Among the demands of the Wall Street protesters is student debt forgiveness - a
debt "jubilee". Occupy Philly has a "Student Loan Jubilee Working Group", and
other groups are studying the issue. Commentators say debt forgiveness is
impossible. Who would foot the bill?
There is one deep pocket that could pull it off - the Federal Reserve. In its
first quantitative easing program (QE1), the Fed removed $1.3 trillion in toxic
assets from the books of Wall Street banks. For QE4, it could remove $1
trillion in toxic debt from the backs of millions of students.
The economy would only be the better for it, as was shown by the
GI Bill, originally instituted in 1944 and which provided virtually free higher
education for returning veterans, along with low-interest loans for housing and
business. The GI Bill had a sevenfold return. It was one of the best
investments congress ever made.
There are arguments against a complete student debt write-off, including that
it would reward private universities that are already charging too much, and it
would unfairly exclude other forms of debt from relief. But the point here is
that it could be done, and it (or some similar form of consumer "jubilee")
would represent a significant stimulus to the economy.
Toxic student debt: the next "black swan"?
The Occupy Wall Street movement is heavily populated with students. Many
without jobs, they are groaning under the impossible load of student debts that
have been excluded from the usual consumer protections.
A whole generation of young people has been seduced into debt peonage by the
promise of better jobs if they invest in higher education, only to find that
the jobs are not there when they graduate. If they default on their loans,
lenders can now jack up interest rates and fees, garnish wages, and destroy
credit ratings; and the debts can no longer be discharged in bankruptcy.
Total US student debt has risen to $1 trillion - more than US credit card debt.
Defaults are rising as well. According to Department of Education data, 8.8% of
recipients of federal student loans defaulted in the 2010 financial year, up
from 7% the previous year. With an anemic recovery from a severe recession and
a difficult job market, the situation is expected to get worse.
The threat of massive student loan defaults requiring another taxpayer bailout
has been called a systemic risk as serious as the bank failures that brought
the US economy to the brink of collapse in 2008. To prevent another disaster
like the one caused by the toxic debts on the books of Wall Street banks, we
need to defuse the student debt bomb before it blows. But how?
The Federal Reserve could do it in the same way it defused the credit crisis of
2008: by aiming its fire hose of very-low-interest credit in the direction of
the struggling student population. Since September 2008, the Fed has made
trillions of dollars available to financial institutions at a fraction of 1%
interest; and in audits since then, we've seen that the Fed is capable of
coming up with any amount of money required or desired. To the Fed it is all
just accounting entries, available with the stroke of a computer key.
The Fed is not allowed to lend to individuals directly, but it can buy Treasury
securities; and with the Student Aid and Fiscal Responsibility Act (SAFRA) of
March 2010, the Treasury is now formally in the business of student lending.
The Fed can also buy asset-backed securities, including securitized student
debt; and there is talk of another round of quantitative easing aimed at just
that sort of asset.
After QE3: the market wants more
When the Federal Reserve's expected "QE3" turned into the tepid and ineffectual
"Operation Twist", the stock market reacted by plummeting. To appease
investors, Fed chairman Ben Bernanke then assured them that the Fed was "ready
to do more". How much more and in what way wasn't specified; but Alan Blinder,
former vice chairman of the Federal Reserve Board of Governors, suggested some
possibilities. He wrote in the Wall Street Journal on September 28th:
To
maintain the size of its balance sheet, the Fed has been reinvesting the
proceeds in Treasurys. But starting "now" (the Fed's word), and continuing
indefinitely, those proceeds will be reinvested in agency bonds and MBS
[mortgage-backed securities] instead. ... A future round of quantitative easing
(QE4?) that concentrates on private-sector securities like MBS, rather than on
Treasurys, is now imaginable. ... Indeed, if we indulge ourselves in a bit of
blue-sky thinking, we can even imagine the Fed doing QEs in corporate bonds,
syndicated loans, consumer receivables and so forth.
Syndicated
consumer loans include asset-backed securities (ABS) of the sort purchased by
the Fed through its Term Asset-backed Securities Loan Facility (TALF) created
in November 2008. According to the Fed's website, "Eligible collateral
initially included US dollar-denominated ABS that ... are backed by student
loans, auto loans, credit card loans, and loans guaranteed by the Small
Business Administration (SBA). ..."
Buying securities backed by bundles of student loans thus falls within the
Fed's purview. Quantitative easing is a tool reserved for economic crises, and
toxic student debt appears to be the next "black swan" on the horizon.
Buying up a trillion dollars in student loans could be a nice stimulus package
for the economy. The money supply is estimated to have shrunk by about $3
trillion since the 2008 collapse of the "shadow" banking system (an array of
non-bank financial institutions including investment banks, hedge funds, money
market funds, structured investment vehicles, conduits, and monoline insurers).
In July 2010, the New York Fed posted a staff report on its website titled
"Shadow Banking", showing that the shadow banking system had contracted by $4
trillion since its peak in March 2008, when it was valued at about $20 trillion
- actually larger than the traditional banking system, which was then only
about $12 trillion.
By July 2010, the shadow system was down to about $16 trillion and the
traditional system was up to about $13 trillion, leaving a $3 trillion gap to
be filled. Adding back a trillion dollars in student aid could go a long way
toward curing this shortfall.
Debt relief as economic stimulus
What could such a stimulus do for the economy? Consider the GI Bill, which
provided free technical training and educational support, along with
government-subsidized loans and unemployment benefits, for nearly 16 million
returning servicemen. Economists have determined that for every 1944 dollar
invested, the country received approximately $7 in return, through increased
economic productivity, consumer spending, and tax revenues.
The GI Bill not only made higher education accessible to all, but it created a
nation of homeowners, new technology, new products, and new companies, with the
Veterans Administration guaranteeing an estimated 53,000 business loans.
Eliminating, reducing or deferring student loan debt would free up the budgets
of millions of students, allowing them to spend more on goods and services,
increasing demand and creating jobs. More jobs would mean more taxes for the
government, and a more educated and skilled work force would mean higher paying
jobs in higher tax brackets.
What the economy sorely needs today is purchasing power. Without customers to
buy their products, businesses cannot expand and cannot hire. And to get the
needed purchasing power, consumers need more money in their pockets. Getting it
there by quantitative easing has been branded dangerously inflationary, but
with a $3 trillion hole in the money supply, we need an injection of new money
today.
As long as the money is spent on goods and services rather than on financial
money-making-money schemes, the result will not be inflationary. Retailers will
just put in more orders for goods, causing producers to produce more and to
hire more workers to do it. Supply will rise along with demand, keeping prices
stable. Overall prices will not increase until the country hits full
employment, which is far from where we are today.
Another alternative: interest-free student loans
Many countries offer free tuition for higher education, including Argentina,
Brazil, Denmark, Finland, Greece, Norway, Scotland, and Sweden. Another program
that has proven to be very fair and workable is a program of interest-free
student loans. The government of New Zealand now offers 0% loans to New Zealand
students, with repayment to be made from their income after they graduate. For
the past 20 years, the Australian government has also successfully funded
students by giving out what are in effect interest-free loans.
The loans in the Australian Higher Education Loan Programme (or HELP) do not
bear interest, but the government gets back more than it lends because the
principal is indexed to the Consumer Price Index (CPI), which goes up every
year. The indexation rate was 2.8% in 2006 and 3.4% in 2007.
To avoid this increase, borrowers can make voluntary repayments, for which they
also get a 10% reduction in the principal. Thus if a person voluntarily repays
$1,000, the debt is reduced by $1,100. The loans are "contingent loans," repaid
only if and when the borrower's income reaches a certain level. If the borrower
dies, any compulsory repayment must be paid from his estate, but the remainder
of the debt is canceled at death.
Following the Australian model, the Federal Reserve could buy up $1 trillion in
US student debt, waive the interest, and collect on the principal only when the
borrowers' incomes reach a certain level. In the meantime, the loan money would
circulate in the economy, stimulating economic activity.
Even assuming a 10% default rate, the Fed would get back $900 billion on its $1
trillion advance. The $100 billion difference is only one-seventh the bailout
money authorized by congress to rescue Wall Street banks, and it would
stimulate the economy more than the bailout money, which just shored up the
balance sheets of insolvent Wall Street banks that then declined to return the
favor by lending to Main Street.
If the Fed's investment generated anything close to the returns from the GI
Bill, its $100 billion outlay could produce a several-hundred-billion dollar
return.
To prevent abuse of the system, colleges should be required to stay within
certain well-defined parameters for providing affordable, high quality
education; and students should meet well-defined standards as well.
Properly monitored, a federal investment in higher education can be a
win-win-win, good for the economy, good for the government, and good for the
people. A generous student loan program will create jobs, increase tax
revenues, and give young people a fair shot at the American dream, a dream that
has become a mirage for 99% of the population.
Ellen Brown is an attorney and president of the Public Banking Institute,
PublicBankingInstitute.org. In Web of Debt, her latest of 11
books, she shows how a private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back. Her websites
are webofdebt.com and
ellenbrown.com.
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