Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?

On July 1, interest rates will double for millions of students – from 3.4% to 6.8% – unless Congress acts; and the legislative fixes on the table are largely just compromises. Only one proposal promises real relief – Sen. Elizabeth Warren’s “Bank on Students Loan Fairness Act.” This bill has been dismissed out of hand as “shameless populist demagoguery” and “a cheap political gimmick,” but is it? Or could Warren’s outside-the-box bill represent the sort of game-changing thinking sorely needed to turn the economy around?

Warren and her co-sponsor John Tierney propose that students be allowed to borrow directly from the government at the same rate that banks get from the Federal Reserve — 0.75 percent. They argue:

 Some people say that we can’t afford low interest rates for students. But the federal government offers far lower rates on loans every single day — they just don’t do it for everyone. Right now, a bank can get a loan through the Federal Reserve discount window at a rate of less than one percent. The same big banks that destroyed millions of jobs and broke our economy can borrow at about 0.75 percent, while our students will be paying nine times as much as of July 1.

This is not fair. And it’s not necessary, either. The federal government makes 36 cents on every dollar it lends to students. Just last week, the Congressional Budget Office announced that the government will make $51 billion on the student loans it issued this year — more than the annual profit of any Fortune 500 company, and about five times Google’s yearly earnings. We should not be profiting from students who are drowning in debt while we are giving great deals to big banks.

The archly critical Brookings Institute says the bill “confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.”

Those criticisms would be valid if the provider of funds were either a private bank or the American taxpayer; but in this case, it is the U.S. Federal Reserve.  Warren and Tierney assert, “For one year, the Federal Reserve would make funds available to the Department of Education to make these loans to our students.” For the Fed, completely different banking rules apply. As “lender of last resort,” it can expand its balance sheet by buying all the assets it likes. The Fed bought over $1 trillion in “toxic” mortgage-backed securities in QE 1, and reportedly turned a profit on them.  It could just as easily buy $1 trillion in student debt and refinance it at 0.75%.

Which Is a Better Investment, Banks or Students?

 Students are considered risky investments because they don’t own valuable assets against which the debt can be collected. But this argument overlooks the fact that these young trainees are assets themselves. They represent an investment in “human capital” that can pay for itself many times over, if properly supported and developed.  This was demonstrated in the 1940s with the G.I. Bill, which provided free technical training and educational support for nearly 16 million returning servicemen, along with government-subsidized loans and unemployment benefits. The outlay not only paid for itself but returned a substantial profit to the government and significant stimulus to the economy. It made higher education accessible to all and created a nation of homeowners, new technology, new products, and new companies, with the Veterans Administration guaranteeing an estimated 53,000 business loans. Economists have determined that for every 1944 dollar invested, the country received approximately $7 in return, through increased economic productivity, consumer spending, and tax revenues.

Similarly in the 1930s and 1940s, the Reconstruction Finance Corporation funded the New Deal and World War II and wound up turning a profit, without drawing on taxpayer funds. It’s an initial capitalization was only $500 million; yet the RFC eventually lent out $50 billion – the equivalent of about $500 billion today. It raised money by issuing debentures, a form of bond. It got all of this money back, made a profit for the government, and left a legacy of roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more that the country did not have before.

In 1944, President Franklin Roosevelt proposed an Economic Bill of Rights, in which higher education would be provided by the government for free; and in the progressive 1960s, tuition actually was free or nearly free at state universities. Some countries provide nearly-free higher education today. In Norway, Denmark, France and Sweden, the cost of college is less than 3% of median income, as compared to 51% in the U.S.

Other countries make loans available to their students interest-free. For more than twenty years, the Australian government has successfully funded students by giving out what are in effect interest-free loans. They are “contingent loans,” which are repaid only if and when the borrower’s income reaches a certain level.  New Zealand also offers 0 percent interest loans to New Zealand students, with repayment to be made from their incomes after they graduate.

Banks Are Good Credit Risks Only Because They Are Backed by the Government

In a National Review article titled “Warren’s Student-loan Demagoguery,” Ian Tuttle argues that the discount window should not be available to students because the Fed defines that resource as “an instrument of monetary policy that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions,” and because the discount window is “an emergency measure used to prevent runs on banks.”

It may be true that the Fed’s discount window is open only to banks, but the Federal Reserve Pact was passed by Congress and can be modified by Congress. The reasoning behind the policy needs to be re-examined.

The question is, why do banks routinely have “shortages of liquidity”?  What does that mean?  It means they have lent out depositor funds that don’t properly belong to them, gambling that they will be able to replace the money before the depositors demand it back. The banks have a binding commitment to return customer money “on demand.” They can make good on that commitment because, and only because, the Fed and the FDIC back them up in a massive shell game, in which they borrow from each other or the Fed overnight – just long enough to make their books appear to balance – and then give the money back the next day. Banks are good credit risks only because they have the backstop of the Fed and the government behind them. Without those guarantees, we would be back to the cycle of endless bank runs of the 19th and early 20th centuries.

“Our students are just as important to our recovery,” says Warren, “as our banks.” What if students, too, were backed by the government’s guarantee? What if, as in Australia and New Zealand, students were not required to repay the investment in human capital represented by their educations until the economy provided them with jobs? What if the government made it a policy to provide them with jobs? This too has been done before, quite successfully. It was part of Roosevelt’s New Deal. As detailed by Prof. Randall Wray, citing N. Taylor’s The Enduring Legacy of the WPA:

The New Deal jobs programs employed 13 million people; the WPA was the biggest program, employing 8.5 million, lasting 8 years and spending about $10.5 billion. It took a broken country and in many important respects helped to not only revive it, but to bring it into the 20th century. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 civilian and military buildings, 700 miles of airport runways; it fed 900 million hot lunches to kids, operated 1500 nursery schools, gave concerts before audiences of 150 million, and created 475,000 works of art. It transformed and modernized America.

In the 1930s, the government was in a worse financial position to achieve all this than it is now; but the commitment and the will were there, and the means were found. In World War II, the means were found again. The government always seems to be able to find the means to fund a war. We can just as easily find the means to fund our economic recovery. And if the funding comes from the Federal Reserve, the government need not be propelled into a mounting debt owed at mounting interest. The funds can be provided interest-free; and because they represent an investment in productive capital, the debt itself can be repaid with the fruits of the investment – the jobs that create the salaries that generate taxes and consumer demand.

The default rate on student loans is close to 10% today because there are no jobs available to repay the loans, and because the interest rate is so high that the debt is doubled or tripled over the life of the loan. Give students loans and jobs, and the default problem will cure itself.

Investing in our young people has worked before and can work again; and if Congress orders the Fed to fund this investment in our collective futures by “quantitative easing,” it need cost the taxpayers nothing at all. The Japanese have finally seen the light and are using their QE tool as economic stimulus rather than just to keep their banks afloat, and we need to do the same.

_________________________

Ellen Brown is an attorney, chairman of the Public Banking Institute and author of twelve books, including Web of Debt and the just-released sequel, The Public Bank Solution. Her websites are webofdebt.com and publicbanksolution.com. 

25 Responses

  1. […] This piece first appeared at Web of Debt. […]

  2. […] This piece first appeared at Web of Debt. […]

  3. Public banking sounds all well and good until you start asking the logical follow-up questions, like: “Who elects the public bankers?”

    State ownership sounds great until you ask: “Who owns the State?”

    All indications right now point to a state and federal political machine that is entirely manipulated and controlled by global corporations through its central banks’ monetary control over the news media, the two-party electoral system, education, and the various governments of what we call the Western World.

    Are you suggesting we turn over direct ownership of our local banks to this same cartel? Or am I missing something?

    It seems to me that we’re getting the cart before the horse. I think we should be more concerned with gaining public ownership of the States.

    • I do believe you are missing something. A Government Sponsored Entity can be created say for housing that offers low interest loans. The money involved in this GSE would circulate on a profit sharing model, that spends money only on housing. Costs, administration, loan servicing, and what have you, could be handled at local, state, regional, or federal levels, or put out to bid.
      The GSE/Bank would be federally backed and owned by the taxpayer, and no multi-national corporation, or any private entity for that matter, need be involved unless they won a bid to do a job for the taxpayer owned Bank, say servicing loans where they could tack on .25% as their share of the profits.
      By isolating GSE banks to area’s of expertise/need and mandating a profit-sharing business model taxpayers could cover basic public works with more transparency, as well as getting more bang for the buck.

      • “A Government Sponsored Entity can be created”
        …..by whom?

        I would ask who in Congress might sponsor such a bill. Then I would ask why.

        Would it be sponsored by a corporate-sponsored Republican congressman or a corporate-sponsored Democratic congressman? Given that, either way, such a bill would be the product of a corporate-sponsored political corporation; what would motivate such action? Do you really believe the corporate-sponsored media fantasy that our government represents The People and pays no attention to all those pesky lobbyists from K Street. Do you also believe the two-party monopoly is a grass-roots political division created by conflicting popular philosophies? Are you seriously going to argue that Wall Street corporations don’t dominate our entire political structure? There’s no revolving door between government and business? Regulatory capture is a myth? Independent candidates have an equal voice in campaign debates? Do you really believe any mass-media corporate monopoly is going to expose the manipulative practices of its sponsors, much less its owners? What choices do you really have when it comes to government representation?

        So, to me, when you say “government”, I hear “corporate-sponsored government”. I would love to see government-owned banks if the government wasn’t owned by private banks. Take out the corporate “middleman” and I’m all for it. It should be unconstitutional for corporations to own other corporations. If they were persons it would be like slavery. Creepy.

        • Very well said. I might add that Libertarians share in this delusion that govt is the problem as opposed to the transnationals & banks that own them through lobbying and monetary debt. They fancy themselves as some sort of political/economic alternative when in fact they, via Austrian economics, are their greatest champions (eg., dupes).

          • right on, moffpat.

        • They are people!

          • Who are “they”?
            You might have to write a whole whopping paragraph if you want to communicate ideas. Are you up to it?

  4. Great article, Ellen; thank you. The power of our ideas must continue to resound until they resonate with the public’s critical mass if we’re ever to have money and banking serve the public.

    We’ll do the best we can and discover all together what we can create.

    All we have is good-faith effort and trust that we’re here on this beautiful but dominated planet for good reason :)

  5. There is no rational excuse for the politicians in Washington D.C. not to pass this bill, except for the fact that it upsets their banker overlords. It costs the Fed nothing to issue; nor will it cost the taxpayers anything as this is an off budget item.

    What’s really at stake here is bringing about an awareness to the Amercian public that the true purpose of the Fed is to serve their economic welfare — not make plutocrats rich through usury. If we want any chance at nationalizing the Fed in the future, we MUST get this bill through now.

    For programmatic strategies on how to get this done, I would recommend listening to one of many of Webster Tarpley’s discussions of the subject.
    http://tarpley.net/2013/05/31/warren-tierney-75-percent-student-loans-paid-by-fed-shows-how-to-start-recovery-create-30-million-new-productive-jobs/

    http://againstausterity.org/

  6. […] Ellen Brown Writer, Dandelion Salad webofdebt.com June 14, […]

  7. PLEASE,PLEASE EVERYONE, SHARE THIS A MILLION TIMES.
    May I repeat,
    ” Carl Herman, on June 14, 2013 at 9:34 am said:
    Great article, Ellen; thank you. The power of our ideas must continue to resound until they resonate with the public’s critical mass if we’re ever to have money and banking serve the public.

    We’ll do the best we can and discover all together what we can create.

    All we have is good-faith effort and trust that we’re here on this beautiful but dominated planet for good reason :)”
    And:
    ” pm , on June 14, 2013 at 11:08 am said:
    There is no rational excuse for the politicians in Washington D.C. not to pass this bill, except for the fact that it upsets their banker overlords…”
    Justaluckyfool says, “Amend the Fed” Make it a central bank that works For the People. Stop working for the Private For Profit Banks.
    ****Great article, Ellen; thank you.****
    If they don’t pass the bill then, ” Elizabeth Warren for President”

  8. […] http://webofdebt.wordpress.com/2013/06/14/elizabeth-warrens-qe-for-students-populist-demagoguery-or-… […]

  9. I think we’re all aware of the university ‘establishment’ that is in place and how they relate to the NWO. They run various scams, including high cost/debt related to their attendance, stacking their people on various high profile board of directors, stiffing kids of the sports profits they generate, and getting ‘big shots’ teach (cough, recruit) from their schools.

    So to watch one of their own, Elizabeth Warren (who gets a nice chunk of her money from Soros and universities) advocate giving students access 0.75% loans from the Federal Reserve is one of the biggest cases of phony political righteousness on the left that I’ve come across lately. Instead of giving money to the banks she wants the money to go to universities all under the cover of helping students.

    Add that probably the next chairman of the Federal Reserve is probably going to be another university gal, Janet Yellen, and it looks like the college industrial complex is becoming more influential.

    The merits of the bill in terms of helping students is accurate, I just thought the article missed a point in the populist demagoguery angle. So I think it’s both populist demagoguery and an economic breakthrough (though not as strong as breakthrough the Kucinich’s HR 2990 bill) if passed.

    https://www.opensecrets.org/politicians/summary.php?cycle=2012&cid=N00033492&type=I

    https://www.nytimes.com/2013/04/25/business/janet-l-yellen-possible-fed-successor-has-admirers-and-foes.html?pagewanted=all&_r=1&

    http://www.monetary.org/wp-content/uploads/2013/01/HR-2990.pdf

    • oh please, if Warren is phony righteousness, give me more of it…even tho she is no radical, she at least articulates a progressive agenda and calls attention to how the monopolistic money creation powers of the Fed are squandered on a few select sectors of economy while of almost no help to regular working folks and general economy…and in fact FED easy money to big banks is making our everyday commodities too expensive.

      Almost every article praising Warren has somebody trying to smear her…they especially go at the populist demagoguery thing and talk about her wealth. Yeah, she’s set…not like Wall Street titans set, but she is part of 1 percent none-the-less. So. FDR was from more wealth than her, but he and his wife did more for the economic security of everyday working people for last 70 years than any folks in history of this country.

      I like how Warren gets slimed for suggesting mild reforms that aren’t nearly as progressive as what many other developed countries do in Europe, Australia, Canada, Japan etc…Yep, such a radical populist, she wants to be to the right of Germany, Sweden…the horror of it all.

  10. […] Ellen Brown  Web of Debt […]

  11. […] Ellen Brown Web of Debt […]

  12. […] American War Machine (you know, so we can fight that war on terror??).  Ellen Brown’s blog, War of Debt, discusses the issue of post-secondary funding and Elizabeth Warren’s bill to reduce student […]

  13. […] Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough? […]

  14. […] 14 06 – Web of Debt – Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough? […]

  15. […] 14 06 – Web of Debt – Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough? […]

  16. […] forces?” But as Ellen Brown of the Public Banking Institute shows in her excellent rejoinder (“Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?“), it makes economic as well as ethical sense to invest in our young people. In fact, it […]

  17. […] forces?” But as Ellen Brown of the Public Banking Institute shows in her excellent rejoinder (“Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?“), it makes economic as well as ethical sense to invest in our young people. In fact, it […]

  18. Investment in Education is the Future

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