I thought I'd chime in with this news article (somewhat edited; see link for full article) :
http://news.yahoo.com/s/nm/20080417/bs_nm/studentloans_salliemae_outlook_dc&printer=1Sallie Mae affirms outlook, warns of "train wreck"
By Kevin Drawbaugh
Thu Apr 17, 11:21 AM ET
Sallie Mae (SLM.N), the largest U.S. student loan company, on Thursday affirmed its 2008 profit forecast, but warned of a "train wreck" in the $85 billion education financing market without urgent government intervention.
But Chief Executive Al Lord told analysts on a conference call: "We've been predicting something of a train wreck" in mid-2008 without prompt changes in a market hit by fallout from the subprime mortgage crisis and cuts last year in federal subsidies to student lenders.
His remarks came hours ahead of an expected vote on the floor of the U.S. House of Representatives on a bill meant to help stabilize the student loan market, with legislation also pending in the Senate amid general White House support.
Millions of young people will begin this month to lock in their financing before heading to college in the autumn, raising concerns among officials about loan availability.
On the conference call, Lord said Sallie was being flooded with loan applications from students, reflecting the exit of dozens of other lenders from the business.
"Far more have left than have announced they've left," he said. "We're operating, as everyone is, in some fairly strange capital markets."
He said loan demand at Sallie was running at $3 billion a month, while the company has only been able to access funding of about $1 billion a month -- at record-setting costs.
Sallie Mae Chief Financial Officer Jack Remondi said on the call: "Although we are awaiting a potential resolution of this issue from Washington, I want to be perfectly clear. We will not do business that jeopardizes the company's liquidity position or franchise value."
My comments:
When I was in college, I was completely clueless about the wider economy. My main concern was having the five bucks it took to get lunch.
For those of you who, similarly, are out to lunch today, the financial sector is in the middle of a serious crisis. It started with a flood of cheap credit, much of which went into overpriced housing. With house prices falling back to more rational values (i.e., what a topnotch brain surgeon might reasonably expect to pay off in a lifetime of eating stale bread and generic ramen), the banking sector is unable to work its fractional-reserve lending magic to pump out new dollar bills.
At the moment, the Federal Reserve is gaming the system to try to stabilize it. Allowing the bond insurers to pretend that they can back up a "AAA" rating, forcing fire sales of Bear Stearns (no relation to BearlyLegal) and Countrywide Mortgage rather than letting them declare bankruptcy, cutting the federal-funds rate to below inflation even as inflation is soaring, and so on and so forth. They can't keep it up forever, though. At some point, banks will have to admit their losses, simply because the internal stresses on the banking system keep getting worse as the game goes on. It's like wrapping duct tape around a hamster before, umm, let me rephrase that. Well, never mind, you probably get the drift.
During the bond insurance crisis about 2-3 months ago, several student loan bond auctions failed. Someone has to put up the initial capital to finance your loans, and nobody was willing to do it.
My best guess is that rates will shoot up dramatically at some point in the not-too-distant future. This will trigger further housing price declines, which will cause more banking-sector pain, which will reduce credit further, which will cause rates to increase, which will cause. . . .
You begin to get the idea.
There are two main schools of thought on what we're going to go through. One is stagflation (with the subschool of staghyperinflation). The other is deflation.
I'm currently on the stagflation side, mostly because it's visibly happening. Last I heard, 4.1% inflation, and a stalled economy. Q.E.D.
A lot of smart people (and some real jerks and idiots) are on the deflation side, saying that the current crunch is simply too large. Maybe we'll end up with a 1990s-Japan "lost decade", or a Great Depression, or just a huge 1970s-style stagflationary schlog.
Then there are those who say "buy some farmland and guns, and learn to grow your own vegetables." Oooookayfine.
Just some random musings from someone who is a bear marketer.
All that said, I really have no idea what will happen to interest rates any time soon. I can't see the mess continuing, but the feds are intervening every time it looks like there will be a reckoning. Anyway, I don't see the next several years as being very pleasant, at least not if you want to borrow money.
Good night, chilluns. Pleasant dreams!
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My bad, seriously.