There's always a bubble somewhere

Those of you who saw The Social Network will remember Peter Thiel as one of the early "angel investors" in Facebook, who helped re-capitalize and re-organize Facebook, leaving Eduardo Saverin on the outside looking in. While Thiel may not have made many friends throughout the years, his record as a contrarian investor is fairly hard to argue with.

But his latest call has raised more eyebrows than usual. Noting that total student loan debt now surpasses total credit card debt in the United States (it is now nearing $1 trillion in aggregate), Thiel now feels that something has to give. Per TechCrunch (emphasis mine),

Some people are contrarian for the sake of getting headlines or outsmarting the markets. For Thiel, it’s simply how he views the world...

Consider the 2000 Nasdaq crash. Thiel was one of the few who saw in coming. There’s a famous story about PayPal’s March 2000 venture capital round. The offer was “only” at a $500 million-or-so valuation. Nearly everyone on the board and the management team balked, except Thiel who calmly told the room that this was a bubble at its peak, and the company needed to take every dime it could right now. That’s how close PayPal came to being dot com roadkill a la WebVan or Pets.com...

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

Like any good bubble, this belief– while rooted in truth– gets pushed to unhealthy levels. Thiel talks about consumption masquerading as investment during the housing bubble, as people would take out speculative interest-only loans to get a bigger house with a pool and tell themselves they were being frugal and saving for retirement. Similarly, the idea that attending Harvard is all about learning? Yeah. No one pays a quarter of a million dollars just to read Chaucer. The implicit promise is that you work hard to get there, and then you are set for life.  It can lead to an unhealthy sense of entitlement. “It’s what you’ve been told all your life, and it’s how schools rationalize a quarter of a million dollars in debt,” Thiel says.

Thiel isn’t totally alone in the first part of his education bubble assertion. It used to be a given that a college education was always worth the investment– even if you had to take out student loans to get one. But over the last year, as unemployment hovers around double digits, the cost of universities soars and kids graduate and move back home with their parents, the once-heretical question of whether education is worth the exorbitant price has started to be re-examined even by the most hard-core members of American intelligensia.

Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can’t wriggle away from by declaring personal bankruptcy, says Thiel. “It’s actually worse than a bad mortgage,” he says. “You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future.”

Of course, the importance of that last point--regarding the non-dischargeability of student loan debt--cannot be overstated. I've mentioned it here before, and I think it's an issue that devastatingly few people who hold student loan debt actually understand. Debt slavery, when it is student loan debt slavery, is particularly ironic and painful. Education is supposed to open doors for us, not narrow our field of options and potential career paths. But increasingly, it's doing the latter.

Thiel's points regarding education may be right, may be wrong, or may just be early. We should certainly know by now that the powers-that-be in our federal government are willing to spend untold billions to protect institutions that Americans hold dear. Just because something is in a bubble, therefore, doesn't mean that the bubble needs to burst. Sometimes that bubble just keeps getting bigger and bigger, and the implications of its bursting that much more far-reaching.

Personally, I don't expect the ever-spiraling costs of higher education to correct themselves any time soon, any more than I expect our nation's health care costs to start coming down (with our without Obamacare). But over the long run (how long is anyone's guess), there does have to be some correction in the math that drives higher education.

There are simply too many people believing on faith alone that college is a good investment, and too many of them are wrong--just like with housing five years ago. It will take time for them to realize just how wrong they were, and only then will we start to see any reconsideration of options or a market correction. In the meantime, Peter Thiel certainly won't be making any friends.

[TechCrunch]
(h/t Mish Shedlock)