Chyden Finance: profit from hypocrisy

The Washington Post reports, “The Democratic-led [US] House [of Representatives, aka Lower House] approved a bill Thursday that would… end a program that subsidizes private lenders that provide federally guaranteed student loans. The [US federal] government itself would make all such federal loans as of July 1 [2010, one presumes, seeing as how it is now mid-September 2009], effectively cutting out banks and other lenders as middlemen.”

Um…

No.

Leaving aside the questions of why the US government should be in the banking business and why the elimination of commercial competition in any field is good, the US government is the middleman in this context. The banks were just the comic sidekicks in this pathetic comedy of error.

As I explained in detail in an earlier post, “[T]uition in the USA is not a function of instructional costs, but a function of federal government student loan guarantees.” Allegedly sleazy operators who prey on the allegedly naive and the allegedly gullible charge tuition rates that are similar to what Harvard and Yale charge, and their alleged students’ loans are guaranteed by the federal government, precisely because a school either is or is not accredited. There is no such thing as ‘partially accredited’; thus, there is no such thing as ‘fully accredited’, as some dubious organizations claim.

Until now, the US federal government guaranteed student loans that banks made to students in the USA. If a bank’s default rate rose too high, it was supposed to be cut out of this risk-free line of work. Likewise, if a school’s default rate rose too high, its students were supposed to become ineligible for federally guaranteed student loans.

Government regulators failed on both counts. Dodgy schools’ students continue get federally guaranteed loans that they neglect to repay in rather heroic proportion, and US taxpayers pay back the loans to the banks. The natural conclusion among the political class is that, since government agents have proven incompetent in policing this system, they should be given a bigger mandate, take over the whole program, and go into the retail banking business.

This way, the total amount floated to students — and not just the bad-debt portion — will come directly from taxpayers, and government agents later can forgive students who are in government-favored classes and waive the repayment of their grants loans.

Why stop there? If we are going to cut out the middleman, why not follow all the way though?

The USA is the world’s Number One basket case debtor nation. US government agents borrow a frighteningly large portion of the money that they spend. Major lenders to the USA include central banks and equity funds in China, Japan, the UK, Caribbean tax havens, OPEC nations, Brazil, Russia, and Hong Kong. Seriously. Click on the link. Brazil holds something like 4% of the outstanding US federal debt… yes, Brazil, the big, poor country with the great music and small bathing suits. Russia — yes… that Russia — holds about 3.5%. Granted, China holds nearly 25% [!!!], but these are still significant numbers.

Instead of having Washington, DC, bureaucrats borrow from China, offshore tax havens, OPEC, and Russia, only to lend the money to students in the USA, why not simply send students to the local Chinese, Caymanian, and Saudi Arabian consulates for their beer money?

Need a Small Business Administration loan?  Get it directly from the Brazilians, Indonesians, or Venezuelans.  Farm subsidies? Social Security? Military adventures? Go to the Japanese, Russians, or Iranians.

They’re all lending to the US government like there’s no tomorrow. Cut out the real middleman and go directly to the real source!

For further convenience, the feds simply could sell some of the banks that they nationalized recently.  That way, the buyers already would have branches throughout the USA, where American students, farmers, and entrepreneurs could go to get formerly federal loans.

It would give the Arabs, the Chinese, and the Russians something profitable to do with their vast reserves of US dollars and help them diversify their portfolios.  And, unlike other banks, they never would have to go to the Fed’s discount window to get more or do overnight trading. They could just check between the cushions of the sofas in their waiting rooms, if their reserves fell temporarily short.

It’s a Win/Win/Win!

</sarcasm>

Invest accordingly.

CWE