Monday, May 05, 2008

Ben, Two Georges and Teddy: Shame on Them All

By Richard Vedder

Today's Wall Street Journal editorial on student loans got me all riled up before the work week has really started. Washington got us into the huge housing credit mess, and has directly or indirectly created the student loan crisis as well. But it is a bipartisan, indeed, tripartisan mess --everyone in DC is to blame, with the possible exception of my sidekicks Bryan, Andy as well as myself (who am temporarily in our nation's capital --a place with some magnificent physical capital in the form of stately buildings designed in the past, but so bereft of human capital). It is a city of politicians who are either very stupid, very unwise, very uncourageous, or a combination of all the above.

Let us single out four culprits.

BEN BERNANKE -- No Alan Greenspan, Bernanke is proof positive that academicians should not be put in charge of something as important as the central bank. Friday he caved on putting fed money into the student loan mess. The Fed has gone from being Lender of Last Resort to banks to being Lender of First Resort to everyone. Greenspan is not entirely innocent, having been the architect of the easy money policies that contributed to the housing debacle, but I cannot see him getting the Fed into every kind of harebrained scheme to bailout people who should have been allowed to fail. He is destroying efficient market signals and causing all sorts of moral hazard problems. I opposed his appointment, and my opposition is vindicated.

GEORGE BUSH -- This is the President who can't say no --who goes along with every anti-market, anti-Reagan Republican scheme, from prescription drugs to, now, bailing out the student loan mess that Congress (see below) largely created. I like Bush on taxes and Supreme Court appointments, and in general for appointing good Ed people, but I am furious at this student loan bailout complicity.

GEORGE MILLER -- He successfully wanted to mandate smaller fees for private student loan providers, creating much of the current flight from that industry. Now, realizing the political liabilities of that boo-boo, he is trying to recoup by providing that hated (not by me) industry with subsidies. Blunder on top of blunders. Buck McKeon (his GOP counterpart) is only marginally better.

TEDDY KENNEDY -- I saved the best for last. Besides favoring bailing every one and their Mother out in order to keep loans flowing even to the most flimsy qualified students, Kennedy wants to expand direct federal lending to students --getting the government further into the banking business. If Teddy has his way, we will Sovietize an already inefficient system.

My view is contrarian. The Feds should get out of the student loan business--period, end of story. Credit should be extended based on economic fundamentals --is the student a good risk? Will she pay the loan back? Markets can and will evolve, providing new products (e.g., equity and well as debt based financing) to meeting growing needs over time. Wall Street is more responsible financially than the Government, which has tens of trillions of dollars in unfunded liabilities on top of a few trillion in explicit debt.

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