In 2002, Paul Krugman said, "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Not only did Greenspan follow this terrible advice, but the bubble he subsequently created led to the biggest pop since 1929. So, the pundits are predictably at it again looking for new bubbles that could hopefully pull us out of recession. This time, however, it’s with student loans.
Today, central planners from both sides of the aisle came to an agreement authorizing a $6 billion bailout to fuel a bubble in the education market. The subsidy is meant to pay for the continuation of extremely low interest rates, currently sitting at 3.4%. Had this subsidy not been been agreed upon by Congress’ big spenders, the current student loan rate would jump to 6.8% on Sunday - a thought which made sense back in 2007 when the rate hike was seen as a necessary cost saving maneuver. Now, though, both Democrats and Republicans have been using Keynesian arguments for why letting the student loan interest rate rise to a less-subsidized level is evil. Student debt, they argue, has risen to such an alarming level that letting a rate hike occur would cripple our fragile economic recovery. Student debt, like mortgage debt, has a large macroeconomic effect. Student debt, also like mortgage debt, is subject to microeconomic laws that dictate the following: a price ceiling that prevents prices from rising to free market levels causes a larger quantity demanded than quantity supplied, also known as a surplus. In context of the student loan crisis, this means that more students are getting cheap loans due to artificially low prices on the rates. Once this occurs, the government has two options: either endure an adjustment that sees less people getting cheap loans, or continue to throw money into a subsidy that sends wrong signals to the economy. And guess which path our government has taken?
Congress decided to saddle our youth with extreme debt, and the more they do this, the more the taxpayers will pay for college-aged kids to get degrees that lead to them mopping up floors and pouring drinks at Starbucks. If insanity really means doing the same thing over and over again while expecting different results, then it is no stretch of rhetoric to call our Representatives insane. Only, when will we do something about it?