Free Market Follies

FREE MARKET FOLLIES….Back in the early days of his presidency, Bill Clinton introduced legislation to reform the federal student loan program. Instead of the feds setting interest rates and guaranteeing loans made by private banks — hardly a paradigm of the free-market in action in the first place — why not just cut out the middleman and have the feds make the loans directly?

It was a good idea and in 1993 the Direct Loan Program was duly created, but more than a decade later 75% of student loans are still made via the old subsidized system. Why? Are private lenders more efficient after all? Hardly. The subsidized loans are unquestionably more expensive for the government, to the tune of nearly $3 billion a year. As Jon Chait explains, the reason for the continued popularity of the subsidized system is a little more prosaic:

It now turns out that the private lenders’ success came not through superior efficiency but through superior graft. The emerging college-loan kickback scandal is a vast scheme by private lenders to bribe colleges into foisting their services onto students. Lenders plied college-loan officers with meals, cruises, and other gifts. Some loan officers were given lucrative stock offers.

….The very thing that drove conservatives to oppose Clinton’s reform — the vast private profits made available by guaranteed loans — is what enabled the scandal. Almost any government program creates at least some potential for cheating. The hallmark of the conservative approach is that the scale of the profits is so huge. Sallie Mae, the largest student lender, was recently sold for $25 billion.

The old system was created in the 60s, when existing banks were the only reasonable way to originate loans in large quantities. Since then, technology and capital markets have both evolved tremendously, making the direct loan program possible. It’s also made the loans much cheaper for banks to administer, and the combination of 60s-era government subsidies and 90s-era capital market efficiency has made the student loan business very lucrative indeed. It’s no wonder that neither the financial industry nor the members of congress they donate money to want to do away with it.

As a result, a toxic combination of conservative true believer-itis in free markets (the stated reason) and old-fashioned corruption (the real reason) costs the taxpayers about $3 billion per year. For just this one program. Welcome to right wing America.