Tuesday, February 16, 2010

Securitization and student Loans and Other Matters

Original Link: http://livinglies.wordpress.com/2010/02/05/common-sense-revisited-securitization-and-student-loans-and-other-matters/

By livinglies

The current crises in reform of student loans, health-care, financial services, prisons, pharmaceuticals, and dozens of other things stalled on the table by an artificial definition of “majority” as 60% instead of 51% lies at the heart of our problem. It isn’t that one policy is right or another is wrong. The problem is that there is no real debate, vote or action.

Here is a simple proposition: A government policy intending to deliver a direct benefit to taxpayer/citizens MUST be delivered by a government agency. All other activities performed by the private sector must be subject to oversight and some regulation so there is a referee on the playing field.

Common sense proves the point with relentless precision. Suppose we violated this simple premise again by “privatizing” fire or police services. Privatizing a social service is exactly the same as delivering a choice to an intermediary as to whether to deliver the service or put the money in their own pocket. The outcome is obvious.

Whether it is student loans (see below),health-care, financial services, prisons, pharmaceuticals or anything else the effect of delegating government or social function to private interests can ONLY lead to one result — reduction of services, increased costs, and increased profits to intermediaries who add nothing to the process.



For those who are academics a quick review of the economists Von Mises and Rothbard you will see that for decades there has been a whole school of economists who have equated economics with politics and politics in turn being the tool of economists. With respect to the student loan program, the proposal back when this program started was based on the following suppositions:

The use of private infrastructure would result in a more efficient system.

The use of private sector banks would result in proper underwriting of loans since the banks presumably know how to make and underwrite a loan.

The use of taxpayer money to guaranty against default diminished the risk to “quote nearly zero” thus encouraging banks to become involved in the student loan program.

The use of taxpayer money in fees and grants to the private intermediary banks who were inserted into the process would further “encourage” student lending.

The legislative imperative in the bankruptcy law preventing students from discharging their obligations under private student loans would further diminish the risk to private banking lenders and encourage them to participate in the student loan program.

The conclusion was that everyone makes money, we get more college graduates, a booming economy results from a highly informed labor force, job growth would inevitably result, along with higher wages, more consumers with more money to spend, greater innovation from well rounded college students, more students getting advanced degrees and the ultimate result of the United States continuing as the No. 1 country in everything everywhere.

The assumption that using private infrastructure is more efficient is simply an ideological myth. A quick look at the privatization of prisons clearly shows that privatizing infrastructure results in higher costs, more laws, more government, and the creation of a private sector accruing profits that would otherwise be translated into lower taxes for the citizens.

The use of private sector banks inserted into the process of student lending on the premise that they know how to make a loan is similarly a myth when you add the other features of the student loan program. Through securitization like in the securitization of private home loans, the banks were inserted into a process where the initial premise was that they might have a risk. In fact thorough securitization and the other features of the student loan program, the originating lender had no risk at all. Thus the other features of the program should not have applied and, I would argue, do not apply if challenged properly in bankruptcy court or in state or civil court proceedings.

In fact these banks were not making the loans, they were simply passing on money from sources outside the transaction who were not identified or disclosed to the student at the time of the loan. Like the home mortgages, students were lured into what appeared to be low payments only to find that their payments later skyrocketed along with interest rates that sometimes reached 16 percent or 18 percent per year.

Thus in a securitized student loan, just as in a securitized home loan, there never was a risk assumed by the mortgage originator nor any of the other intermediaries (including the investment banker who originated the securitization chain) and the guaranty from the federal government and protections against discharge in bankruptcy were waived at the time of the organization of the transaction because the risk presumed to exist on the part of the lender never existed.

The use of taxpayer money to “encourage” student lending merely amounts to another government program creating a giant at the taxpayer troth where they made a fortune in fees without risk. The numbers just don’t add up.

The ultimate conclusion that the results would benefit society and the students has been disproven. While there were many people in the private sector who made a great deal of money from the unwitting students who entered into these private student loans and from the government who paid the private sector banks to enter into these transactions, the rest of the benefits for the most part never materialized. In fact, the numbers don’t add up today. Getting a college degree on private student loans leaves the students in a state of virtual permanent economic slavery under a debt which will never be repaid.

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