A recent column in The Wall Street Journal refers to a story published by Beatrix Potter in 1909 called “The Tale of Ginger and Pickles.” Ginger is a cat and Pickles a dog.
Ginger and Pickles open a general store with a business model that offers unlimited free credit for all. Potter explains to her young readers that when a housewife buys a bar of soap, she simply says she will pay another time. “And Pickles makes a low bow and says, ‘With pleasure, Madam,’ and it is written down in a book.”
Business booms and they have many more customers than the cash-only store, run by Tabatha Twichit, also a cat, an unexplained single mother of three. Ginger and Pickles have lots of sales, but no actual money is coming in. They send out many repeat bills that are ignored. Finally, they are forced to close.
The WSJ columnist, Joshua P. Hochschild, compares this story with the housing crisis of 2008. Ginger and Pickles could not collect from their debtors because they had no collateral, no leverage to make people pay. They sold mostly consumables that could not be retrieved, so they were the ones who lost out. In the housing crisis, however, the houses were still worth something and could be taken back. “The banks and the politicians who set up the perverse incentives, generally all benefited. It was the people who bought houses they couldn’t afford who suffered the most.”
Now we have the education bubble, says Hochschild, where the government has freely guaranteed huge loans with no collateral, and it is not clear the loans can, or will, be paid back. The government has leverage only for wage-earners. Even they cannot get blood from a turnip. A college education, like a bottle of milk or a bar of soap, cannot be taken back once it is consumed. The colleges, of course, have their money and want the loans forgiven, as some politicians suggest, to keep the bounty flowing. Even if their loans are forgiven, the students are still unemployed and a few years older—and left holding the bag.