase in life expectancy post-retirement? They were never intended to support decades of retirement: in the old days, you retired at 65 and there was a good chance you'd be dead by 70, at most 75. (When Social Security was established in the 1930s, life expectancy was only 61.) Nowadays, there's a good chance you'll live beyond 90, with expenses increasing disproportionately towards end-of-life. Combine that with a shrinking birthrate, and no feasible increase in ROI/worker contributions can sustain pension-funded retirements of 25+ years.
Using overall life expectancy here is misleading, as it includes the risk of childhood mortality. You have to look at life expectancy at a given age. According to the SSA's life tables[0], life expectancy for men at 65 in 1930 and 1940 was about 12 years. In 2020, it was about 17. A significant increase, but not nearly as extreme as you're saying.
In 1930, if a person starts paying into the pension at 30, at that point they have a life expectancy of 37 years, ie they will benefit from the pension for 2 years. Life expectancy at age 30 goes up to 48 in 2020, which gives them 13 years after retirement, 6.5 times higher. Assuming linearity, the average life expectancy after retirement during the time you are paying into your pension between 30 and 65 would be 7 years in 1930, and 17 in 2020.
At age 65 life expectancy hasn’t gone up as much, only around 6 years more today vs 1930. So it’s still a factor but not as dramatic as you make it seem.
What is the value in 1930 though? Only 6 years could in fact mean over 100% increase in life expectancy at age 65. There's a reason full Social Security now starts at 67 rather than 65, and you are incentivized to take Social Security at age 70 if possible.
No, the problem was that increased contributions [that would've ensured solvency with lower market returns and/or extended life expectancy] would've cost more sooner, and no one wants to pay more. So, we "extend and pretend" using generous return assumptions and when those assumptions are not borne out in reality, we simply shrug. Similar to $39T in US treasuries someone will need to pay back. Only the top 40% of Americans have enough income to have a federal tax liability, so who is going to pay this debt back? Different sides of the same coin. What is a debt after all besides a promise to pay.
I'd like to see more public banks. Municipalities, and even states, are holding balances in commercial banks but there's nothing stopping them holding this in their own bank to direct capital for public benefit. California has a law allowing it, although despite a campaign in LA I don't know if it's been used. North Dakota has a state-wide public bank. It works!
Pension funds should have a rule -- invest in technologies, industries and companies that create a deflation (by technology, scale, efficiency, etc). This will create better outcomes for pensioners. If they invested in cheaper housing, healthcare, pensioners can live without the constant fear of running out of money. The absolute first thing to invest in is clean energy which can be super cheap to zero to actually making money by supplying power back to the grid. Once energy is solved, it solves an entire spectrum of problems.
Increasing the money(number), while making everything else costly (a lot more costlier in reality because of fictional inflation number) is not only hard to achieve, but even if achieved, doesn't mean much. ".S. Dollar itself has lost roughly 98% of its purchasing power over the long term" -- random Warren Buffett quote.
> Pension capital is money that will not be needed for 20 to 40 years.
Is it though? Much of the article talks about public employee pensions, and many of those are ridiculously underwater. People tend to think of pensions as deposit accounts that grow a bit while you wait to retire, but in reality many of them pay out a portion of your pension deposits directly to retirees, because the money those retirees deposited has already been spent.
Student Loan interest rates in the US can be as high as 9-13%. The government can borrow at 3.36% which even if we assume a 20% overhead is 4.03% to the borrower. Other countries/governments do a scheme similar to this, and it makes repayment realistic.
I'm certain someone will respond telling me the difference between Subsidized, Unsubsidized, PLUS, and private loans which completely missing the point: There shouldn't be a private entity that needs to turn a profit on the backs of students begin with, it is immoral. If you remove the private for-profit entity, the loan-type distinction goes away.
It isn't uncommon to read stories from people, who graduated and are in good jobs, and had no gaps in repayments that are now on 300%+ of their original borrowed amount.
Your argument kinda falls apart with the observation that private loans often have waaaay lower interest rates than federal ones... Typical private loans start in the 3% range, vs 6.4 for the lowest Federal ones.
Can you think to the "3% range" private student loans? But regardless, my "argument" is for lower, fairer, interest rates that students are actually expected (and can realistically) repay. One where profit isn't made.
Who makes the profit is largely irrelevant; the students suffer the same either way.
The headline intimates that Vanguard, like other investment companies don't have large stakes in private equity firms... the same private equity firms bankrupting hospitals across the country.
> There is roughly $6 trillion of it, sitting in American public pension funds, currently being allocated in a way that serves nobody.
Yeah. That's what pension funds do. They accumulate money and hand it out to people who think they damn well better be able to withdraw upon it.
In 1960, the birth rate in the US started to decline. It hasn't had a meaningful rise since. [0]
Markets can experience natural growth - typically through birth rates, sometimes through immigration - or they can begin to more thoroughly monetize capital as to create growth from fewer people.
The Baby Boomers thoroughly broke the ability to grow through natural means, and it's been that way for 25-30 years.
This is a problem, because you need that natural growth to fund the retirements that the Boomers planned on having, along with the entitlement state in the US, which focuses almost exclusively on people over the age of 65 with OASDI and Medicare.
So how do you solve this problem?
If you're investing the hospital business, for example, you can no longer expect the same sort of growth that you used to if your plan is to have a current customer birth their 2.1 kids in your maternity ward. You now need to do other things to monetize the current customer, like charging him more for his next procedure, or - even better - looking to developing markets like India (or China 25 years ago) and focus your investment there. It's a lot easier to bring a rural clinic "up to spec" in China than it is in the US, because one started out with far cheaper needs to meet. X-ray machines are easy to install; cancer centers with advanced imaging machines and academic medicine practitioners are expensive.
And that's what the investors do. They find ways to get in on deals that aren't in the US. It's not just medicine, either. That capital that built Shenzhen into a tech mecca came from the US.
In the meantime, they need to find ways to exist in the American market, so they do what I mentioned earlier: they monetize the hell out of customers they already have. If that means closing a hospital and making the "customer" (read: guy having a heart attack) go to one twenty miles further away that has a better business value, then they do exactly that.
Or, they find ways to monetize the younger generations more, since they're not drawing on pensions and IRAs yet. Otherwise they risk gobbling up the returns they handed back to their members with increased costs.
Ban companies from owning other companies? How would that work exactly?
Private equity is a convenient whipping boy for ignorant, low-information HN users who don't understand the basics of how finance works. You can certainly find examples of destructive or unethical behavior if you dig deep enough. What you don't see in the news are all the cases where PE saved companies that would have otherwise gone bankrupt.
> ignorant, low-information HN users who don't understand the basics of how finance works
I though HN was a site that welcomed people of all levels of knowledge and shared thoughts, ideas, and resources to help people learn so we can elevate each other. Why are you coming at someone who freely admitted they lack understanding and tossing out a dismissive reply to them instead of saying: "Let me help fill in the knowledge gap here."
I thought HN was a site where users would take 30 seconds to do a modicum of research before wasting everyone's time trying to score points with a lazy, low-effort comment.
Sure, people mostly call out private equity when you see a group trying to cobble together local monopoly power over some necessity of life just to extract more from everyone, or trying to financially optimize something by that was never financial before. There are of course many more benign examples that no one pays attention to. But the fact remains that there are PE firms doing massively harmful things to extract wealth.
the PE business model depends on a lot of discretionary financial regulation.
For example, banks are given pretty generous capital rule treatment when they loan money to PE firms to increase leverage. We could stop that. They also get a lot of tax preferences that increase returns to investors and managers.
> Private equity is a convenient whipping boy for ignorant, low-information HN users who don't understand the basics of how finance works. You can certainly find examples of destructive or unethical behavior if you dig deep enough. What you don't see in the news are all the cases where PE saved companies that would have otherwise gone bankrupt.
This is an unnecessarily aggressive comment and not appropriate.
But also, your own comment is information-free. Why don’t you share actual examples and we can determine if those are significant enough to erase the anecdotal evidence from the other side. Virtually all examples of PE I’ve seen are extractive. They don’t result in a better product. They are instead just lazy arbitrage relying on the power of capital, vendor lock-in, switching costs, and the limited capital of their abused customers.
As for “how would that work exactly” - like anything else. We can come up with ways to classify companies as private equity and enact enormous taxes on them. Or pass other types of regulations into law.
The problem here is that only bad/negative/failed cases make it to discussion.
It's like researching the safety of driving by only looking at local news station websites. It will seem like the only thing those cars do is crash and kill people.
When laypeople criticize private equity, what they almost always mean to refer to are leveraged buyouts. I suspect you’d acknowledge that, if a private equity firm sees a strategy to turn around a business operationally but doesn’t produce enough returns to service their debt, they won’t pursue it even though the original owner likely would have.
You, presumably, have examples of these cases. Could you show them to us, please? (Given your understanding of the evidence available to us "ignorant, low-information HN users", you know you're making a bold claim, which creates a corresponding burden of proof.)
TFA provides examples where private equity has been destructive in the healthcare sector:
> A 2024 Review of Financial Studies paper <https://www.nber.org/papers/w28474> found that private equity acquisition of nursing homes was associated with an ~10% increase in deaths, implying approximately 22,500 additional deaths over the twelve-year sample period.
I was asking for examples where private equity has made things better.
That you did is valuable criticism of my writing. When you get deep enough into "no, you're wrong", "no, you're wrong", it becomes virtually impossible to keep track of who's saying what, unless people actually state their claims explicitly… which I didn't.
The rules are arbitrary, the rules can be changed at any time. Finance is simply a construct on top of lower level primitives (primarily the legal framework around property ownership and corporate entity law). Totally fine for folks to ask which rules matter, which don't, and which can be changed and how long it will take. Be curious!
If the President can sign EOs banning private equity/institutional ownership of homes [1], OP's ask does not seem to be that out there imho; again, all of these rules are arbitrary and can change at any time. How do we change rules around ownership? We change laws or how they're applied.
I don't think a ban is required. Other countries (in the EU?) have put restrictions on it that prevent the abuses you see in the US. Why don't we do that? Because US Congress has been neutered and that appendage of US politics has withered and died.
Private equity is simply a person (or small group of people) owning a company. Basically every small business in the US.
The problem is not private equity, but that private equity engages in corporate raiding--buy up a company, borrow, extract capital, sell it to suckers who don't see the problems. Dig into practically all malfeasance and you'll find it's someone who benefits from making the future value of something look better than it really is and then leaving the problem for somebody else. At the executive level I think the answer is mandating income above a certain threshold be paid over time based on the future value. (Stuff that's actively traded would be easy: Let's say the cap was $1m. Pay the CEO 10m? No, he gets $1m, plus shares currently worth $1m to be delivered in a year, shares currently worth $1m to be delivered in two years and so on.) And while there is pending income they are categorically prohibited from any transaction that benefits from a drop in share price. Inadvertent (say, bought a fund that shorted the stock) it's a 100% tax rate, deliberate and all pending shares are forfeit. I have no idea of an answer with the PE problem.
I accept there's a problem. I don't believe there's a simple, one-size-fits-all solution. It'll take years, possibly decades, of regulatory and anti-trust work across every industry. Tons of political will and capital.
It is important definition. As private equity can mean anything not publicly traded.
I do support banning certain financial actions. Like paying dividends with debt. Or structuring deals that achieve same effect. On other hand I would also ban stock buybacks.
It'd be difficult to ban what we commonly describe as private equity (a.k.a. PE firms) without banning the private (a.k.a. random people) from being able to hold equity. Someone smart might be able to ban the kind of investment vehicles that have become the bane of modern productivity but we do still need some mechanism to allow investment.
Well, let's start with banning debt push down and then move on to the next tool used to privatise profit and socialise risks. You know, it used to be that unfair business practices were researched and banned, simple as that. Just throwing up your hands and saying "Well, what to do?" when there's, you know, a whole science in which people are trained, is disingenuous.
Im gonna speculate they were referring to the part of private equity where you buy businesses to load them up with debt to buy more businesses ad nauseum
You can't load someone else with debt. That's obviously illegal. When you buy a company it isn't "them" anymore. And the new owners have exactly the same rights to borrow money as the old ones.
That's true when the debt is taken it is taken by the company (at the direction of the acquiring firm)... and maybe the bigger issue is that banks should be a whole lot more judicious in extending that debt. But some firms have found a heck of a loophole in buying a company, running an extremely high debt line, paying the acquiring firm (themselves) handsomely and then innocently whistling when the business collapses and a bunch of real economic value is erased.
Doing that to a company isn't an activity that should be rewarded since you're destroying, rather than creating, economic value. It is absolutely an exploit or flaw in our system and no more than one person should have been able to get away with it.
It isn't rewarded. If a business you buy collapses, you lose money. You seem to be falling for the conspiracy theory that private equity wants to collapse businesses.
I have no idea why leveraged buyouts are legal. What a bizarre mechanism for acquisition that feels so easy to just shut down with a relatively simple rule.
Restricting a previously purchased business from taking out debt feels harder to regulate, but someone smart could probably figure out a few good rules to stop the majority of abuses.
Do you think non-recourse mortgage (the dominant type in USA) also should be banned? VC finds a bank that borrows them money to buy X, with X as collateral. It is exactly the same.
The mass selloff of assets and absurd cost-cutting is caused by new owners not giving a damn about the future of acquired company, its workers nor clients - it has nothing to do with leveraged buyout itself.
Most pension funds aren't heavily invested in ETFs (or other mutual funds). They're usually large enough that it makes sense to invest directly in the underlying securities.
Everyone has a prediction about what will cause the next major financial panic. Personally I think it will be triggered by property and casualty insurers who have purchased a lot of bonds where the credit ratings don't accurately reflect the true default risk. But who knows, it could be something else.
> how do you crash an ETF? I'm talking about broad index funds. Not stuff like ARKK
Any ETF's share value can "crash" if there are not enough buyers to purchase shares when they are trading below NAV (net asset value). It's worth a quick google to see what "market makers" or "authorized participants" do, but the thing to keep in mind is: if the market is kind of exploding in some major ways (think 2008) an ETF might not have a lot of buyers, even if its market price is well below its net asset value.
But why would that happen? Let's say an ETF normally trades at 99% of it's NAV. Suddenly it "crashes" and only trades at 97.2% after some bad news. Bob in accounting embezzled millions. It's gone, Bob spent it all at the strip club. Wouldn't some investor decide to just net the approximately ~1.8% by increasing demand and buying it up? After all, Bob embezzled millions. Not the billions that larger ETFs control.
Unless you're proposing some weird industry wide boycott of Vanguard or something. In that case the only thing stock traders are going to accomplish is destruction of every publicly traded asset they hold as market confidence in retail traders slowly slips downwards.
> Wouldn't some investor decide to just net the approximately ~1.8% by increasing demand and buying it up?
When it comes to individual investors, sure, in a situation where everything is going crazy in the markets some will buy and some will be happy to sell, provided the exchange doesn't halt trading temporarily in response to an extreme drop in share prices. The problem comes when the large market makers who are meant to really be on the ball and buy large blocks of shares quickly are suddenly worried about their own survival, or at least that's the way I remember a few of the chaotic days of 2008.
I knew a few people who made money buying bond ETFs at a discount to NAV.
I have no idea how one would crash an ETF but I do wonder if someone could manipulate an index. I.e by somehow suggesting a larger fraction of free floating stock so that the index weights the stock higher than its actual share. That should create increased demand for that particular stock (fund companies buy it more) and thus raise its value over what the market would assign normally.
Index crashes have happened many times in the 20th and 21st centuries. The fact that index ETFs didn't exist for most of that period isn't relevant. If they had existed they would've crashed because they follow indices.
The point is that the ETF tracks its index, so what does it even mean to say ETF crash? Isn't that just the tracked stocks crashing? The ETF has little to do with it. But if there is some other risk that's warrants the ETF label, that's very very interesting and should be discussed! It would be little known or novel ETF mechanics.
> so what does it even mean to say ETF crash ? Isn't that just the tracked stocks crashing?
Yes. I've learned to differentiate between the words people use and what they actually mean, rather than being literal.
Since index ETFs make up a large portion of people's investments they fear the value of those ETFs tanking. Obviously this is due to the underlying stocks' prices dropping This has happened many times in the past, most (in)famously in 1929.
Well that's the crux of it, isn't it? How do you know what they really mean, if not through the words? You have to impose a mental model on the speaker, which we of course do anyways.
Saying ETF crash specifically sounds like there is an idea there, and lots of people talk about thinking that ETFs specifically have problems that owning stocks directly would not have, so in my mind the model is that the speaker has an idea about how ETFs cause the crash through hidden risk. And since hidden risk is behind most crashes, it's definitely an interesting direction to ask about.
If you own an ETF and the underlying assets crash the ETF value has gone down. Additional failure modes exist due to the mechanics of the ETF, but from context we can tell the original comment was about risks to the large amount of money invested in ETFs
A US wealth/unrealized gains tax might trigger it, because it would likely create a cascade of forced selling, with the proceeds of sales getting burned as tax revenue for entitlement programs or debt payments rather than reinvested.
I don't think that would happen for the same reason that there are income taxes and yet the government doesn't have every last dollar. Sovereign wealth funds sell assets too.
If you think sovereign wealth funds are communism, someone should tell Alaska.
I invite you to watch Mike Green videos. In short, the current market rely on inflow of money to substain itself. P/E ratio can't increase forever. There will be a tipping point and if most of the money is invested based on an algorithm, it can unravel rapidly.
> Second, that capital is trapped in an institutional arrangement that charges enormous fees to match the performance of a simple index fund, while the money deployed through these intermediaries actively harms the communities pensioners live in: buying up their housing, closing their hospitals, bankrupting their local employers, gutting their newspapers.
This is the same argument that Ann Pettifor has about how the poor allocation of pension funds is because "it’s much easier to make money from gambling and speculating than it is from investing in the land on the one hand, in the broader sense of the word, or investing in labor"
> Larry Summers warned against “moral hazard lectures” and demanded SVB depositors be made whole immediately in 2023, months after calling student loan relief inflationary and unfair. Moral hazard for borrowers, bailouts for banks. Not lost on the public.
I can't believe I'm about to say something that could be construed as a defense of Larry Summers, but here goes: bank depositors are not engaging in risky behavior, they are putting cash in a bank. SVB did not get bailed out, it failed.
And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Combine this with the "need" for nuclear (a perfectly cromulent but excessively expensive power source which has cheaper zero-carbon options), in the first paragraph, these comments that are not about the main topic severely undermine my ability to trust the rest of the essay.
The lesson to myself is to be narrow when I write, so as not to bring in a bunch of other positions that also need to be defended.
I disagree about student loans. The entire system needs to be dismantled.
Universities don't care if their majors will result in a job and the student loans are a source of risk-free money.
They need to start taking on the risk of all student loan, not me, the tax payer.
Ok, but forgiving student loans doesn't do that. It signals to borrowers that they don't have to repay high loans if their career can't support it. It tells borrowers that they can make risky loans without a chance of default. It tells universities that they can keep charging exorbitant tuitions because kids can still get loans to pay them.
The solution is to allow judges the discretion to default them in bankruptcy after X number of years after graduation. Lenders need to accept the risk. With no risk, they can loan as much as they want and have guaranteed repayment. This drives tuition higher and higher.
I’m always surprised that student loan forgiveness appeals to anyone who should otherwise be able to think about all of the bad second order effects.
The more we inject money into the education system, the higher prices go. Setting a precedent that the government will just pay off your loans if you don’t pay them off only encourages more people to take out loans without thinking about paying them back.
There are so many things wrong with this idea that I can’t believe it continues to be popular. The only thing I can think of is that it’s a litmus test for who can and cannot consider second order effects of economic decisions, or who believes money can spent en masse without altering the system.
If this were done in a less ridiculous manner, it might actually have the desired effect. Make student loans dischargable in bankruptcy (just like any other loan) and don’t give them government backing. Then private lenders could decide how much money to lend out, and the answer might well be “not very much.”
Maybe, but that precedent has been set before for other types of loans, and in a limited way for student loans, and the sky didn’t fall. The upward price pressure on university prices is far more influenced by other factors (which should be fixed!). Loan forgiveness probably is a drop in the bucket, I suspect.
>Maybe, but that precedent has been set before for other types of loans.
what is this referring to?
What are the second-order effects of a subclass of citizens permanently encumbered by debt that (with rare exceptions) cannot be discharged through bankruptcy?
Perhaps your analysis of second-order effects is not thorough and complete? Have you really considered all of them?
Not really sure why this is getting downvoted.
I don't really think we need to forgive student loans - I think they should absolutely be dischargeable through bankruptcy, though.
Bankruptcy isn't a "get out of jail free" card - it puts a huge burden on a student relatively soon after graduating that makes it harder to start a family or buy a home. So it incentives are still aligned for the students taking the loans.
But the option that a student defaults brings some real light and transparency into a loan system that just feels wildly disconnected from reality right now. If a student can't pay the loan back with the job options in the field and is like to default... don't issue the loan.
I think it's absolutely abusive that student debt can't be discharged, and is pretty heinous as policy.
Yeah it's pretty amazing that we have loans which you can never escape and yet have high interest rates in spite of that. If I cannot declare bankruptcy, then at the least the interest rate should be 0%, appropriately reflecting the risk.
No.
1) Zero risk does not mean 0% interest. True zero risk should have the same yield as treasuries.
2) No bankruptcy does not equal guaranteed payment. Some will die without having repaid.
Only if treasuries are truly zero risk. That may not be a valid assumption anymore.
> I don't really think we need to forgive student loans.
Neither do I. I was happy with the status quo ante Trump where many classes of public servant could get their student debts forgiven after on the order of ten years of service. (An imperfect program with too many disqualifying loopholes, but it was better than nothing. Now, almost no one qualifies.) The Overton window has foreclosed on that kind of solution to the problem, however. Even military personnel have been disqualified from attending certain schools as part of their meager education benefit.
> Bankruptcy isn't a "get out of jail free" card
Indeed. One’s mid-twenties are arguably the worst period of one’s life to live with damaged credit.
> I think it's absolutely abusive that student debt can't be discharged, and is pretty heinous as policy.
Absolutely, it needs to go.
The reason that you can't (default) discharge student loan debt in bankruptcy is that your degree can't be seized and sold off, so there's a pretty weak incentive to not declare bankruptcy as soon as you're handed your degree.
What if a degree could be seized? For example, what if bankruptcy courts could require a debtor to stop "representing themselves" as having a degree as a condition for discharging debt. If a court revoked a degree, it would effectively reset the graduate to the status of a dropout removing a significant amount of the degree's value (I know knowledge has its own value, but credentialism is a big part of a degree's value too).Universities already have the infrastructure to flag students. For example, many institutions withhold official transcripts or diplomas for academic fraud, moral infringements etc. Could this create enough of an incentive to pay back loans and not declare bankruptcy?
I don't think that would fly, since it would provide no benefit to the owner of the debt and would just be enormously punitive and feel pointlessly cruel.
It would be like if instead of a foreclosure they just took a bulldozer to the house, then salted the earth with asbestos and lead so nobody could ever build a house there again. What's the (acute) benefit in just destroying the value? Plus, it turns the four years into a complete waste of time, no matter how hard you worked to get the degree, just because you couldn't find employment after.
I know we're talking about tweaking incentives to make it not worth it to game the system, but this would also screw over people that found themselves in that position through no fault of their own, plus it would waste all the time and work of everyone that taught that person and contributed to their education (even though they got paid, people largely aren't in education for the cash).
I don't know, I think it would be too much of a bummer to work.
When student debt becomes dischargeable, market forces will finally price degrees according to their actual economic value relative to the risk of poor returns. Currently, that price discovery is broken; the cost of a degree bears almost no relationship to its real-world payoff. No need for degree seizure to correct it. Lenders can decide for themselves which degrees lead to returns, which in turn provides degree seekers with actual financial signals instead of vibes-based "go into programming" propaganda from FAANG.
> What are the second-order effects of a subclass of citizens permanently encumbered by debt that (with rare exceptions) cannot be discharged through bankruptcy?
A harsh lesson in personal responsibility. If you went to an out-of-state school to major in criminology hoping to be the next CSI, and you borrowed 180k to do it, you've learned a valuable lesson.
Don't give me "they're only kids, they aren't able to make these decisions!"
> Don't give me "they're only kids, they aren't able to make these decisions!"
You’re responding to something you imagined I said. We’re talking about economic effects here, not your vengeful little morality play.
Just heading it off, not imagining anything.
Allowing student debt to be canceled during bankruptcy would be a good first step (possibly even better than canceling student debt across the board).
To your point, making it easy to cancel debt teaches borrowers that debt isn’t a serious thing.
Requiring someone go through bankruptcy (and all of the associated negatives on your credit score, etc) seems like a good tradeoff. Allows you to get out from under the debt (the entire purpose of bankruptcy in the first place..) while not letting everyone pretend the debt never existed (need to live with the impact of bankruptcy on your ability to borrow in the future)
I don’t know why we don’t hear more people lobbying for this. I guess it’s because the sound bite isn’t as sexy.
Bankruptcy affects your credit score for 7-10 years. Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
There is also the obvious drawback that if more people can discharge the debt, the interest rate goes up, and then everyone else has to pay for the people who took out loans they didn't pay back.
> Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
So change the bankruptcy law? It’s a pretty easy fix. Create a whole new chapter if that’s what it takes. Make it dischargeable only after 7 years of nonpayment, do means testing… bankruptcy law already has these kinds of nuances built in.
> Make it dischargeable only after 7 years of nonpayment
You don't really want to give people an incentive for nonpayment.
> do means testing
Bankruptcy already does that. But what are your "means" the day you graduate from college and haven't yet found a job, or temporarily take a low-paying one on purpose to meet the eligibility requirements?
You would need something like, deferred payments while you're unemployed but if you subsequently find a job then you have to pay, instead of one-time permanently discharging the loans. Except that's how it already works.
The questions you have are best put to a judge. The law is not meant to cover every possible permutation of circumstances and motivations.
If student loans are dischargeable in bankruptcy, lenders will price it in or refuse to lend without a gurantor.
> The law is not meant to cover every possible permutation of circumstances and motivations.
This isn't a permutations issue. We know the specific shape of the problem: 18 year olds from poor and lower middle class families don't typically have existing assets with which to secure a loan, so if they can't secure it with their future earnings, they can't get one, and then they can't afford to go to college.
> If student loans are dischargeable in bankruptcy, lenders will price it in or refuse to lend without a gurantor.
That's the problem. The inability to discharge them allows the borrower to get a much lower interest rate than they otherwise could for unsecured debt issued to someone with minimal credit history, or find someone willing to loan them the money to begin with.
It was set up this way so that people could go to college.
Imagine a world where lenders charged different interest rates depending on the risk profile of each school.
Lower interest rates for schools where graduates repay their debt, higher interest for schools where many people default.
Assuming it wouldn’t disproportionately affect disadvantaged populations, that could be an interesting way to incentivize schools to get their shit together and prepare students for starting their career
I've suggested a very different approach:
Don't have a dollar amount that you repay. Rather, your student loan payment is x% of (your income minus the average rate for those with a high school diploma) for y years. Forgiveness programs for certain fields go away--instead, the tab gets picked up perhaps with a multiplier. Disability, death? Irrelevant--a dead person generally makes nothing, the amount owed is $0. (Generally makes nothing because there can be ongoing income from something they produced. That would be subject to the loan repayment.)
Devils advocate: I don’t think this would work due to the cash flow uncertainty the models causes.
If universities don’t know how much they’re going to bring in over the next few years, they won’t be able to budget effectively.
And then there’s the question of whether it’s acceptable for the lender to collect more than what was borrowed. E.g. if I graduate college, start a company, and sell it for $100 million.. am I then paying my alma mater (or lender) millions? If so, would universities make more money from the commons or are they banking on a very small percent landing extremely lucrative gigs post-graduation? I don’t think we want the model to resemble startup financing, where nearly all fail and a small handful pay for the rest (that works for startups, doesn’t work for people’s careers)
I like the concept though. In 2010’s when I was entering college, I actually made a website trying to solicit someone to pay for my education in exchange for a percentage of my future earnings. I found no takers at the time.
That effect would be drowned out by all the people defaulting en masse because getting out of a six figure unsecured debt is worth more than a temporary hit to your credit score.
If that’s true, why isn’t everyone already doing it? Especially if 87% of student loans are forgiven during bankruptcy - maybe people just aren’t aware it’s possible.
"Possible" and "easy" are two different things. 87% is of the people who applied for it, but they would be the ones most likely to have it granted because there is little reason to pay lawyers to file a form which is likely to be rejected. But the more you relax the requirements, the more people do it, which is of course the problem.
People who start lobbying for it quickly discover that 87% of people who petition for their student debt to be cancelled in bankruptcy get it (https://www.cnbc.com/2025/12/29/bankruptcy-student-loan-borr...). I support removing the special treatment entirely, but ultimately most student debt holders don’t go bankrupt.
> Still, few people pursue the option because of a “pervasive” myth that the loans can’t be included in the proceeding
It also says nothing about whether the person actually goes bankrupt, just which debts are discharged, which is one of the key parts of the bankruptcy process. Certain debts are discharged because the person can’t pay them back, which is the point of going into bankruptcy court.
> The solution is to allow judges the discretion to default them in bankruptcy after X number of years after graduation. Lenders need to accept the risk. With no risk, they can loan as much as they want and have guaranteed repayment. This drives tuition higher and higher.
This. The whole student loan mess is a direct result of their special treatment during bankruptcy.
> It tells universities that they can keep charging exorbitant tuitions because kids can still get loans to pay them.
I wouldn't be opposed to some kind of tuition claw-back from schools, when a student loan goes into default (but only by the government, not private lenders). The universities need more skin in the game to keep tuition under control.
That's why it should be a one time event in conjunction with reworking the whole system.
Why can I, as an 18 year old, sign for a loan that _cannot_ be forgiven, graduate into a crashed economy, and still be held accountable for choices that impact me when I only had a small part in them? The system needs reformed, and we need to do something for the people still on the hook of the old system (and I say this as someone who has paid off all my student loans).
Same reason you can sign up for war, or ride a bike without a helmet (in some places). The world is a dangerous place and the less legislation we have blocking people from making decisions, the more likely they are to be capable of making their own. In 2009 when I graduated, it was common knowledge that any private colleges or abnormal degrees were an oddity only for rich people to buy a piece of paper for their more disappointing kids. I don't know what changed (or if it was just localized), but whoever convinced you to go for the scam is at fault here in your circumstance- not the "system" for allowing other people to benefit.
It's a bunch of able-bodied people who took the elevator instead of stairs thinking it was a shortcut, but the effort put in was the whole point. Anyone who told you otherwise is to blame. Punishing people who took the stairs sends a clear message to everyone else deciding which way to go.
> Why can I, as an 18 year old, sign for a loan that _cannot_ be forgiven, graduate into a crashed economy, and still be held accountable for choices that impact me when I only had a small part in them?
Because you took the money promising to pay it back, spent it on something you wanted, and now it's gone and someone has to pay the money you spent.
It's like saying why can I, as an 18 year old, purposely drive a car into someone else's house, cause six figures in costs, and then be expected to be on the hook for that because auto liability insurance doesn't cover intentional acts? You're the one who chose to do that.
The price of tuition and the expectation that you pay back the money are not secrets kept from you until after you've already signed, or if they somehow are then maybe fix that.
The money can't be spent on a house or any useful asset that could be resold. They wouldn't give you a loan for that at 18 because it'd be irresponsible since they know you don't know anything about finance or economics as you likely don't have an education yet. They'll give you a high interest credit card with a 500 dollar limit to buy what you want though.
They give you the loan because the asset is you. In general if you get a degree, your future earnings increase by more than the cost of the degree.
The "problem" is that if you don't pay a mortgage the bank takes the house, but the only thing for them to take if you don't pay your student loans is your future earnings, which is just the thing where you have to pay back the loan.
> Because you took the money promising to pay it back, spent it on something you wanted, and now it's gone and someone has to pay the money you spent.
How are they supposed to pay it back with a crashed economy? Look, I get it with personal responsibility and all that but these people were following the rules, did their part and now are burdened to their death while Big Co gets bailed out over and over and never learns responsibility. Why the double standard?
Bailing out corporations went very poorly. They reinflated the housing bubble like they wanted to see how big they could make the balloon this time. I mean look at this:
https://fred.stlouisfed.org/graph/?g=1M8KZ
The peak in 2007 was the massive housing bubble that crashed the whole economy. Where are we now?
The only reasonable way to solve that is to stop bailing out corporations.
Except that no one has been preaching at you for your entire academic life that you MUST drive a car into someone's house at 18 in order to be able to get more than a minimum wage hard labor job.
But now we've arrived at the source of the trouble. Why are people being preached at to get a degree in subterranean cat washing instead of engineering or nursing, or for that matter forego a degree and pursue a trade?
As a parent of a 16 and almost 14 year old i'm effectively home schooling personal finance with them. My wife and I got none from our parents and were preyed upon constantly. I think I was 45 when i finally got my student loans paid off. My wife did many years in a dangerous, low-performing, HS as a teacher to get hers forgiven. Sending an 18 year old off to college without a solid understanding of finance is like throwing an 18 year old in the ocean while bleeding profusely and tasking them with swimming to shore, maybe a couple make it but the sharks will get the rest.
It's a crying shame that public high schools do not teach basic finance, basic accounting, and how a business works.
In other words, they don't teach anything about how our economy works.
https://www.wunc.org/show/due-south/2024-06-10/personal-fina...
they do. maybe not where you live but they do. my kid has had personal finance classes since 4th grade
I attended 4 different public schools growing up, and none of them did. I see that some today do.
But I still see college graduates ranting on X who clearly do not understand compound interest on their student loans.
Why should other people be on the hook for your decisions?
If there are decisions that are so bad people shouldn't be on the hook for them, we should prohibit those decisions.
Banning credit for a large portion of the population would be a net good but we can't have that conversation.
Why would I work hard once I found out I was going to be defaulted X years from now?
so take the money back from the universities in all cases where they negligently misrepresented the future job market of the field of study to the borrowers or what?
Student loans currently carry no risk. They can't be discharged. Interest is the payment to the lender to accept risk. There is no risk in the current state of student loans. Therefore they should never-ever charge interest.
Also schools need to be reigned in, if GA et al can pay each student athlete $40,000 a month, they MUST be held accountable for burdening the students and the state with unscrupulous debt.
> Student loans currently carry no risk. They can't be discharged. Interest is the payment to the lender to accept risk.
you make a good point, if there's no risk there should be no interest. Or at worst, the interest rate should track COLA adjustments to social security. Some basic adjustment relative to inflation so the lender gets back what they lent out.
Now that schools can pay their athletes I hope the rest of the student body take notice and start asking questions about school funds allocation. It should make it plain as day to the average student that their school has plenty of cash and choses to force them into debt.
>you make a good point, if there's no risk there should be no interest.
Even loans to the US government pays interest. If you meant "no premium beyond the risk-free rate", why would anyone want to lend to students, when they have to deal with the hassle of dealing with lenders and the political risk of it getting discharged, when they can just led to the federal government instead?
Around 6% of student loans are defaulted on. Some of those end up never being repaid while others are delayed substantially.
Also interest is payment for the combination of losing use of money + risk + inflation.
They should charge rate. But rate should be similar to say interbank rate. Maybe plus something like 0.5%. This is how standard loaning often operates. You have risk free lending so you get loan from somewhere else and then take some margin.
Interest also compensates for the other things that money could be doing. If I didn't loan it to you (or a student), then I would be doing something else with the money, even if just buying a government bond.
I'm not sure that is accurate. You need a borrower to do that. If there were other low risk borrowers they would also lend them money, it's not a zero sum game. I'm no banker, but pretty sure the bank doesn't lend itself fractionally reserved loans and buy t-bonds.
One downside is that money lent for a student loan cannot otherwise be invested. If paid back later with no interest, the money will likely have lost value to inflation in the meantime.
I think I agree with your broader point - just quibbling, here.
>. It signals to borrowers that they don't have to repay high loans if their career can't support it.
The loan forgiveness wasn't a thing when many students took out the loans.
It would be a signal to future borrowers.
That's not a solution at all, because it will price out way too many students.
The solution is to do what Germany and most of the EU does - pay universities with tax money and do not charge students anything at all (or maybe a few hundred to thousand euros).
> The solution is to do what Germany and most of the EU does - pay universities with tax money and do not charge students anything at all (or maybe a few hundred to thousand euros).
This is a totally fine system, but would change US tertiary education massively. Much of the state university increases in tuition since the GFC have been driven by exactly the opposite behaviour (cut state funding, make it up in tuition).
Most states already have affordable tuition for in-state residents. California is middle of the pack, and CSU tuition is less than $10k/year. (Nationwide, public in-state 4-year tuition ranges from ~$5k/yr to ~$15k/yr.)
For most students at public 4-year universities in the US, room & board costs significantly more than tuition. Even in those EU countries where tuition is free, average student loan debt is often >$20k USD because of this. By way of comparison, average student loan debt in the US is ~$40k USD, and that includes private school and out-of-state student tuition as well as room & board. Note that at least for the US, $40k is the mean; the median debt is <$30k. And these numbers are totals, not per year.
Perhaps one of the best ways to address the college affordability "crisis" would be to build more dormitories. The capital expenses could be publicly funded, and then charge students maintenance costs. But for various reasons, including NIMBY development barriers as well as modern expectations (see, e.g., the vitriol spewed about the windowless UCSB Munger Hall bedrooms), schools have long ago neglected this aspect.
That is what we did in the past, and why my undergrad degree didn't cost me nearly as much as someone would pay to get the same degree today from the same university. We've decimated state funding for public universities.
When students have "skin in the game", i.e. they are paying for it, they will work to get their money's worth out of it.
People do not value things they get for free.
How many German universities are ranked top 40 globally? How many American?
> How many German universities are ranked top 40 globally? How many American?
University rankings are mostly nonsense. They generally over-weight English speaking universities because most of the "high impact" journals are in English. The UK also does well by these metrics, but fundamentally academic research and teaching are very different things, and incentivising high output research institutions to focus on the research breaks the social purpose of universities which is to turn out educated undergraduates.
The German model is to focus more on teaching, which is a more sustainable approach than chasing the finite research dollars.
Great example of narrow rationality. Huge amount of Americas current problems can be traced back to a poorly educated population. Universal access to third level education, combined with a school system designed to educate - in direct opposition to current goal of producing labour units for corporate; would massively improve pretty much ever aspect of American life.
The market lens is myopic, the market cannot be expected to produce social goods in proportion to necessity - that's not any part of its function.
I agree that the student loan system is insane. Students need grants to cover cost of living while they focus on learning, education itself of course should be free.
>combined with a school system designed to educate - in direct opposition to current goal of producing labour units for corporate; would massively improve pretty much ever aspect of American life.
"producing labour units for corporate" at least pays the bills. What's the alternative? Education is for "finding yourself" or whatever? That's a nice platitude, but "finding yourself" with a film studies course doesn't pay the bills, and is arguably the reason why there's a student loan crisis in the first place.
A liberal education serves a social function. It makes human beings.
There's a student loan crisis because US education is dominated by for profit colleges (in start contrast to most other countries) and because student loans lack ordinary consumer productions (in stark contrast to all other countries).
In the US students act as guarantors for debt obligations between the government and commercial institutions. The reverse of the usual arrangement.
>There's a student loan crisis because US education is dominated by for profit colleges
No it's not. Most students go to public or non-profit colleges, and most student loans is from government (not private) lenders.
> in direct opposition to current goal of producing labour units for corporate
I never understood this characterization. How do the schools implement a goal for producing labor units?
> education itself of course should be free
People don't value what they get for free. If you sign up for a course in welding, are you going to be more or less diligent in learning it if you have to pay the tuition?
> People don't value what they get for free
No education is free, it's paid in time and effort. I value my degree because it was difficult, not because it had a cost attached. One that could be purchased without effort would have no value.
Paying tuition out of one's own pocket motivates one to learn the material.
The German model is pretty good. Tuition prices are reasonable. If you're studying something statistically considered a good investment - you get free tuition. If not, you pay for it.
The American model is terrible. The tuition prices are insane because no one pays for it now, and there's endless appetite to lend because your borrower is a systemically non-financially literate CHILD who is signing away their future wages with no right to default EVER.
No one would ever lend to the majority of these at these insane tuition prices. We'd quickly end up with reasonable tuitions like in Germany. And then most of the problem goes away.
Suddenly schools and degrees that WEREN'T good investments become good investments again.
I agree with you about student loan forgiveness, but disagree with your assessment of universities as a system. The humanities (which are highly profitable for the university) are suffering an existential crisis because their funding keeps getting cut, while STEM programs (which have low or even negative ROI after lab/equipment/resource costs) keep getting expanded. There's obviously more nuance to that, but at a high level, universities are prioritizing majors which have higher job placement at the expense of their own bottom line.
How about clawbacks from the universities.
Seems massively unconstitutional to retroactively impose penalties, especially if the previous behavior didn't violate any laws. Not to mention the reputational risk on the trustworthiness of US as a place to do business and the risk of abuse from future administrations. You might cheer that universities are getting their just desserts for scamming students, but your political adversaries might use it to claw back funding from universities for being too "woke" or whatever.
> Seems massively unconstitutional to retroactively impose penalties
For existing agreements, of course.
Going forward, for those who are the real beneficiaries of the loans, they should have a skin in the game.
Why aren't universities standing behind their product and offering financing without the unusual non-dischargeable nature of the loans? Do they not stand behind their products?
For all loans? What if a person takes a loan to get into a medical program but can't find a job after and defaults the loan.
Is the university responsible? The arguments seem to be based on majors that have a poor job market.
Is this actually true?
I think about my lab classes and typically these were separate credit hours. More money to the university. Outside chemistry, we were using outdated equipment that wasn't getting refreshed/bought new.
If what you are saying is true, Humanities needs to cut costs of their credit hours or double down. For entertainment degrees (art, music), its prohibitively expensive to casually obtain the education. For business/politics/psychology, there is at least some sort of return on investment to be expected.
"Labs" as in the physical facilities, not the class credits. Computer labs are one example - my school had a Linux lab that, uh, wasn't much used outside of CS/IT/maybe EE. There's also lab equipment for research professors - a nice oscilloscope can cost more than a new car, and students won't ever actually get to use that. Not saying it's wrong - I really appreciated that Linux lab - but it's definitely not equality between departments.
For your second point, I've never heard of a university that charges different credit rates for different majors (outside of special stuff like paying for certain PE classes), but that seems like it would be a university policy, not a department policy.
If universities should take on that risk, should they also receive some share of the student's future earnings? Do you want all schools to work like the US military colleges, where is admitted you get free tuition but also are agreed to work for the school's parent organization for a period?
It’s interesting that not being able to discharge the loan in bankruptcy is because “you can’t take back the knowledge.” While true, you can still make the credential mostly useless. Everyone needs to do certain verification in a new job (e.g. I-9). If a job was posted that requires some degree, and a new hire used the degree they discharged in bankruptcy to get that job, the debt can come roaring back into existence when it’s caught during onboarding. Like anything, there are edge cases (e.g. starting a new company). But even there you might be able to have gates at financing stages that would trip the debt resurrection.
if college education produces a public good (a more competent workforce), then it should be funded through public funds-- government should pay for education.
If it does in fact lead to better outcomes, then the higher tax will cover the cost.
running it through the private system builds in too many perverse incentives.
The US government already subsidizes higher education. And all the state governments do as well. So this is already happening.
It’s not at all clear we need to increase the level of subsidy, the rate of college attendance is very high right now compared to past history.
In theory that sounds good, but in practice our private system has created the best universities in the world and educates an immense number of students to highly employable levels.
>if college education produces a public good (a more competent workforce)
It doesn't achieve this; the % of college graduates has vastly increased over the past few decades, but this hasn't contributed to any significant improvements in standardised measures of graduate knowledge or intelligence. From a business perspective the primarily usage of college is as a filter, a proxy for intelligence and willingness to follow instructions, but its usefulness as a filter has been steadily decreasing as it becomes easier and easier to attend and graduate from college.
That doesn't work, because the Universities benefitting from the high-risk student loans are not the ones making bank from their grants and endowments. This is an imagined enemy fallacy. What you're really doing is demanding that Harvard somehow make whole the defrauded students of the University of Phoenix.
Now, sure, there's a genuine argument that those diploma factory schools aren't providing valuable service and are just parasites subsisting on public loan guarantees while their students bear the risk. But that's not a financial argument, it's a regulatory one.
No one thinks that people shouldn't be allowed to float a Stanford degree on loans, and "dismantling the entire system" just guarantees that we return to the era where only the rich could afford Ivy degrees.
If you had a choice between nothing being done and forgiving student loans which would you pick?
Second. Let's say universities did take on the burden of loans, of course that would be via a bank right?
If that's the case. How would they enforce risk? Based on certain majors? Who would give a loan with no collateral to young people with no credit on the hopes the major they picked had a viable job market years from that point?
> Who would give a loan with no collateral to young people with no credit on the hopes the major they picked had a viable job market years from that point?
Who gives out scholarships now?
Let's also note that the obvious response to the risk of the job market shifting after several years is to shorten the number of years required to pad out the degree, which is pure societal upside. The standard model of a four-year college degree only has you taking classes from your major during the final two years.
So you believe universities have taken advantage of students by crafting, encouraging and financing education programs with an understanding that those programs would not result in jobs which would be sufficient to repay the debt needed to complete them, but you think the 18 year olds who were taken advantage of should be forced to suffer for their failure to make perfect decisions at 18.
Cool. Cool.
So you believe uninvolved taxpayers should be on the hook when the 18 year olds make bad decisions.
Cool cool.
Should post grad be funded by the government? Yes. Next question.
Feel like I'm answering whether or not public schools should be a thing from some 19th century peasant.
It's a question of supply and demand though. Sure we should fund science post grad, I'm not so sure about humanities (supply already outstrips demand there). Saying we should fund "post grad" in general elides this complexity.
Public school is as much about providing babysitters for parents that have to work as it is about education. Notice how hard it is to be expelled from public school. Grades are irrelevant. This is very different from how post secondary education operates.
When compulsory education became a thing it met resistance from families that didn't wanna lose another pair of working hands on the farm. Babysitting is a 20th century post agrarian phenomenon.
The decision to invent a new special type of debt for student loans was a political decision made by our representatives. To the extent that the voters/taxpayers are responsible for anything: this is our shared mess.
I mean, the whole premise of representative democracy is that we’re responsible for the messes we send representatives to make. If we don’t want that responsibility, I guess we’d have to look at alternatives to representative democracy, but that’s a pretty big topic.
I accept responsibility, let's fix it.
I’d probably pause loan repayments (no need to dig a deeper hole), make student loans dischargable via bankruptcy, wait a bit for the market to figure itself out. Once we’ve figured out what the value of each degree is, we can refund the difference to everyone who’s paid.
There’d be a bit of fudging as we’d need to adjust for inflation and the reputation of colleges fluctuate over time, but this seems like the fairest way to do it.
Why have police? Why have firefighters? Why have EMS?
Do I believe in community, empathy, kindness toward my fellow human beings? Why, yes. Yes I do. Am I willing to pay a few bucks to put my money where my mouth yes. Why yes, yes I am.
The unfortunate reality is that your kindness and empathy is a resource that is being exploited by unseen actors.
You are being taken for a ride and you feel good about it.
I absolutely support maximizing access to education and I'm willing to pay for it. I'm not willing to prop up a giant unsecured-loan grift that transfers financial risk onto those least able to bear it, while universities jack up their tuition to grab their slice of this new pie.
You are correct and I am making a conscious choice. I'm not being taken for a ride, I'm willingly offering one, even to those who would rob me blind given the chance.
Of course there are those who would exploit. But I'm not going to punish the well-deserving masses because of the unscrupulous few. It's a very small sacrifice I can make each year, which has the potential to positively impact the lives of thousands of families, and for generations to come.
Were I to refuse participation in such an opportunity to "protect" myself, I'd be no less selfish and greedy than those you warned me about.
We don't have the option to "refuse participation," so that's not really the point. We can feel better or worse about it, and you feel good about it, and that's great. I feel good for the individual students who benefit but do not feel good about the institutional corruption that this system represents.
If we were to finally reform the student loan process without any protections for the students themselves, it'd be a painful correction for everyone. But the current system has massive pain in the form of students taking on massive debt to go to places like the University of Phoenix, and they often don't even end up with a degree. Some of them do, of course, so maybe under the current system we end up better off as a whole. It's hard for me to know one way or the other.
But it is painfully obvious who the winners and losers are. The winners are the universities, debt collectors and loan servicing companies. The losers are some percentage of low-income students who get screwed and saddled with debt, the well-meaning taxpayers who fund the loan scheme, and the middle-class parents who pay ever-rising tuition that is fueled by loan money that they don't even qualify for.
What if someone else thinks that there are better (more kind, empathetic) uses of that money than funding someone's college? Why is "free college" the most kind and empathetic thing we can do with this money?
I don't recall saying or even implying it was "the most kind and empathetic thing we can do" -- can you point me to where I gave that impression?
Than that person should learn we can do multiple things at once.
Federal spending is not derived from revenue and it's weird people keep thinking it is.
No they’re saying that the schools should repay the loans, not the government
You take on the risk every time you pay the local school district's real estate taxes. Well to be fair that's even riskier. After all you have no idea if the kindergartner will go on to get a college degree and start paying taxes. It's actually riskier than student loan bail outs.
> And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Being slightly inflationary is a strawman concern. Student loan forgiveness has a major problem in that it’s a large reward the goes only to a specific slice of society who match some arbitrary criteria and who have useful degrees. It also fails to address the root cause of the problem, letting current generations accumulate debt in the same way.
It’s an idea that appeals to a subset of the voter base for whom a college graduate with loan debt represents the prototypical struggling young person, but ignores all of the young people who are even worse off and don’t have college degrees either.
Spending a huge amount of money to forgive student loans would be politically catastrophic in ways that a lot of people who live in highly educated middle class bubbles don’t realize. There are a lot of people struggling out there, but college graduates are not at the top of the list of people who need the most help.
Exactly. I don’t know who decided we should spend our limited redistribution dollars on young middle class individuals with above average human capital instead of say on working class people?
> bank depositors are not engaging in risky behavior
Supposedly intelligent investors leaving money in accounts above FDIC limits ($250k per holder per bank, so $500k for joint account) were engaging in risky laziness.
So what do you do when your payroll is more than $200k? The depositors were not treating SVB as investment, they were bank accounts for doing transactions.
That's not our problem to solve, but seeing how millions of other businesses were able to pay people maybe it's SVB that needs to figure out how to do this and not lowly commentators.
Millions of other businesses do not have a secret strategy to pay people without ever landing >>$200k in a single account. Their banks just didn’t fail so it wasn’t a problem.
Of course it's not secret, but they do. Read almost any other comment here.
Sweeps and obo accounts are the bone simple answer to this that every mainline treasury has used for this problem for at least 30 years.
Further the banking ecosystem in the US is predicated on the idea that depositors, especially large ones, are doing their own diligence on the health of the bank.
Yeah but but first principles! /s
There are banks that sweep the money across various other banks automatically.
Things I learned in Econ 101 like 25 years ago, and one of about four options if you google "how do companies manage payroll with fdic limits".
But people with [mb]illions of funding just plopped money in a single account ..
Indeed, most of SVBs customers were those who had almost zero business finance experience. There were lots of startups but there were also lots of normal businesses and non-profits in the Bay Area that used SVB.
Perhaps the slow depositors should be punished for not being sufficiently sophisticated, or as quick as the Thiel-backed startups that got the bat-signal to do a bank run. But the "moral" value of letting all those organizations lose their deposits is very low. The moral value of letting SVB fail, which it did, seems high to me!
> Indeed, most of SVBs customers were those who had almost zero business finance experience. There were lots of startups but there were also lots of normal businesses and non-profits in the Bay Area that used SVB.
The thing is that you don't need to be a financially sophisticated. Why are they making companies without talking to a CPA? They can get an account with PayChex and they will literally handle everything related with payroll. If your average mom and pop restaurant didn't do this we would fault them for being irresponsible.
They disrupted financial sophistication
The depositors were using SVB because SVB was willing to hand out loans to startups with no revenue that other creditors wouldn't fund, right? Using a less reliable vendor to get a better rate is a risk, whether that vendor is supplying labor or parts or banking services.
One could argue that the depositors didn't know SVB was unreliable, but that's kind of undercut by the fact that there was a run on the bank in the first place.
Buy private deposit insurance.
A corporation can hold t-bills and cash equivalents instead of relying on a bank account where the $250K FDIC limit will bite them.
This notion that the $250K FDIC insurance limit is an acceptable part of our system, except in cases where a bank fails and the depositors are... sympathetic? It's incredibly silly.
Use your political power to lobby for making electronic money transfers a government operated utility.
Multiple accounts?
Buy insurance for this type of situation. It's not like Silicon Valley lacks the funds to buy insurance. The rest of us are MANDATED to buy insurance for our cars and our healthcare, and many of us live paycheck to paycheck.
Silicon Valley, however, home to the world's greatest concentrations of private wealth? Oh no, thats a too much to ask that they play by the same rules.
It is a little bold to ask FDIC to payout more than what the terms of the policy dictate. Try that with any other insurance on the planet!
Yeah, bailing out bank depositors is nowhere near the same as forgiving a loan. The bank failed as it should and depositors were made whole as they should. I'm not sure how this has any bearing on forgiving student loans.
One round of loan forgiveness is fine, but it builds an expectation of it in the future. All of the loans, growing larger and larger, just encourage universities to grow fatter and raise costs to students.
If students could not borrow enough to attend, they would be forced to lower costs (not necessarily the very top universities, but all the rest).
The student loan system is fucked up, so what should happen is an acknowledgement that it's fucked up, forgiving the fucked up loans, and also changing the system to be less fucked up so it won't have to happen again.
A reasonable option. But was that on the table? Or was "just student loan forgiveness with no change to the system" what was being proposed?
And if that was the proposal, would that be better or worse than the current status quo?
Healthcare is in exactly the same boat.
A major part of why it's so expensive is because of government subsidies to private healthcare insurance. No or little public option is exactly what allows insurance companies to go hog wild on their premiums.
The ACA subsidies are simply a bandaid on a broken system which allows insurance to further break the system as they adapt to what people are willing to pay for a necessity.
Healthcare is really complicated. No one factor makes up a majority of the excess (compared to other rich nations) cost.
The ACA is a bandaid, and may be making things worse over time, at least in some areas. But Americans don't see to have the appetite to really change anything. Probably because most voters are insulated from this by good (enough) employees plans.
A big part of that is also the transfers between private insurance and Medicare, with health care providers accepting far lower rates for Medicare and then subsidizing operations with the rates charged to private insurers. Hospital administration is pretty hellish. As is administering payments!
Any functioning health care system is going to have a "band-aid" exactly ACA subsidies: make sure that those with the lowest incomes can still afford health care. Something in between Medicaid and the full cost. But as we rein in the costs and get healthcare to be a smaller fraction of GDP, the size of the band-aid can shrink.
There has, for 30+ years, been a real problem with politicians refusing to speak truth, or anything close to it. They tell voters what they want to hear. This is often "truth adjacent", and they thus offer partial solutions that tend to not work out.
The US has real problem that require real changes, but the political system is not responding.
IMO, people sense this, grow frustrated, and become willing to take a chance on someone who seems to speak (more) truth, and claims to be willing to pursue real changes.
We are starting to see more moderate mainstream politicians willing to speak more truthfully, and propose policy changes that may not appeal to everyone. But I'm not sure it's happening fast enough.
Everything is on the table if people vote for it.
It's already unaffordable, enrollment is dropping, and tuition has only continued to go up to offset lower enrollment.
The incentives are not so naively simple
Population trends are a pretty big factor in enrollment. Most enrollment is by fresh high school grads. And there are significantly fewer of those then there were 10 years ago; you can make up some of that by expanding eligibility and encouraging more young people to go to college (even those that would be better served doing something else), or expanding international admissions (but maybe not in this administration).
Cost is certainly also a factor, but I suspect population is a bigger factor.
The solution to that is rebuilding the state and federal funding for higher education with added regulations on where and how that money can be spent (perhaps even putting tuition caps in play).
The reason universities are so expensive is there is no limit on how much they can charge for tuition and no requirements on how much they pay their professors. It allows them to dump a huge portion of their funds into the marketing and athletic departments.
I know of a few religious universities who's mission is mainly to educate (so their well educated members can pay back more money to the church). While they do subsidize the educational costs, it isn't by as much as you'd think and it does result in some very cheap education.
There's no reason the government couldn't do exactly the same thing. It did right up until reagan.
> encourage universities to grow fatter
In a typical state school, where's most of the fat accumulating? What could be cut significantly without affecting the quality of education?
I'm not an expert, but a lot has been written on this.
Some areas:
- more and more administrative staff and "middle management". The assistant to the assistant vice chancellor for elm trees.
- Building and running very expensive science research operations. These may well be worthwhile efforts, but conflating them with undergraduate educations is a problem.
- more and more student amenities. Fancy dorms, student centers, rec centers, etc
- competitive athletics
A big part of this, is that they need to attract students, ideally ones who can pay or borrow. And students are putting a lot of weight on the research programs (they impact public ratings), fancy dorms, rec centers, football teams, etc. And they are spending loan money, and don't seem to fully grasp the economics. But even if they did, the highest rated schools are the ones spending all this money, and thus charging more, it's a cycle. And this propagates down to mid- and lower tier schools.
And then people in the leadership ranks of these schools are in part evaluated on how the ranking of their school changes. So if you can go from spot 150 to 140 by raising fees to build stuff you don't really need to teach (but improve your ranking), that is good for you.
Also, I should mention: highly competitive employers do filter based on school ranking, both in recruiting (acting looking for people), but also in hiring. For example, requiring extra approvals to hire someone who did not attend a top N school for their major. So it can be rational for a student to stretch hard to get into a higher ranked school.
(I know this from being personally involved in this at more then one company)
Just can't help humming in my head reg yoo la toe ree cap chur
Any system that can juice itself by increasing both funding and cost will scale both until the natural incentive gradients (are you smart? do you actually want to do stuff or do you just want a desk job?) vanish into the noise. When everyone went to college, nobody learned anything.
University is one of those things you always want to be capability rather than means gated, but those of means will always want their kids to get in regardless of how they were raised. After all, they worked hard. Why should their kids? They will ally with every convenient rationalization in order to moralize for the politics, taking advantage of arguments about "disadvantaged backgrounds" etc to treat everything as a means problem, but the goal is to dilute the capability aspect, and that robs talent.
If you have exceptional talent, you need to know the truth. Systems naturally try to optimize the dumb-rich to smart ratio so that there's a lot of subsidy available for anyone who actually needs to be there, but consequent GPA inflation demands that we make the education somewhat meaningless, so you're really on your own to set goals, and any good ones are way higher. Check the boxes, take the free lunch, and then treat the overall coddling like a charade that must be ignored. Then again, isn't self direction always that way?
I think the point wound be to eliminate all borrowing for tuition. It would be drastic and universities would complain the whole time but band-aid has to be ripped off at some point. I don't think a solution other than welding shut the money font will have a meaningful effect.
* Eliminate the entire federal student loan program. Just gone. No more loans.
* Make it so that private loans for tuition and related expenses can be trivially discharged. Like just fill out a form and it's auto-approved. You can just decide to not pay your student loans with no repercussions whatsoever. There's probably a better way to accomplish this legally but make it so that they're toxic to private lenders.
Once the money officially dries up and less than 1% of families could pay out of pocket for current tuition rates then we watch as jobs stop requiring degrees, apprenticeships become popular, and schools belt-tighten to focus on student ROI. Watch magically as GE requirements evaporate and we find out they weren't ever necessary in the first place. Watch as high schools get pressured to teach actually useful things instead of being grade school the sequel.
Your solution means that only the wealthy can attend university, someone who grew up poor wouldn’t stand a chance.
Your argument is basically that current university costs are intrinsic and can't possibly be reduced but we know that isn't true. We have not two generations ago people paying for their college tuition with money from their part time jobs.
My grandpa paid his way to a PhD as a line cook. Got no financial support from family who were only slightly above dirt poor.
Like I don't want to be completely reductive but a good chunk of university classes are 30-100 people paying for a single dude and a room with chairs to lecture for 5 hours a week. This doesn't have to be ruinously expensive.
>My grandpa paid his way to a PhD as a line cook. Got no financial support from family who were only slightly above dirt poor.
That can still be easily done.
In California, most families earning under $100k get their tuition costs to UCs covered. CSUs are probably even easier.
Then, PhDs largely get paid for by undergrad tuition and research grants, it's pretty unusual for PhDs to pay their own way.
Right, so broadly the solution you're proposing is subsidies. University will be cheaper from the perspective of the student but we don't actually undergo any meaningful cost cutting it's just the money comes from somewhere else. I don't know about you but I don't think this actually solves the problem of the cost of university ballooning out of control and becoming unaffordable to almost every American if they had to pay for it with what was in their bank account.
I mean it can work so long as the government can bully the university into keeping a lid on the per student costs but large public universities have massive amounts of political capital to sell the cost increases to the government.
I'm not proposing a solution, I'm describing the current reality.
Forgive me, are you not proposing to roll these subsidies out everywhere? Because yeah, someone can afford their tuition on minimum wage if they get a full ride scholarship too but that's hardly a solution to the student loan crisis unless we're handing them out to all our undergrads.
My PhD program, in CS (top 20 school), for an American, was basically free back in the early 2000s. At times it seemed like there were more fellowships than students. I'm not sure if that has changed.
My CS PhD was not only free, I got a decent stipend, and that's still common, but it often depends on grant funding, which has been less stable lately.
Oh, yeah, I mean by free, "net free", like the stipend cover almost all my expenses.
I feel like I maybe should've been more explicit about him having gone all the way from undergrad to a PhD was all paid for by being a line cook. Yeah, he didn't actually pay for his PhD program because he got a fellowship but that's also not really the point. He was still able to pay for the expensive part on what was barely over minimum wage for the time.
>This doesn't have to be ruinously expensive.
Having been the "single dude", the issue is not that they are paying lecturers too much for this service, doubly so for adjuncts.
I think this is the strongest disagreement I have gotten from someone who understands my point completely and agrees with it.
This is exactly why I'm saying that university can be made orders of magnitude less expensive is because the primary educational value you get which comes from professors lecturers, and TA's is not expensive at all. Everything else is negotiable and an opportunity to make cuts.
I’m guessing those were at subsidized public universities. I don't think anyone was paying full fare Harvard tuition entirely with part time work.
Most top private schools will give a full ride to anyone that's not from a wealthy family (or I guess wealthy themselves) anyway, no?
According to this page https://college.harvard.edu/admissions/why-harvard/affordabi..., Harvard covers your costs if you have <$100k family income. So in ways it's better than covering tuition with part time work.
other poorer countries just pay all or most tuition for students and own the universities
In most such countries there is also an entrance exam requirement that would exclude most student loan borrowers in the US.
The State governments do own many universities. To a large extent, the government is responsible for the current situation.
Also some of the universities are older than the government by hundreds of years and private, the government can’t just “own” them.
This is true, state gov does own many universities, though there was a concerted effort to bring the idea of privatization and deregulation there too since at least the 1990s by cutting subsidies.
I met a Polish student a number of years ago who was attending a U.S. Ivy League institution. She said people made fun of her back home for "buying her degree". That has stuck with me ever since.
> bank depositors are not engaging in risky behavior, they are putting cash in a bank
That is risky behavior. You can't earn interest without taking a risk.
Is there a lower risk, lower interest option with the same capabilities (ability to use the money to pay others)?
Genuine question, I have no idea, but I didn't choose my bank based on interest rate. I can't pay bills or transfer money if it's cash under the mattress.
In the US, depositors are insured by the FDIC (Federal Depositors Insurance Fund) up to $250000 per institution. This doesn't apply to investment accounts, but would cover standard checking and savings accounts, even if they pay interest. The interest on those accounts is usually negligible at most banks, anyway - not even close to offsetting inflation.
Edited to add: not my area of expertise, but I did research it a couple years ago when I was acting as executor for the estate of a deceased person. So take what you will from that. I do notice banks usually have a sign up saying they are FDIC insured. I think it's required, but I don't know for sure. I suppose a shady investment firm could try to suggest they are an insured bank without actually saying so.
There is, it's called a narrow bank and it would probably pay more interest than normal banks. Unfortunately they have been mostly outlawed thanks to lobbying by the banking industry(see also the current lawsuits about usd stablecoins paying yield).
I've never had a checking account at a bank that paid interest. What interest are you talking about?
It's expensive because it's not built in series, unlike say korea or china or russia.
Both loan forgiveness and nuclear have huge benefits
Yeah that quote fundamentally misunderstands what it meant to make depositors whole. That's not bailing out the bank, it's bailing out the depositors, which is exactly what the FDIC is for. In the case of SVB most of the depositors were businesses, but in any case depositing money in a bank is intended to not be a risky activity at all, and FDIC is part of how the government acts to ensure that is so.
FDIC limits are very clearly spelled out. Ignoring them is known by high-school kids to be risky behavior.
Over the last 30 years the primary role of economists seems mainly to be providing justification for the enormous concentration of wealth that has occurred.
Student loan forgiveness yes, paid for by the schools that let people rack up debt for low value degrees.
In the olden days student loans qualification depended on the students degree program and grades, and there wasn’t any repayment problem
larry summers? the epstein guy?
As someone who supports education loan forgiveness, I say we do as our elders have and just take from them without a whiff of concern for their grandstanding about morality.
What obligation to the generation that's been aware of physical evidence of climate change for decades and ignored it?
The old dying and the youth rewriting social and political custom and truism is a physical constant of the universe.
Physics is ageist; sorry/not sorry grandparents.
> bank depositors are not engaging in risky behavior,
Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not being risky if I knew taxpayers would bail it out.
More importantly, if there is no risk, what purpose does a bank serve? They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. The government should be able to offer that service for free.
Banking is a basic utility. Penalizing customers of a business for the business going under is bonkers. We learned this lesson during the Great Depression.
Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.
I dislike that the SVB bailout happened without a revision to FDIC insurance rules. It felt like a good time to reevaluate those rules (if the limit needs to be raised then lets raise it) and encode the new version to ensure consistency of insurance going forward. SVB accounts getting a full bailout without any formal shift towards that being the future policy felt arbitrary - either we want that policy or we don't - lets not just change the rules for a single case.
> SVB bailout
There wasn't any bailout at all. This entire thread is so confusing. But yes they got 2 days or something of deposit freeze IIRC.
My apologies on the imprecise language - maybe "extension of FDIC account insurance beyond the standard 250k limit to depositors" is better terming?
SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
No, not only there was no extension, there even wasn't 250k given by FDIC. Absolutely no taxpayer money or even FDIC money went into the collapse.
It's not a question of terminology. As you say, SVB came out of it broke, but their stuff didn't burn to the ground - their operations and assets were taken over by a bridge institution Silicon Valley Bridge Bank, which was then quickly acquired by First Citizens Bank. Where's the point where the depositors should have lost money? Would it have been fair for First Citizens to tell every customer who had over $250k in their account "sorry, we've taken the rest as an acquisition bonus"?
Agreed.
Depositors are lending their money to the bank at low interest. They may seek risk in terms of increased yield on their savings account, but FDIC insured banks will have trouble meeting their requirements while offering high yields on their accounts.
Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure.
Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.
Unsophisticated depositors are not holding more than $250k of cash in bank accounts. The problem is not that depositors were made whole, the problem is that the FDIC insurance prices are based on limited losses, when for all intents and purposes, the depositors' risk is completely based on their political influence.
This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules.
Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.
There has been a lot of discussion about how the basic setup of banks (borrow short, lend long, collect the spread) is probably not a great idea, and we should just separate these two activities (see Money Stuff). People who want to lend long should do that with their own money, and people who just want to save should be able to do that.
But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.
So I read the Matt Levine article on this and a couple other pieces, and I'm not getting the impression Levine or other mainstream economists think this is a good idea as it currently stands? I don't necessarily think they are suggesting its clearly bad either, but it didn't seem as positive on it as I was expecting from your comment.
Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
When you deposit money in a US regulated bank, there are basically two places that can end up:
- on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at)
- loaned out by your bank (or again, a bank your bank uses)
The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans.
The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing.
Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.
Yes, I understand all of this. What I don't understand is why the Fed "putting their finger on the scale" (which I don't dispute they are doing, as it's part of their job) is a problem, and I still did not really pick up on Levine arguing for or against this, just saying (this is me paraphrasing, not intended to be a direct quote) "we could operate differently in theory due to all these alternative lenders that now exist in parallel with the traditional, regulated banking system, which would have some benefits and some drawbacks."
I can see some upsides (in addition to matching bank creditor and debtor duration expectations), like the implication that it would be easier in some sense to safely manage large amounts of cash because said cash is invested in T-bills instead of who knows what, but there are some obvious downsides as well concerning risk management. To quote Levine directly here, "How will the NDFIs find an extra $100 of loans to make? One obvious possibility is by making much worse loans. Another is by making fake loans."
> Because the taxpayers (and all users of USD) repeatedly bail them out.
The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay.
> They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow.
Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.
> Because the taxpayers bail them out. I could define anything as not being risky if I knew taxpayers would bail it out.
I feel like I must be misunderstanding something here because it sounds like you're saying depositing funds in a bank is considered risky behaviour?
It is supposed to be if the amounts are above $250,000. I have no problem with the first $250k being risk free, that is a policy that is well published and that we all "agree" on. Making arbitrary policy decisions that in some cases depositors should be made whole when risky behavior (such as depositing above the insurance limit) bites them is problematic. Stick to the policy or change the policy don't make one off exceptions because that sets weird expectations.
89% of deposits at SVB were uninsured.
I’m sure you would feel differently if it was your employers money there and they weren’t able to pay your salary.
$250k is not much at all for a business
Businesses can use deposit management services to spread cash among many banks. Bonus points they also are less impacted by the poor business practices of one bank.
Individuals can do this too with investment brokers or wealth management providers.
Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
> depositing funds in a bank is considered risky behaviour?
of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.
No, the bank pays you interest on your deposit to entice you to deposit money there so they can lend it out. There is literally zero risk involved (other than something on the scale of the collapse of the US government, which no one is really considering here) because of the FDIC, and yet interest rates on FDIC protected assets are not 0%.
Taxpayers don't bail out bank depositors, the FDIC (which is insurance paid for by the banks) does.
And banks do a lot more than what you described, which I have to assume you know already.
Insurance priced for damages capped at $250k per person per bank or whatever it is. If the insurance covered unlimited damages, then this wouldn’t be a discussion.
Yes. What are these repeated bailouts by taxpayers that you mentioned?
And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
https://americandeposits.com/insights/brief-history-us-bank-...
>In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure.
I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years.
>And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong?
The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
>The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
You mean like FedNow[0], which many banks are eschewing in favor of services life Zelle[1]?
[0] https://en.wikipedia.org/wiki/FedNow
[1] https://en.wikipedia.org/wiki/Zelle
All this demonstrates is that you don't understand how the US banking system works. Bank failures != taxpayer funded bailouts.
Also, I don't know what you have been reading, but a comprehensive list of times that depositors have been bailed out by taxpayers (or anyone else, as the FDIC is not bailing out anyone by definition) would be quite short.
Lastly, there is a huge distinction between regulating banks and directly controlling access to an individual's funds. If you really can't see any theoretical problems there, I suggest you work on your creativity.
The FDIC insures $200k of deposits because banks are not supposed to be risky. Thats taxpayers bailing out everybody in order to keep banks as "not risky"
In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions.
The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement.
When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.
> When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement.
I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it.
1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning.
2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday".
Also, not for nothing, causing a bank run is a federal felony.
In the end it's a distinction without a difference. The result is the same, and Thiel was building the fire escape before anyone could smell smoke.
I don't think you can credit Thiel with smelling smoke, he lit the fire. He heard the same statements from SVB leadership about the problems with T-bills and higher fed rates, realized that there was a huge spread between current market value and long market value of SVBs T-bills, and threw a match on it.
What about banking regulations that mandated that SBC put those deposits into treasury bonds?
The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off.
Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
From first principles public pension funds are broken.
The "Safe Withdrawal Rate" assumed by many private individuals planning for their own retirement assumes a withdrawal rate in the 3 - 4% range based on the "trinity study" - https://en.wikipedia.org/wiki/Trinity_study
Meanwhile, American public pensions are structurally engineered around a 7%+ SWR - this was recently confirmed again by the median goal by the National Association of State Retirement Administrators.
The perpetual "under funded" nature, and all the return hunting etc in pension fund management can be explained by that disconnect.
But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place requiring us to either:
(a) Raise taxes to increase contributions.
Or
(b) Somehow make due with less government :)
Individuals saving for retirement must deal with the risk that they live to an old age and their savings must last for decades. Pension plans have a higher safe withdrawal rate, because people on the average have average lifespans. When a plan member dies early, their remaining contributions can be used (partially or in full) to fund other members' pensions.
Really good comment and fair point
But mortality credits (pooling) don't solve the math of the discount rate - they add 100 - 150 basis points of reduction so retarget to 5.5% vs 4% if generous
So they are still structurally designed where they HAVE to allocate towards risk to meet their targets which is at core of issue
It feels like you're missing the whole point of the whole article, which is that treating public pensions like a bunch of 401ks misses the opportunity to invest all that money in something that benefits the retirees collectively. I'd rather retire on 4% from a bond to improve the school my grandkids go to than 5.5% from a PE firm that intends to "more efficiently manage" the retirement home I live in.
And a pension fund can be in a more tax advantaged situation.
But that does not justify the numbers we actually see being used.
Only taxpayer funded defined benefit pension plans get to use 7%+. Because they have the power to use future taxpayers’ money to pay for underfunding/underperformance/corruption from the past. And obviously, politicians that would choose to increase taxes today for something that could but punted to the future would lose elections.
The Pension Protection Act of 2006 mandates that non taxpayer funded defined benefit pension plans use discount rates from high grade corporate bond yield curves, which are much lower.
https://www.irs.gov/retirement-plans/pension-plan-funding-se...
The power to use future taxpayers money isn't justification for doing so.
Yet that is the modus operandi of governments worldwide that need to secure the votes of the old. There is no reason the US explicit has different rules for taxpayer funded and non taxpayer funded defined benefit pensions. They are the same liabilities, the same cash flows, the same probabilities, just different political entities on the hook.
Even some non taxpayer funded defined benefit pension plans are more privy than others, depending on the political power of their beneficiaries.
https://archive.is/CJefA
Yup, this is the real problem. What he's talking about isn't the real problem. The real problem is we have gone to a "model" of fund less, pretend we can make it up by increasing risk. And rather than face a big problem it gets swept under the rug until it can't be any more.
We also have the problem that paying pensions becomes somebody else's problem. Thus in contract negotiations pushing benefits into pensions rather than current wages becomes attractive. You can agree to more without breaking the current budget.
The old rules worked better because limiting what pension funds could be in also limited the shenanigans that were possible.
Employee pensions are a tiny portion of overall government spending. There are any number of ways to handle a modest increase in costs there.
>There are any number of ways to handle a modest increase in costs there.
So the "we'll find 'efficiencies' somehow" argument that every opposition party trots out when they're campaigning?
Well we tried the "burn it all down" approach with DOGE and the BBB and we got... -2 trillion in savings? Really? Wow, okay.
The truth is nobody wants to solve the deficit. It's a self eating beast at this point and simply cutting funding for a bunch of shit won't solve it. A lot of these things are fundamentally the federal governments concern, whether people admit it or not.
What does it mean for something to be broken from first principles? I would expect some that just cannot work on a fundamental level, like faster-than-light travel or a lightbulb that powers it’s own via solar panel.
3% vs 7% doesn’t seem broken on principle, just, a tuning parameter is off.
Don't need to even raise taxes, just make the loopholes go away for corps. You want access to the market and the people, you need to pay your share.
> But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place
It's not just the government. It's all of the other stuff seniors buy. It used to be that you just kind of stuck around and retired in the area where you had worked. You had paid off that house, so you retired in it. Maybe you went to the Shriners' hall and played bingo with a core group of friends until you couldn't anymore. Then you moved into a retirement home and they found activities for you to do there until Father Time came to collect his due. Maybe you spoiled yourself with a Buick or Lincoln sometime between getting your gold watch from the plant manager and croaking.
Now, that's not enough. We need entire retirement communities hundreds of miles away in warmer climes where they can play golf several months out of the year. We need cruises and travel packages. We need cosmetic procedures to look younger. We need more advanced surgeries that extend life, though not participation in the workforce. And of course, now that Lincoln is a Mercedes.
And that's great, because we've told everyone that they deserve it after a long, hard career. There's only one problem: we never addressed where that retirement income was actually coming from. They're coming from that 7% SWR, which must be funded somehow. Otherwise the retirees might have to stay in-town, be cold during the winter, and provide childcare for the grandkids because preschool now costs as much as a year of college tuition. And that makes them cranky and they start calling investment advisors and politicians demanding answers.
Ah, a classic paperclip maximizer. Pension plans got the goal of multiplying the money so pensioners have more of it. Nobody bothered to mention that they should also make sure there's a world the pensioners can live in, so now that gets slowly sacrificed in the pursuit of the only explicitly stated goal
If multiplying money is the goal why does the article say they're doing a worse job of that than just buying index funds? If that claim is true, then clearly there are other issues at play than just that.
Pension funds have a different time horizon / cash flow needs than individual investors (namely, they need to meet their liabilities every month) and so are going to have a more conservative asset mix (read: lower expected returns w/ lower volatility) than your average S&P500 index funds.
For example, CaLPERS has ~45% of their assets under management in debt / real estate.
Is high volatility really such a concern when you're dealing with a large pool of funds over such a long timeframe? Sure, if you need to withdraw funds during a downturn that's bad, but over the long term isn't that statistically balanced out by other months where you get lucky and withdraw during a peak?
I dont think its safe to assume perfect balance.
Further, I know it goes against economic orthodoxy, but I am a big fan of buying low and selling high. When the market is bad, I become more frugal, I might even run on debt instead of selling. When the market is at all time highs, I'll sell some from riskier and move that into other things.
Another oddity in this situation... People die slightly more often during flu season, so you could game this and plan to withdraw less.
Longbets: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” - https://longbets.org/362/ (won by Warren Buffett)
Should New York’s $270B pension fund abandon Wall Street? - https://www.semafor.com/article/08/07/2025/new-york-comptrol... - August 7th, 2025 ("Drew Warshaw is running for New York state comptroller, a job most voters would struggle to define but one that includes oversight of the state’s pension fund. If he unseats 18-year incumbent Thomas DiNapoli, Warshaw’s plan is to move much of its nearly $300 billion of investments into ultra-cheap, passive index funds. The New York State and Local Retirement System has more than $90 billion invested in private equity, private credit, real estate, and other complex assets. All promise high returns — catnip for pension managers facing future payouts to retirees — but charge high fees, too. The question facing New York and hundreds of other state and local pension funds, charitable endowments, universities, and government funds around the world: Are these high-priced managers worth the fees they’re charging?")
What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing - https://www.wsj.com/articles/what-does-nevadas-35-billion-fu... | https://archive.today/ywTFd - October 19th, 2016
The management fees are, broadly speaking, a grift/rake of capital flows and economically inefficient, based on the evidence and the data. The issue at play is that the capital market ecosystem has become a bureaucracy that demands to continue to grow, versus cannibalizing itself in the name of economically efficient capital allocation.
Tangentially, the markets are moving to more trading (24/7/5) versus less because when trades are made, money is made in a Parable of the Broken Window sort of way by the capital market industry.
Yes, that's my point. That bet ended 8 years ago. If "multiplying money" is really the sole goal then why didn't all the pension funds switch to investing in index funds back then? There are clearly some structural issues here which don't align well with the idea that pensions are a "paperclip maximizer" with the goal of maximizing returns.
I find it interesting that the OP isn't arguing pensions should switch to investing in index funds, but rather into other projects the OP considers morally superior and that he personally believes will give better returns then hedge funds. To me that just feels like trading one set of hedge fund managers for another.
Are you asking why people getting paid to manage pensions inefficiently want to continue to get paid to do so?
Why would it matter what they want? I'm making a rhetorical point that "multiplying the money" is de facto not the sole goal of these funds, there's clearly something else at play.
CalPers, the largest public employee retirement system in the US was not getting the kind of returns that they needed. They were restricted from purchasing stocks in certain industries, such as oil, weapons, etc.. However, they recently switched to investing in private equity funds and now they are getting much better returns, without all the pesky moral issues involved with it.
> However, they recently switched to investing in private equity funds and now they are getting much better returns
TFA says otherwise, in detail and with a lot of supporting data. If you're going to contradict it you ought to cite a source.
Here's a link to their private equity fund status: https://www.calpers.ca.gov/investments/about-investment-offi...
And here's a link to the CalPers celebrating their new ROI: https://news.calpers.ca.gov/celebrating-10th-anniversary-cal...
Until PE fleeces them
>they recently switched to investing in private equity funds
That's not recent at all. They've, for a long time, had large allocations to PE funds.
So is that basically a pensionwashing scheme?
Washing what, exactly? If you are suggesting that pension funds are investing via PE funds in assets that the pension funds themselves are prohibited from investing in, that's not how it works. The mandate between a pension fund and the PE fund will be quite clear on what assets the PE fund may or may not invest in on behalf of the pension fund, and will mirror the restrictions that apply to the pension fund.
Pretty much spot on.
I would not be so sure they are getting better real returns. The mostly made up marks come out infrequently and seem to go down very slowly.
We won't know the return until the investment is over and capital is returned.
This kind of deceit is one of the main services PE funds provide
> However, they recently switched to investing in private equity funds and now they are getting much better returns, without all the pesky moral issues involved with it.
Investors Warn of 'Rot in Private Equity' as Funds Strike Circular Deals - https://news.ycombinator.com/item?id=46380751 - December 2025
Once Wall Street’s High Flyer, Private Equity Loses Its Luster - https://news.ycombinator.com/item?id=46364566 - December 2025
Private Equity’s Latest Financial Alchemy Is Worrying Investors - https://news.ycombinator.com/item?id=44891882 - August 2025
People Are Worried About Private Market Liquidity - https://www.bloomberg.com/opinion/newsletters/2025-06-10/peo... | https://archive.today/wJ3Uf - June 10th, 2025
Private Equity Fundraising Plunges Amid Struggle to Return Cash - https://www.bloomberg.com/news/articles/2025-05-27/private-e... | https://archive.today/hxvzb - May 27th, 2025
Private Equity Firms Hunt for Alternate Ways to Return Investor Cash - https://www.bloomberg.com/news/newsletters/2025-05-14/privat... | https://archive.today/6UzBk - May 14th, 2025
Unlocking a potential US$3.8 trillion opportunity for private equity firms - https://www.deloitte.com/us/en/insights/industry/financial-s... - December 16th, 2024
Oil and gas is bad but private equity which can act like a loan shark is fine!
Isn't the main problem with pensions today the dramatic increase in life expectancy post-retirement? They were never intended to support decades of retirement: in the old days, you retired at 65 and there was a good chance you'd be dead by 70, at most 75. (When Social Security was established in the 1930s, life expectancy was only 61.) Nowadays, there's a good chance you'll live beyond 90, with expenses increasing disproportionately towards end-of-life. Combine that with a shrinking birthrate, and no feasible increase in ROI/worker contributions can sustain pension-funded retirements of 25+ years.
Using overall life expectancy here is misleading, as it includes the risk of childhood mortality. You have to look at life expectancy at a given age. According to the SSA's life tables[0], life expectancy for men at 65 in 1930 and 1940 was about 12 years. In 2020, it was about 17. A significant increase, but not nearly as extreme as you're saying.
[0] https://www.ssa.gov/oact/NOTES/pdf_studies/study120.pdf
In 1930, if a person starts paying into the pension at 30, at that point they have a life expectancy of 37 years, ie they will benefit from the pension for 2 years. Life expectancy at age 30 goes up to 48 in 2020, which gives them 13 years after retirement, 6.5 times higher. Assuming linearity, the average life expectancy after retirement during the time you are paying into your pension between 30 and 65 would be 7 years in 1930, and 17 in 2020.
At age 65 life expectancy hasn’t gone up as much, only around 6 years more today vs 1930. So it’s still a factor but not as dramatic as you make it seem.
What is the value in 1930 though? Only 6 years could in fact mean over 100% increase in life expectancy at age 65. There's a reason full Social Security now starts at 67 rather than 65, and you are incentivized to take Social Security at age 70 if possible.
Ultimately the way we will get out of this is inflation, except that so many pensions have COLA.
Years spent in retirement have roughly doubled, while the pyramid has shrunken from 16:1 workers to retirees in 1950 to 3:1 today.
Means testing and retirement age increases also cause a voter or worker revolt.
Going to be real hard to keep this on the rails.
No, the problem was that increased contributions [that would've ensured solvency with lower market returns and/or extended life expectancy] would've cost more sooner, and no one wants to pay more. So, we "extend and pretend" using generous return assumptions and when those assumptions are not borne out in reality, we simply shrug. Similar to $39T in US treasuries someone will need to pay back. Only the top 40% of Americans have enough income to have a federal tax liability, so who is going to pay this debt back? Different sides of the same coin. What is a debt after all besides a promise to pay.
I'd like to see more public banks. Municipalities, and even states, are holding balances in commercial banks but there's nothing stopping them holding this in their own bank to direct capital for public benefit. California has a law allowing it, although despite a campaign in LA I don't know if it's been used. North Dakota has a state-wide public bank. It works!
Pension funds should have a rule -- invest in technologies, industries and companies that create a deflation (by technology, scale, efficiency, etc). This will create better outcomes for pensioners. If they invested in cheaper housing, healthcare, pensioners can live without the constant fear of running out of money. The absolute first thing to invest in is clean energy which can be super cheap to zero to actually making money by supplying power back to the grid. Once energy is solved, it solves an entire spectrum of problems.
Increasing the money(number), while making everything else costly (a lot more costlier in reality because of fictional inflation number) is not only hard to achieve, but even if achieved, doesn't mean much. ".S. Dollar itself has lost roughly 98% of its purchasing power over the long term" -- random Warren Buffett quote.
I don't know where you are from, but that is the case for most european countries. I would be surprised if it were not also the case in the US?
Usually it's not implemented as a rule though, but rather by creating tax cuts for certain kind of investments.
E. G. In France you get tax cuts if you invest in green energy, housing in poor neighborhood, and a trillion other subcategories.
I'd go the opposite: pension funds can only invest in market index funds.
> Pension capital is money that will not be needed for 20 to 40 years.
Is it though? Much of the article talks about public employee pensions, and many of those are ridiculously underwater. People tend to think of pensions as deposit accounts that grow a bit while you wait to retire, but in reality many of them pay out a portion of your pension deposits directly to retirees, because the money those retirees deposited has already been spent.
> student loan relief inflationary and unfair
The problem with US student loans is usury.
Student Loan interest rates in the US can be as high as 9-13%. The government can borrow at 3.36% which even if we assume a 20% overhead is 4.03% to the borrower. Other countries/governments do a scheme similar to this, and it makes repayment realistic.
I'm certain someone will respond telling me the difference between Subsidized, Unsubsidized, PLUS, and private loans which completely missing the point: There shouldn't be a private entity that needs to turn a profit on the backs of students begin with, it is immoral. If you remove the private for-profit entity, the loan-type distinction goes away.
It isn't uncommon to read stories from people, who graduated and are in good jobs, and had no gaps in repayments that are now on 300%+ of their original borrowed amount.
Your argument kinda falls apart with the observation that private loans often have waaaay lower interest rates than federal ones... Typical private loans start in the 3% range, vs 6.4 for the lowest Federal ones.
Can you think to the "3% range" private student loans? But regardless, my "argument" is for lower, fairer, interest rates that students are actually expected (and can realistically) repay. One where profit isn't made.
Who makes the profit is largely irrelevant; the students suffer the same either way.
Federal loans can be discharged after 10 years of public service, private loans cannot. Hence the higher rate. Well, one reason for a higher rate.
The headline intimates that Vanguard, like other investment companies don't have large stakes in private equity firms... the same private equity firms bankrupting hospitals across the country.
> There is roughly $6 trillion of it, sitting in American public pension funds, currently being allocated in a way that serves nobody.
Yeah. That's what pension funds do. They accumulate money and hand it out to people who think they damn well better be able to withdraw upon it.
In 1960, the birth rate in the US started to decline. It hasn't had a meaningful rise since. [0]
Markets can experience natural growth - typically through birth rates, sometimes through immigration - or they can begin to more thoroughly monetize capital as to create growth from fewer people.
The Baby Boomers thoroughly broke the ability to grow through natural means, and it's been that way for 25-30 years.
This is a problem, because you need that natural growth to fund the retirements that the Boomers planned on having, along with the entitlement state in the US, which focuses almost exclusively on people over the age of 65 with OASDI and Medicare.
So how do you solve this problem?
If you're investing the hospital business, for example, you can no longer expect the same sort of growth that you used to if your plan is to have a current customer birth their 2.1 kids in your maternity ward. You now need to do other things to monetize the current customer, like charging him more for his next procedure, or - even better - looking to developing markets like India (or China 25 years ago) and focus your investment there. It's a lot easier to bring a rural clinic "up to spec" in China than it is in the US, because one started out with far cheaper needs to meet. X-ray machines are easy to install; cancer centers with advanced imaging machines and academic medicine practitioners are expensive.
And that's what the investors do. They find ways to get in on deals that aren't in the US. It's not just medicine, either. That capital that built Shenzhen into a tech mecca came from the US.
In the meantime, they need to find ways to exist in the American market, so they do what I mentioned earlier: they monetize the hell out of customers they already have. If that means closing a hospital and making the "customer" (read: guy having a heart attack) go to one twenty miles further away that has a better business value, then they do exactly that.
Or, they find ways to monetize the younger generations more, since they're not drawing on pensions and IRAs yet. Otherwise they risk gobbling up the returns they handed back to their members with increased costs.
[0]https://www.macrotrends.net/global-metrics/countries/usa/uni...
I don't understand why we don't just ban private equity. Seems like zero value-add to the actual real economy.
Ban companies from owning other companies? How would that work exactly?
Private equity is a convenient whipping boy for ignorant, low-information HN users who don't understand the basics of how finance works. You can certainly find examples of destructive or unethical behavior if you dig deep enough. What you don't see in the news are all the cases where PE saved companies that would have otherwise gone bankrupt.
> ignorant, low-information HN users who don't understand the basics of how finance works
I though HN was a site that welcomed people of all levels of knowledge and shared thoughts, ideas, and resources to help people learn so we can elevate each other. Why are you coming at someone who freely admitted they lack understanding and tossing out a dismissive reply to them instead of saying: "Let me help fill in the knowledge gap here."
I thought HN was a site where users would take 30 seconds to do a modicum of research before wasting everyone's time trying to score points with a lazy, low-effort comment.
Sure, people mostly call out private equity when you see a group trying to cobble together local monopoly power over some necessity of life just to extract more from everyone, or trying to financially optimize something by that was never financial before. There are of course many more benign examples that no one pays attention to. But the fact remains that there are PE firms doing massively harmful things to extract wealth.
the PE business model depends on a lot of discretionary financial regulation.
For example, banks are given pretty generous capital rule treatment when they loan money to PE firms to increase leverage. We could stop that. They also get a lot of tax preferences that increase returns to investors and managers.
> Private equity is a convenient whipping boy for ignorant, low-information HN users who don't understand the basics of how finance works. You can certainly find examples of destructive or unethical behavior if you dig deep enough. What you don't see in the news are all the cases where PE saved companies that would have otherwise gone bankrupt.
This is an unnecessarily aggressive comment and not appropriate.
But also, your own comment is information-free. Why don’t you share actual examples and we can determine if those are significant enough to erase the anecdotal evidence from the other side. Virtually all examples of PE I’ve seen are extractive. They don’t result in a better product. They are instead just lazy arbitrage relying on the power of capital, vendor lock-in, switching costs, and the limited capital of their abused customers.
As for “how would that work exactly” - like anything else. We can come up with ways to classify companies as private equity and enact enormous taxes on them. Or pass other types of regulations into law.
> You can certainly find examples of destructive or unethical behavior if you dig deep enough
Dig deep enough? Please. Merely tilt your head slightly upwards, and let your eyes feast on countless examples.
The problem here is that only bad/negative/failed cases make it to discussion.
It's like researching the safety of driving by only looking at local news station websites. It will seem like the only thing those cars do is crash and kill people.
And yet you didn't give one
When laypeople criticize private equity, what they almost always mean to refer to are leveraged buyouts. I suspect you’d acknowledge that, if a private equity firm sees a strategy to turn around a business operationally but doesn’t produce enough returns to service their debt, they won’t pursue it even though the original owner likely would have.
You, presumably, have examples of these cases. Could you show them to us, please? (Given your understanding of the evidence available to us "ignorant, low-information HN users", you know you're making a bold claim, which creates a corresponding burden of proof.)
Example: almost every housing development.
Did you read TFA? There are some great examples there for the health care sector, and not just one off sensational examples.
TFA provides examples where private equity has been destructive in the healthcare sector:
> A 2024 Review of Financial Studies paper <https://www.nber.org/papers/w28474> found that private equity acquisition of nursing homes was associated with an ~10% increase in deaths, implying approximately 22,500 additional deaths over the twelve-year sample period.
I was asking for examples where private equity has made things better.
Sorry, I must have misread what you said.
That you did is valuable criticism of my writing. When you get deep enough into "no, you're wrong", "no, you're wrong", it becomes virtually impossible to keep track of who's saying what, unless people actually state their claims explicitly… which I didn't.
The rules are arbitrary, the rules can be changed at any time. Finance is simply a construct on top of lower level primitives (primarily the legal framework around property ownership and corporate entity law). Totally fine for folks to ask which rules matter, which don't, and which can be changed and how long it will take. Be curious!
If the President can sign EOs banning private equity/institutional ownership of homes [1], OP's ask does not seem to be that out there imho; again, all of these rules are arbitrary and can change at any time. How do we change rules around ownership? We change laws or how they're applied.
[1] Congressional housing deal faces new hurdle as Trump pushes investor ban - https://www.politico.com/news/2026/02/13/housing-deal-faces-... - February 13th, 2026
> What you don't see in the news are all the cases where PE saved companies that would have otherwise gone bankrupt.
Please provide citations of companies worth saving were saved by PE. I will start with the only one I know: Barnes & Noble.
I don't think a ban is required. Other countries (in the EU?) have put restrictions on it that prevent the abuses you see in the US. Why don't we do that? Because US Congress has been neutered and that appendage of US politics has withered and died.
Private equity is simply a person (or small group of people) owning a company. Basically every small business in the US.
The problem is not private equity, but that private equity engages in corporate raiding--buy up a company, borrow, extract capital, sell it to suckers who don't see the problems. Dig into practically all malfeasance and you'll find it's someone who benefits from making the future value of something look better than it really is and then leaving the problem for somebody else. At the executive level I think the answer is mandating income above a certain threshold be paid over time based on the future value. (Stuff that's actively traded would be easy: Let's say the cap was $1m. Pay the CEO 10m? No, he gets $1m, plus shares currently worth $1m to be delivered in a year, shares currently worth $1m to be delivered in two years and so on.) And while there is pending income they are categorically prohibited from any transaction that benefits from a drop in share price. Inadvertent (say, bought a fund that shorted the stock) it's a 100% tax rate, deliberate and all pending shares are forfeit. I have no idea of an answer with the PE problem.
Banning people from owning business?
This is just a boogie man media term. There are good owners/investors and bad.
Private Equity doesn’t “own” business in the sense most people understand it.
PE is finalisation of business, its ownership is far more similar to a mortgagee than an owner in every sense of the word.
Why don't you define private equity so we know what you're referring to
Because the thing you want to ban isn't well-defined.
But do you agree that there are a set of bad actors who fall under the (not well-defined) term of "private equity"?
Is this a definitional quibble or do you not believe there is a problem?
I accept there's a problem. I don't believe there's a simple, one-size-fits-all solution. It'll take years, possibly decades, of regulatory and anti-trust work across every industry. Tons of political will and capital.
It is important definition. As private equity can mean anything not publicly traded.
I do support banning certain financial actions. Like paying dividends with debt. Or structuring deals that achieve same effect. On other hand I would also ban stock buybacks.
It'd be difficult to ban what we commonly describe as private equity (a.k.a. PE firms) without banning the private (a.k.a. random people) from being able to hold equity. Someone smart might be able to ban the kind of investment vehicles that have become the bane of modern productivity but we do still need some mechanism to allow investment.
Well, let's start with banning debt push down and then move on to the next tool used to privatise profit and socialise risks. You know, it used to be that unfair business practices were researched and banned, simple as that. Just throwing up your hands and saying "Well, what to do?" when there's, you know, a whole science in which people are trained, is disingenuous.
Private equity is capitalism. That's the capitalism part of the economy.
Im gonna speculate they were referring to the part of private equity where you buy businesses to load them up with debt to buy more businesses ad nauseum
You can't load someone else with debt. That's obviously illegal. When you buy a company it isn't "them" anymore. And the new owners have exactly the same rights to borrow money as the old ones.
That's true when the debt is taken it is taken by the company (at the direction of the acquiring firm)... and maybe the bigger issue is that banks should be a whole lot more judicious in extending that debt. But some firms have found a heck of a loophole in buying a company, running an extremely high debt line, paying the acquiring firm (themselves) handsomely and then innocently whistling when the business collapses and a bunch of real economic value is erased.
Doing that to a company isn't an activity that should be rewarded since you're destroying, rather than creating, economic value. It is absolutely an exploit or flaw in our system and no more than one person should have been able to get away with it.
It isn't rewarded. If a business you buy collapses, you lose money. You seem to be falling for the conspiracy theory that private equity wants to collapse businesses.
I have no idea why leveraged buyouts are legal. What a bizarre mechanism for acquisition that feels so easy to just shut down with a relatively simple rule.
Restricting a previously purchased business from taking out debt feels harder to regulate, but someone smart could probably figure out a few good rules to stop the majority of abuses.
Do you think non-recourse mortgage (the dominant type in USA) also should be banned? VC finds a bank that borrows them money to buy X, with X as collateral. It is exactly the same. The mass selloff of assets and absurd cost-cutting is caused by new owners not giving a damn about the future of acquired company, its workers nor clients - it has nothing to do with leveraged buyout itself.
That's called a leveraged buyout and isn't restricted to private equity.
I do wonder when some unforeseen 2008 like crash someone crashes ETFs.
I can't really see how it would happen and that I suppose is part of the fun.
Most pension funds aren't heavily invested in ETFs (or other mutual funds). They're usually large enough that it makes sense to invest directly in the underlying securities.
Everyone has a prediction about what will cause the next major financial panic. Personally I think it will be triggered by property and casualty insurers who have purchased a lot of bonds where the credit ratings don't accurately reflect the true default risk. But who knows, it could be something else.
Unless we're just talking about regular embezzlement of funds, how do you crash an ETF? I'm talking about broad index funds. Not stuff like ARKK
> how do you crash an ETF? I'm talking about broad index funds. Not stuff like ARKK
Any ETF's share value can "crash" if there are not enough buyers to purchase shares when they are trading below NAV (net asset value). It's worth a quick google to see what "market makers" or "authorized participants" do, but the thing to keep in mind is: if the market is kind of exploding in some major ways (think 2008) an ETF might not have a lot of buyers, even if its market price is well below its net asset value.
But why would that happen? Let's say an ETF normally trades at 99% of it's NAV. Suddenly it "crashes" and only trades at 97.2% after some bad news. Bob in accounting embezzled millions. It's gone, Bob spent it all at the strip club. Wouldn't some investor decide to just net the approximately ~1.8% by increasing demand and buying it up? After all, Bob embezzled millions. Not the billions that larger ETFs control.
Unless you're proposing some weird industry wide boycott of Vanguard or something. In that case the only thing stock traders are going to accomplish is destruction of every publicly traded asset they hold as market confidence in retail traders slowly slips downwards.
> Wouldn't some investor decide to just net the approximately ~1.8% by increasing demand and buying it up?
When it comes to individual investors, sure, in a situation where everything is going crazy in the markets some will buy and some will be happy to sell, provided the exchange doesn't halt trading temporarily in response to an extreme drop in share prices. The problem comes when the large market makers who are meant to really be on the ball and buy large blocks of shares quickly are suddenly worried about their own survival, or at least that's the way I remember a few of the chaotic days of 2008.
I knew a few people who made money buying bond ETFs at a discount to NAV.
I have no idea how one would crash an ETF but I do wonder if someone could manipulate an index. I.e by somehow suggesting a larger fraction of free floating stock so that the index weights the stock higher than its actual share. That should create increased demand for that particular stock (fund companies buy it more) and thus raise its value over what the market would assign normally.
It has happened many times throughout the 20th century. It requires mass fear so many people withdraw at the same time.
Pretty sure the first ETF was from around 1993, so I'm not sure how it is possible to happen "many times throughout the 20th century"
Index crashes have happened many times in the 20th and 21st centuries. The fact that index ETFs didn't exist for most of that period isn't relevant. If they had existed they would've crashed because they follow indices.
The point is that the ETF tracks its index, so what does it even mean to say ETF crash? Isn't that just the tracked stocks crashing? The ETF has little to do with it. But if there is some other risk that's warrants the ETF label, that's very very interesting and should be discussed! It would be little known or novel ETF mechanics.
> so what does it even mean to say ETF crash ? Isn't that just the tracked stocks crashing?
Yes. I've learned to differentiate between the words people use and what they actually mean, rather than being literal.
Since index ETFs make up a large portion of people's investments they fear the value of those ETFs tanking. Obviously this is due to the underlying stocks' prices dropping This has happened many times in the past, most (in)famously in 1929.
Well that's the crux of it, isn't it? How do you know what they really mean, if not through the words? You have to impose a mental model on the speaker, which we of course do anyways.
Saying ETF crash specifically sounds like there is an idea there, and lots of people talk about thinking that ETFs specifically have problems that owning stocks directly would not have, so in my mind the model is that the speaker has an idea about how ETFs cause the crash through hidden risk. And since hidden risk is behind most crashes, it's definitely an interesting direction to ask about.
If you own an ETF and the underlying assets crash the ETF value has gone down. Additional failure modes exist due to the mechanics of the ETF, but from context we can tell the original comment was about risks to the large amount of money invested in ETFs
ETFs are a convenience tool for buying a bundle of assets. those assets exist independently. Other ways of owning bundles of assets existed before.
A US wealth/unrealized gains tax might trigger it, because it would likely create a cascade of forced selling, with the proceeds of sales getting burned as tax revenue for entitlement programs or debt payments rather than reinvested.
What if wealth taxes could be paid with shares instead of cash? And the shares went into a sovereign wealth fund? No forced selling, no crash.
What if the government owned all the corporations?
I don't know. You tell me.
I don't think that would happen for the same reason that there are income taxes and yet the government doesn't have every last dollar. Sovereign wealth funds sell assets too.
If you think sovereign wealth funds are communism, someone should tell Alaska.
I invite you to watch Mike Green videos. In short, the current market rely on inflow of money to substain itself. P/E ratio can't increase forever. There will be a tipping point and if most of the money is invested based on an algorithm, it can unravel rapidly.
https://www.youtube.com/watch?v=dkL4oz8iEg4
> Second, that capital is trapped in an institutional arrangement that charges enormous fees to match the performance of a simple index fund, while the money deployed through these intermediaries actively harms the communities pensioners live in: buying up their housing, closing their hospitals, bankrupting their local employers, gutting their newspapers.
This is the same argument that Ann Pettifor has about how the poor allocation of pension funds is because "it’s much easier to make money from gambling and speculating than it is from investing in the land on the one hand, in the broader sense of the word, or investing in labor"
https://annpettifor.substack.com/p/on-pensions-and-the-globa...