03 April 2010 By Ellen Brown "We say in our platform that we
believe that the right to coin money and issue money
is a function of government.... Those who are opposed
to this proposition tell us that the issue of paper
money is a function of the bank and that the
government ought to go out of the banking business. I
stand with Jefferson ... and tell them, as he did,
that the issue of money is a function of the
government and that the banks should go out of the
governing business." - William Jennings Bryan,
Democratic Convention, 1896 William Jennings Bryan would have
been pleased. The government is now officially in the
banking business. On March 30, 2010, President Obama
signed the reconciliation "fix" to the health care
reform bill passed by Congress last week, which
includes student loan legislation called by the
President "one of the most significant investments in
higher education since the G.I. Bill." Under the
Student Aid and Fiscal Responsibility Act (SAFRA), the
federal government will lend directly to students,
ending billions of dollars in wasteful subsidies to
firms providing student loans. The bill will save an
estimated $68 billion over 11 years. Money for the program will come
from the US Treasury, which will lend it to the
Education Department at 2.8 percent interest. The
money will then be lent to students at 6.8 percent
interest. Eliminating the middlemen allows the
Education Department to keep its 4 percent spread as
profit, money that will be used to help impoverished
students. If the Department were to actually set up
its own bank, on the model of the Green Bank being
proposed in the Energy Bill, it could generate even
more money for higher education. A Failed
Experiment in Corporate Socialism The student loan bill may look like
a sudden, radical plunge into nationalization, but the
government was actually funding over 80 percent of
student loans already. Complete government takeover of
the program was just the logical and predictable end
of a failed 45-year experiment in government subsidies
for private banking, involving unnecessary giveaways
to Sallie Mae (SLM Corp., the nation's largest student
loan provider), Citibank, and other commercial banks
exposed in blatantly exploiting the system. Under the Federal Family Education
Loan Program (FFELP), the US government has been
providing subsidies to private companies making
student loans ever since 1965. Every independent
agency that has calculated the cost of the FFELP, from
the Congressional Budget Office to Clinton's Office of
Management and Budget to George W. Bush's Office of
Management and Budget, has found that direct lending
could save the government billions of dollars
annually. But the mills of Congress grind slowly, and
it has taken until now for this reform to work its way
through the system. In the sixties, when competing with
the Soviets was considered a matter of national
survival, providing the opportunity for higher
education was accepted as a necessary public good. But
unlike Russia and many other countries, the US was not
prepared to provide that education for free. Loans to
students were necessary, but students were notoriously
bad credit risks. They were too young to have reliable
credit histories, and they did not own houses that
could be posted as collateral. They had nothing but a
very uncertain hope of future gainful employment, and
banks were not willing to take them on as credit risks
without government guarantees. The result was the FFELP, which
privatized the banks' profits while socializing losses
by imposing them on the taxpayers. The loans continued
to be "originated" by the banks, which meant the banks
advanced credit created as accounting entries on their
books the way all banks do. Contrary to popular
belief, banks do not lend their own money or their
depositors' money. Commercial bank loans are new
money, created in the act of lending it. The alleged
justification for allowing banks to charge interest
although they are not really lending their own money
is that the interest is compensation for taking risk.
The banks have to balance their books, and if the
loans don't get paid back, the asset side of their
balance sheets can shrink, exposing them to
bankruptcy. When the risk is underwritten by the
taxpayers, however, allowing the banks to keep the
interest is simply a giveaway to the banks, an
unwarranted form of welfare to a privileged financier
class at the expense of struggling students. Worse, underwriting these private
middlemen with government guarantees has allowed them
to game the system. Under the FFELP, banks actually
profit more when students default than when they pay
back their loans. Delinquent loans are turned over to
a guaranty agency in charge of keeping students in
repayment. Pre-default, guaranty agencies earn just 1
percent of the loan's outstanding balance. But if the
loan defaults and the agency rehabilitates it, the
guarantor earns as much as 38.5 percent of the loan's
balance. Collection efforts are also much more
profitable than efforts to avert default, giving
guaranty agencies a major incentive to encourage
delinquencies. In 2008, 60.5 percent of federal
payments to the FFELP came from defaults. An Education
Department report issued last year found that only 4.8
percent of students who borrowed directly from the
government had defaulted on their loans in 2007,
compared to 7.2 percent for the FFELP; and the gap
widened when longer periods were taken into account. In 1993, students and schools were
given the option of choosing between the FFELP and the
Direct Loan program, which allowed the government to
offer better terms to students. The Direct Loan
program was the clear winner, growing from just 7
percent of overall loan volume in 1994-1995 to over 80
percent today. The demise of the FFELP was
hastened in early 2007, when New York Attorney General
Andrew Cuomo began exposing the corrupt relations
between firms lending to students and the colleges
they attended. Lenders that had been buying off
college loan officials were forced to refund millions
of dollars to borrowers. Where Will
the Money Come From? The Green Bank Model Eliminating the middlemen can
reduce the costs of federal lending, but there is
still the problem of finding the money for the loans.
Won't funding the entire federal student loan business
take a serious bite out of the federal budget? The answer is no - not if the
program is set up properly. In fact, it could be a
significant source of income for the government. The SAFRA doesn't mention setting
up a government-owned bank, but the Energy Bill that
is now pending before the Senate does. Funding for the
energy program is to be through a Green Bank, which
can multiply its funds by leveraging its capital base
into loans, as all banks are permitted to do.
According to an article in American Progress: Funding for the Green Bank should
be on the order of an initial $10 billion, with
additional capital provided of up to $50 billion
over five years. This capital could be leveraged at
a conservative 10-to-1 ratio to provide loans,
guarantees, and credit enhancement to support up to
$500 billion in private-sector investment in
clean-energy and energy-efficiency projects.
[Emphasis added.] Banks can create all the credit
they can find creditworthy borrowers for, limited only
by the capital requirement. But when the loan money
leaves the bank as cash or checks, banking rules
require the bank's reserves to be replenished either
with deposits coming in or with interbank loans. The
proposed Green Bank, however, is apparently not going
to be a deposit-taking institution. Presumably then,
it will be relying on interbank loans to provide the
reserves to clear its checks. The federal funds rate - the rate
at which banks borrow from each other - has been
maintained by the Federal Reserve at between zero and
.25 percent ever since December 2008, when the credit
crisis threatened to collapse the economy. An
Education Bank qualified to borrow at the interbank
lending rate should thus be able to borrow at zero to
.25 percent as well, generating more than 6.5 percent
gross profit annually on student loans. The Treasury, by contrast, paid an
average interest rate for marketable securities in
February 2010 of 2.55 percent, which explains the 2.8
percent interest at which the Education Department
must now borrow from the Treasury. The interbank rate
is obviously a better deal, but it could go up. The
cheapest and most reliable alternative would be for
the Treasury itself to become the "lender of last
resort," as William Jennings Bryan urged in 1896. The Treasury Department and the
Education Department are arms of the same federal
government. If the government were to set up a
government-owned bank that simply lent "national
credit" directly, without borrowing the money first,
it could afford to lend to students at much lower
rates than 6.8 percent. In fact, it could afford to
fund a program of free higher education for all. That
such a program could be not only self-sustaining, but
a significant source of profit for the government, was
demonstrated by the G.I. Bill, which was considered
one of the government's most successful programs.
Under the Servicemen's Readjustment Act of 1944, the
government sent seven million Americans to school for
free after World War II. A 1988 Congressional
committee found that for every dollar invested in the
program, $6.90 came back to the US economy.
Better-educated young people got better-paying jobs,
resulting in substantially higher tax payments year
after year for the next 40-plus years. Taking Back
the Credit Power Winston Churchill once wryly
remarked, "America will always do the right thing, but
only after exhausting all other options." More than a
century has passed since William Jennings Bryan
insisted that issuing and lending the credit of the
nation should be the business of the government rather
than of private bankers, but it has taken that long to
exhaust all the other options. With student loans, at
least, government officials have finally come around
to agreeing that underwriting private lenders with
public funds doesn't work. We are increasingly seeing that
underwriting banks considered "too big to fail"
doesn't work either. Banks are borrowing at near-zero
interest rates and speculating with the money, knowing
they can't lose because the government will pick up
the losses on any bad bets. This is called "moral
hazard," and it is destroying the economy. Issuing the national credit
directly, through a federally-owned central
bank, may be the only real solution to this dilemma.
Today, the government borrows the national currency
from the privately-owned Federal Reserve, which issues
Federal Reserve Notes and lends them to the government
and to other banks. These notes, however, are backed
by nothing but "the full faith and credit of the
United States." Lending the credit of the United
States should be the business of the United States, as
William Jennings Bryan maintained. The dollar is
credit (or debt), in the same way that a bond is. Both
a dollar bond and a dollar bill represent a claim on a
dollar's worth of goods and services. As Thomas Edison
said in the 1920s: If the Nation can issue a dollar
bond it can issue a dollar bill. The element that
makes the bond good makes the bill good also. The
difference between the bond and the bill is that the
bond lets the money broker collect twice the amount
of the bond and an additional 20 percent. Whereas
the currency, the honest sort provided by the
Constitution pays nobody but those who contribute in
some useful way. It is absurd to say our Country can
issue bonds and cannot issue currency. Both are
promises to pay, but one fattens the usurer and
the other helps the People. Comments 💬 التعليقات |