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Credit Crunch: We're From the Government, We're Here to Help
No, Really, They Are -- Read It For Yourself

By Robert Folsom
Thu, 24 Apr 2008 17:00:00 ET
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Lenders cannot stay in business simply by making loans. They also have to charge borrowers a rate of interest that is profitable enough to even be in the lending business. Right?

"Yes, of course," is probably what you're thinking to yourself. "Who doesn't get that?"

Good question, but for reasons you're about to understand, I prefer not to give a direct, one- or two-word reply. The answer you deserve will take some explaining -- I promise not to make it too long.

Let's assume that you've heard of "college tuition." If so, you may also have heard that it's expensive. From this, we can infer that the people who pay college tuition (mostly parents, plus some students themselves) are not happy about just how expensive it is. They have to deplete their savings, and/or work extra jobs, and/or take out various types of loans. What's more, tuition costs go up every year. In turn, the people who pay the tuition must do even more of that same stuff which reminds them of how unhappy they are about how expensive it is.

"Even more of that same stuff" does, of course, include various types of loans -- and as borrowers they must pay a rate of interest that's profitable enough to keep the lender in business.


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Well, in September 2007, the representatives of the American people said: We're From the Government, We're Here to Help. Specifically, Congress passed (and the President signed) a bill that basically mandated a 50% reduction in the interest rate lenders could charge for federally-insured student loans. In case you're wondering, federally-insured student loans amount to some 70% of the $100 billion borrowed for that purpose each year.

So, recalling the first paragraph of this article, what do you suppose happened to the lenders who had been in the business of making student loans?

If you say, "The business of making student loans is drying up because lenders are pulling out in droves," then you get a Gold Star, dear reader. Congress passed a law that forbade lenders from charging a profitable rate of interest on student loans. And so, "A third of the nation's top 100 lenders to students in 2007 have temporarily suspended new loan origination or exited the business altogether," according to The Wall Street Journal.

Naturally, the same bunch that said We're From the Government, We're Here to Help, are back to say and do more of the same. Congress is patching together something to fix the system it broke. You can look it up, but what you'll find is a ton of articles about how the "Credit Crunch Affects Higher Education." That premise is rubbish. Most news stories say little or nothing about the real cause of the problem. Many lenders did go too far and did create a credit crunch, most conspicuously in the housing market. But that is not what happened in the market for student loans.

The trashing of the debt markets has involved no shortage of greed, but let's not neglect the role played by raw stupidity. It is a distinction with a difference, as every independent thinker knows.


If you're ready for a perspective you can't get elsewhere -- plus facts, forecasts, and a take on the "news" that no one else offers -- consider a subscription to the Financial Forecast Service. Click here to see what you're missing.


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