Posts tagged Dot-com bubble
Lately, a convergence of events — graduation season, impending expiration of a subsidy on student loans, and an election year — have led to a broader discussion about the overall economy of higher education. In particular, some have suggested that we have an “education bubble”. How accurate is this suggestion? And, if it is, what are the potential impacts of it bursting?
To answer this, we should start by examining the meaning of an economic bubble. Historically, economic bubbles were referred to as “booms”, and their popping as “busts”. Only the terminology has changed.
Booms are caused when credit grows rapidly in a particular market, leading to rising prices, and overexpansion. Eventually this leads to a point where the return on investment is no longer assured, which causes the credit to quickly dry up, and the market to then collapse (the “bust”). The credit for the boom can come from many different sources, but typically the late stages of the boom are funded by private creditors.
We saw this happen with Internet companies in the late 1990s, as their stocks skyrocketed from a tremendous influx of private investments. We saw it happen more recently with real estate, as home prices skyrocketed from a tremendous influx of private investments in credit default swap–backed collateralized debt obligations, which funded the mortgages that funded the real estate purchases. In both of these cases, the credit dried up when speculators were no longer able to turn profits by reselling the investment property.
What about higher education? (more…)