Democrats love to point the finger at private enterprise as the culprit for whatever ails us. They always want to take the profits away from those big corporations. Never mind that those profits are paid out to retirement plans, both public and private, and ordinary investors seeking to keep their head above water in an attempt to survive the increased costs that often are caused by ill-conceived legislation.
The latest bailout sought by Dems in DC resulted from their own legislative folly. As described in today's WSJ, with my underlining:
In September, Congress vowed to make education more affordable by passing the "College Cost Reduction and Access Act." The law reduced the interest rates borrowers pay on federally insured student loans. Backed by the Federal Family Education Loan Program, these loans account for more than 70% of education lending. Taxpayers will fork over $7 billion by 2012 to pay for the rate cuts.
But Congress didn't stop there. Convinced that the private lenders who make these loans were reaping too much profit, Congress also cut the yield on each loan. The return on the popular Stafford loan for undergrads was reduced by 70 basis points. For loan consolidations, Congress cut returns by 65 basis points. In a vibrant market, banks might have absorbed these hits and continued to lend. But the combination of legislative fiat and fewer investors willing to buy asset-backed securities amid the credit crunch has put the squeeze on lenders.
What's now clear is that Congress didn't merely wring the profits out of student lending. It's blown up the entire student loan market. Market leader Sallie Mae says it now loses money on every new federal education loan. Sallie continues to lend in hopes of a change in D.C., or increased investor demand for securitized loans.
Others can't wait. A third of the nation's top 100 lenders to students in 2007 have temporarily suspended new loan originations or exited the business altogether. Citibank subsidiary Student Loan Corporation cited "unprecedented federal legislation" in announcing its recent withdrawal from much of the market.
Usually, the law of unintended consequences takes so long to reveal itself that no one remembers the culprits. But the speed at which Congress's student lending changes have gone south is raising political danger for Democrats, if Republicans had the wit to point it out. (They don't; that's why they're Republicans.)
Democrats would thus like to clean up the mess they created before May, when a flood of college-bound seniors will seek loans. But the pols can hardly repeal their autumn blunder mere moments after taking credit for it. No doubt many of them are still sending out taxpayer-financed mail bragging of their "achievement."
The result is that the same man who authored last year's bill to cut lenders' returns has crafted a new bill to subsidize those same lenders. Last week the House passed Education and Labor Chairman George Miller's latest foray into collegiate finance. The bill gives the Department of Education new authority to purchase loans directly from lenders.
To summarize: Congress mandated a return on student loans that is too low to attract private capital in the current market. So Congress will now use your money to create artificial investor demand. Taxpayers will bear more risk so that Congress can fashion a new business model to replace the one it just destroyed. The Bush Administration, unwisely but typically, has endorsed this approach.
Oh, there's more. Mr. Miller's allies in the Senate understand that legislation moves more slowly on their side of the Capitol. There may be too little time before the angry phone calls from parents target the 202 area code. So the same Senators who gave us the autumn accident have begun a letter-writing campaign to request that bailout we mentioned earlier.
The rest of us have to actually accomplish something from day to day in order to keep a roof over our heads, etc. Our elected politicians apparently feel that they can screw up and not get fired. And here's the WSJ's last paragraph:
Needless to say, none of this legislative history is appearing in the multiple media sob stories about students who can't get loans. But like airline passengers stranded this month due to panicky inspections, the current student loan "crisis" didn't have to happen. It is entirely a product of Congress.
