Kenneth R. Szulczyk
revenue bonds. When the students pay to live there, the university pays the bondholders
some of the revenue. We include stocks and bonds that we had defined earlier in this chapter. Mortgage is a loan on a house or property and the loan duration ranges from 15 to 30
years. Usually, the property becomes the collateral. For instance, if a homeowner loses his
job and cannot repay the mortgage, then the bank takes possession of his house. We call
this process foreclosure as a bank takes the property and evicts the homeowners. A variety
of savings institutions and banks grants mortgages, making mortgages the largest debt
market. Commercial bank loans are banks lending to businesses. These loans do not have well
developed secondary markets. Government agencies can issue securities. For example, Sallie Mae is a quasi-government
agency and lends to college students. Then Sallie Mae pools the student loans into a fund
and issues bonds, allowing investors to buy into the fund. Subsequently, the investors
indirectly earn the interest from the students’ monthly payments. Thus, Sallie Mae
increases the liquidity of student loans.Sallie Mae may experience financial hardship. U.S. economy has been plagued with weak
economic growth since the 2007 Great Recession, and many college graduates cannot find jobs
and start to default on their student-loan payments. Many call this the College Bubble. As
college tuition soars into the stratosphere, many college students accumulate large amounts of
debt to pay for their education, and some of these students have slim chances of finding good-
paying jobs after they graduate. Consequently, high school graduates may shun college to avoid
accumulating debt, sparking a financial crisis for the U.S. colleges and universities. Then the
colleges and universities could contract similarly to the U.S. housing market after 2007.
The United States Banking System
The United States banking system differs from other industrialized countries. For instance,
the United States has more banks per capita, and the banks possess fewer assets because the U.S.
government imposed strict regulations. Early in the United States history, the public and
government feared big banks, so state and federal governments passed regulations that forced
banks to be smaller and encouraged a large number of banks to form.
The United States, furthermore, has a dual banking system. A bank chooses a charter from
a state government or from the U.S. federal government. A charter is a document that legally
establishes a corporation and allows a financial institution to participate in banking activities. A
national bank receives a charter from the federal government, while a state bank receives a
charter from a state government.