Earlier in my posts, I highlighted the irresponsibility of WeWork business model and that America is at an unprecedented and dangerous debt level that can spark a new crisis. What adds to it is America’s continued love affair with structured debt financing – they never learnt from the collateralised debt obligation (CDO) debacle that caused the subprime crisis- financial underwriters and new start-ups are pursuing business models that effectively predicated on growth via transfer of risks to others (and eventually including banks themselves) [ and at home, like Afterpay, ZIP ].
Investment bankers on Wall Street are once again ‘cutting and dicing up student loans into collateralised loan obligations” ABC reports. These derivatives have been rolled up in a market worth $8 trillion and even FDIC chair Sheila Bair said that the unfolding student loan debt defaults are set to drag the US economy into a tailspin.
By transferring risks to others (e.g municipals, pension funds taking up higher yield debts like SLAB (student loan asset backed securities), education institutions can continue raising their fees (that without loan, would have been unaffordably high) – but if these students cannot find jobs (in a recession) they cannot pay their loans and these SLAB would technically be in default and to make matters worse they have no collateral, unlike mortgages. Banks themselves either also buy these SLAB or loan money to people buying them.
The reality is that America’s Extreme Capitalism spearheaded by financial engineering gurus (the Goldman Sachs of the world) that create growth via exponential debt creation will eventually cause the mother of all crashes when the favourable economic conditions that were ever present since the end of the GFC disappear , creating the same house of cards we saw in the last crisis 10 years ago.
