Despite the secret-handshake nature of the proceedings (which is just cool, admit it) the TBAC minutes and documents released almost always contain some interesting information beyond the de rigueur recommended Treasury auction schedule. Below are some excerpts from the minutes of the latest TBAC meeting on November 5th (formatting added, edited for brevity):
·
Budget deficits forecasts have declined, and
that Treasury is likely to be over-financed in FY2015. Specifically the
Treasury’s current auction schedule would raise $100 and $200 billion more than
the current FY2015 forecasted borrowing estimates from primary dealers and the
CBO, respectively.
·
Based upon these better-than-expected deficits
and near-term fiscal projections for FY2015, the Committee recommended that
Treasury initiate $1 billion cuts to both the 2- and 3-year coupon auction
sizes beginning in November.
·
Treasury’s borrowing needs would increase again
in 2016.
·
While Treasury would normally address a
short-term decline in borrowing needs by reducing bill issuance, Treasury
officials recommended that Treasury and the Committee should instead consider
the possibility of cuts to coupon security issue sizes. This consideration is warranted as Treasury
bills comprise just 11 percent of marketable debt outstanding and that further
large reductions could have implications for the functioning of short-term
markets, given investors’ persistent and strong structural demand for
short-term high-quality liquid assets.
·
Editor’s
note: It would be particularly risky to cut T-bill issuance in 2015 when
the FOMC is expected to begin raising rates and will be draining a lot of
liquidity out of the short-end of the market. A fact no doubt considered by the
Treasury and TBAC.
At the previous meeting, TBAC was charged by Treasury to provide
an update on trends in the student loan market over the last several years.
Below are excerpts of their condensed response in the minutes. The full
presentation can be found here.
·
The balance of outstanding student loans has
grown from $1.0 trillion as of the end of 2011 to $1.3 trillion as of
mid-2014.
·
Four key factors that continue to drive student
loan growth:
1.
Students’ broadly choosing to consume more years
of higher education, in part reflecting demographic change with growth in the
20-34 year old cohort;
2.
A greater proportion of students utilizing the
federal student loan program (48 percent as of 2012, up from 33 percent in
2002);
3.
Increases in the cost of higher education
exacerbated by reduced subsidies from state governments to in-state schools;
and
4.
Outstanding loan balances declining at a slower
rate than originally anticipated due to both increased volume of loans in
deferral and forbearance as well as longer loan tenors.
·
Default rates are high and rising, with the
two-year cohort default rate increasing to 10.0 percent as of 2011 versus 8.8
percent in 2009.
·
“Default” in the context of federal student
loans is generally defined as 270 days without payment and that loans in
default represent 9 percent of the stock of outstanding federal student loans.
Editor’s note: Wow.
A 10% default rate outside of financial crisis is the land of sub-prime
lending. Years ago during the financial crisis I briefly covered asset-backed
securities, and when the universe of credit card defaults rose above 10% - to
eventually hit just below 12% - it was a historic default wave.
·
The member suggested that students are taking
out student loans because higher education has historically been correlated
with upward economic mobility. However,
the member noted an average of 40 percent of students at four-year institutions
(and 68 percent of students in for-profit institutions) currently do not
graduate within six years. As a result,
most likely do not benefit from higher incomes associated with education yet face
the burden of student debt.
·
Unlike all other indebtedness, student debt
cannot be extinguished in bankruptcy in almost all cases and the government can
garnish income tax refunds, Social Security and other federal benefits.
Editor’s note: Despite some caterwauling from a few progressive
Senators (I’m side-eyeing you, Elizabeth Warren) there is a very good reason
that student loan debt can’t be discharged in bankruptcy – because both the
moral hazard risk and economic consequences for taxpayers are enormous. Borrowers
could declare bankruptcy immediately following graduation, when they were young
and had virtually zero assets to pay off the debt. The default would then be expunged from their
credit histories within 7 years, or most likely by their 30th
birthdays – effectively sticking taxpayers with the cost of their educations. Speaking
of cost:
·
The member noted that CBO calculations indicate
that the student loan program will deliver a $135 billion profit to taxpayers
over the next decade. However, it was observed that the estimate is based on
the programs as legislated and does not factor in market risk or shifts in
macroeconomic conditions, thereby ignoring the impact of potential
defaults. The estimate does not include
the potential cost associated with recent proposals to redesign elements of the
student lending program, including:
reducing the interest rate on student loans; increasing repayment
options; and addressing the pace of
origination with a focus on qualifying institutions eligible for such
programs. The member noted that under an
alternative fair-value accounting approach used by CBO, the program results in
an $88 billion cost to taxpayers.
·
A robust and spirited discussion followed the
presentation.
Yeah, I bet.
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