Some of the nation’s top bankers just argued for more bank bailouts in Sunday’s New York Times. But helping students would cost far less, and the benefits would be far greater.
It’s not surprising that a newspaper so closely tied to Wall Street would publish bankers’ appeal for more tax dollars. But the suggestion that we hand over trillions more to the banks ignores a much more beneficial and far more obvious solution to the coming economic crash.
The cost of bailing out banks
The op-ed, entitled “What We Need to Fight the Next Financial Crisis,” is co-authored by former Federal Reserve chairman Ben Bernanke and former Treasury Secretaries Hank Paulson and Timothy Geithner. The authors argued that, as we approach the ten-year anniversary of the Lehman Brothers crash — the domino that caused the 2008 financial meltdown and the subsequent Great Recession — another crisis “will occur eventually.”
The crux of the piece is that the only reason the global economy didn’t collapse ten years ago was due to the controversial bailout of Wall Street megabanks.
“Congressional action made it possible for two presidents, one Republican and one Democratic, working with regulators, to prevent the collapse of the financial system and avoid another Great Depression. Most importantly, Congress provided capital to the banking system, allowing for the normalization of credit flows,” Bernanke, Paulson, and Geithner wrote.
However, the authors went on to lament that Congress made it so banks can no longer get bailed out in the event of another financial crisis, which they said was “critical in stopping the 2008 panic.”
“[I]n its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury. Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds,” the op-ed reads. “The paradox of any financial crisis is that the policies necessary to stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy become greater.”
While the Troubled Asset Relief Program (TARP) Congress authorized in 2008 bailed out banks to the tune of $700 billion, the Federal Reserve went on to buy up an astonishing $12 trillion in toxic assets (also known as Quantitative Easing) held by those same banks over a period of years. CNBC estimated the total cost of the bailouts to be roughly $29 trillion.
Students captive to unpayable debt could cause the next crisis
While the 2008 crisis was largely due to big banks gambling and losing on bogus mortgage-backed securities that Wall Street credit rating agencies recklessly categorized as safe investments, the next crisis could very well be brought on by a massive student debt default. A May 2018 article in Investopedia warned that the $1.4 trillion in outstanding student debt — most of which is underwritten by the federal government — is on the verge of seeing a massive default.
Millions of students who take out loans are simply unable to pay down not only the original loan, but all of the egregious fees and interest that loan servicers like Navient tack on that end up costing students more than what they took out to pay for school. A 2017 Reuters investigation profiled mother and home health aide Lakisha Johnson, who borrowed $6,625 in 2006, to pay for medical school.
However, Department of Education contractor Navient ended up garnishing Johnson’s entire $8,220 income tax refund to pay down the approximately $17,000 in debt Navient said she owed. Johnson was homeless on the streets of Philadelphia with her 12-year-old daughter at the time, as she was counting on the tax refund to pay for the first month’s rent and security deposit on an apartment. Navient never informed her about income-based repayment plans, which could have prevented her from defaulting on her loans.
“I didn’t think it was going to double up or stack up, or cause me to lose the money I had worked for this whole time,” Johnson told Reuters.
Students who have unsustainable debt loads, like Johnson, are far more at risk of defaulting due to Congress deciding to not allow student debt to be discharged through bankruptcy. In addition to losing tax refunds, borrowers in default can even have their Social Security checks garnished. Reuters found that the Department of Education garnished 173,000 Social Security checks in 2015, up from just 36,000 in 2002:
Because of the many ways the government provides for repayment, student loans — unlike credit card bills, home mortgages, or even gambling debts — can’t be discharged in personal bankruptcy. The only way to get rid of the debt is to pay it off, or die.
At the same time, the DOE’s debt collectors aren’t subject to some of the federal rules designed to protect consumers from aggressive collection tactics, such as robo-calling borrowers’ employers. They don’t even need a court order or a judge’s signature to reach into bank accounts to claw back funds.
The number of Americans who have had their wages or Social Security benefits garnished or their tax refunds seized jumped 71 percent in the five years ended September 2015, according to the Government Accountability Office.
Bailing out students now could prevent a bank bailout in the future
As Grit Post reported earlier this year, a buyout of all outstanding federal student debt could boost the U.S. economy by as much as $1 trillion over the course of a decade. A Bard College study found that the increase in economic activity resulting from 44 million borrowers suddenly having thousands of more dollars in disposable income to spend would create anywhere from 1.2 million to 1.5 million new jobs.
The only negatives of such a plan would be negligible increases in inflation (0.3 to 0.5 percentage points) and the debt-to-GDP ratio (an estimated 0.65 to 0.75 percentage point increase). Any Republican who voted for the GOP’s tax cuts in 2017 would be hypocritical in opposing this plan on such grounds, as Goldman Sachs estimated the debt incurred from the tax cuts would make up more than five percent of GDP by 2021.
Because the Federal Reserve was able to bail out the banks to the tune of $29 trillion, buying up $1.4 trillion in debt to help students is small potatoes by comparison. It would certainly be a less expensive option than bailing out the big banks all over again in the event of another financial crisis.
Tom Cahill is a contributor for Grit Post who covers political and economic news. He lives in Bend, Oregon. Send him an email at tom DOT v DOT cahill AT gmail DOT com.