Two Awful Tastes that Taste Awful Together

March 10, 2010

(Guest post by Greg Forster)

You can’t make this stuff up, folks.

The Democratic congressional leadership is now going to add their bill to eliminate all private student-loan lending, granting the government (i.e. themselves) a monopoly on all student loan business, to the same reconciliation process by which they’re jamming health care through.

As we know, the saga of federal involvement in student loans clearly illustrates the direct path from the “public option” to full-blown single-payer nationalization.

You would think they’d be shy to put the two right there next to each other. Then again, for those who haven’t learned this lesson by now, will hitting them in the face with it make any difference?


Death Panels for College Kids Update

December 18, 2009

(Guest post by Greg Forster)

In today’s Wall Street Journal, Arne Duncan points out that it makes no sense for government to run a giant subsidy program for student loans that allows bankers to capture taxpayer dollars as intermediaries between Uncle Sam and the kids.

Obviously, the only sensible alternative is for government to completely abolish private lending and socialize the whole system, so that the only place any student of any income level will be able to go for a loan is the federal government! No other possible solution to the problem is imagineable.

The headline summarizes the administration’s bullying ambitions with admirable transparency: “Banks Don’t Belong in the Student Loan Business.”

And how did the path to socialism start? With the creation of a “public option.” After that, the rest is just math.

The Student Loan Lesson for Health Reform

July 21, 2009

Monopoly - Pennybags

From now on, any time you need care, just come ask my permission!

(Guest post by Greg Forster)

In case you missed it, you’ll definitely want to check out Stephen Spruiell’s NRO column on what we can learn about health care reform from looking at the federal student loan program. “Reform” means irreversible steps that must inevitably end in dictatorial socialization.

It’s important to begin with the understanding that we don’t have a free market in health care as it is. What we have is a government-mandated cartel. Pretty much all the problems people complain about arise from the mandatory cartelization of health care. The question is whether we’re going to stick with this lousy command-economy cartel, or switch to an even worse direct government monopoly.

I’ve noted before how the already-complete monopolization of the education sector provides a general model for the ongoing monopolization of health care. But Spruiell’s article on how government muscled its way to becoming the sole student lender in America demonstrates that the education monopoly provides not only a general model, but a step-by-step tactical plan:

  1. Sponsor a huge, hubristic attempt to monopolize the market.
  2. When you lose that fight, fall back on the comparatively “reasonable” “compromise” of massive subsidies.
  3. Sit back and wait for the massive subsidies to badly distort the market, creating widespread suffering and injustice.
  4. Whip up public anger over the injustices you’ve created, directing blame away from yourself by demonizing the private service providers.
  5. Offer a “public option” as a way to “control costs” and “keep the private sector honest.” Subsidize the public option so it offers a better deal.
  6. Watch the “public option” become the dominant service provider, and then a de facto monopoly.
  7. Demonize the remaining private providers because they’re not as good as the public option.
  8. Outlaw the remaining private providers so everyone must now come to you.
  9. Begin reshaping the government service provider to meet your needs, taking advantage of your complete freedom to order everything however you want, since there are now no alternatives and thus no way for anyone to effectively resist you.
  10. Lie back and enjoy your tyrannical rule over a nation of willing slaves.

On federal student loans Congress is about to take step 8. On schooling generally we’ve long since completed step 6, but the periodic attempts to progress to step 7 have (so far) been successfully repulsed. On health care we are now being invited to take step 5.

The game is pretty simple. Most games are, once you read the box top and know what’s going on.

The only question that matters is: at what point does the progression become irreversible? I suspect that if we ever arrive at step 10, it will be primarily because at some prior stage, the people who were smart enough to see what was going on assured themselves that the point of no return had not yet been reached, when in fact it had.

WSJ and Bloomberg Notice the Student Loan Crisis

April 24, 2008

(Guest post by Larry Bernstein)

The Wall Street Journal and Bloomberg have stories on the student loan crisis.  I presume the articles were in response to my post a couple of days ago.

This is typical. I think the WSJ editorial page gets the issue wrong.  The editors blame the current crisis on new Fed limits on the allowable credit spreads.  In addition, there is a mention of an idea to allow the Federal Reserve to accept student loans as collateral at the discount window. 

I don’t think either of these issues is critical.  The key point is that students are defaulting on their loans at a rate much higher than expected.  With higher default rates and worse than expected recoveries, the loans are worth less than par.  State Street, who had bought billions of securitized private student loans in the secondary market, admitted last week that they may need to take reserves equal to as much as 10% of par.

The current crisis is not a funding crisis, or an ability to use the loans as collateral for secured financing by banks.  The problem is a basic financial problem.  The borrowers are unwilling to pay the lenders back.  There are two typical responses to this sort of problem.  The first is to stop lending until we figure out what the likely default rates are going to be and if the business makes economic sense.  This is the current lender response to the increasing rates of default in the subprime residential market.  The second response is to lend, but at much higher interest rates to cover for the additional expected losses from defaults and to cover additional risks of even greater defaults.  The market is seeing both responses from lenders.

What should public policy be for student lending?  This is clearly complicated and depends on your view of the role of government.  Do you think that the federal government should lend directly to students at a below-market rate?  The answer depends on the public’s willingness to accept substantial losses on the loans.  The market price embodies the market’s view of defaults.  Today, the market is saying that the government will lose more than 10% of the loan size.  There are $70 billion of new federally guaranteed loans each year, and both Democratic presidential candidates want to expand the program.

What is the market failure that requires government action?  Why shouldn’t the interest rates on student loans reflect the risk of the loans?  If we let the market work, banks will demand additional collateral (from the parents) at various interest rates to reflect the individual risk of the borrower.  It cannot be that whenever credit spreads go up to reflect greater risk of defaults that the government needs to step in and lend money at a below-market rate.

(As an aside, the current plan to use the FHA to solve the nation’s residential mortgage crisis will most likely result in government losses in excess of the 1980s thrift crisis.  Sadly, many years from now, Congress will investigate how this could have happened.)

The Student Loan Crisis

April 21, 2008

(Guest post by Larry Bernstein)


When you hear about the current financial crisis, most of the focus is on foreclosed subprime loans.  But, the financial crisis has spread to all financial products as delinquencies have increased for credit cards, auto loans, and other secured and unsecured borrowings.  Direct lenders and securitization lenders are now demanding more spread to compensate for the perceived increased risk of default. 


Student loans are no different from any other form of debt.  Defaults have surged in the past few months.  Despite the fact that most loans are guaranteed by parents of the students with terrific FICOs (credit ratings), many more loans are delinquent.  How bad is it?  One of the largest insurance companies that guarantee private student loans filed for bankruptcy last week.  First Marblehead, which securitizes private student loans, stock price is down more than 90% from its highs of last year as investors rightly perceive that First Marblehead’s residual claims on student loan securitizations may not be very valuable.  Bank of America which is one of the largest direct lenders in private student loans announced last week that they will discontinue making private student loans, and Bank of America will only make Federally Guaranteed student loans.


Based on these three events described above, the number of private student loans will decline dramatically in the week’s ahead.  There are financial and social consequences to this problem.  Students with limited access to financial means will not be able to attend their school of choice next semester.  For most students, if you cannot pay, you cannot attend.  I suppose, some students will go to school part-time, or will work part-time to make ends meet.  But for many students, they will either choose a less costly collegiate experience, defer, or will discontinue their college education. 


I expect for-profit colleges’ earnings to suffer with fewer students.  I have not yet shorted these company’s shares, but I will be looking into it in the days ahead.   We should expect not-for-profit college institutions to suffer as well.  Clearly Harvard will be fine.  Harvard’s endowment and student body can afford the education.  It is the poorer schools with a limited endowment and a student body that depends on private school loans to be truly hurt during this financial crisis.


Whenever the financial markets curtail borrowers, there will be those that cry out for additional government assistance.  We are seeing this particularly in the residential home loan market.  The government cannot make the defaults disappear.  The government will be making loans to those citizens who the market believes are not creditworthy or at a rate of interest that is insufficient for private actors to lend.  I fully suspect that if the government increases the loan sizes that it is guarantees, then we should expect substantial losses on the government’s loans.  There is no free lunch. 


The time of reckoning for private and public actors is next semester.

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