Remember Elizabeth Warren?
She used to be a law professor at Harvard. It was widely speculated that she was President Obama’s first choice to be Director of the Consumer Financial Protection Bureau, an agency that owes its very existence in no small measure to Warren’s academic writings and public advocacy. She proved to be so controversial a figure that confirmation of her nomination was considered impossible. So the story goes that the President looked elsewhere to fill the CFPB position while Warren remained in academia.
But then she ran for the United States Senate in Massachusetts. Warren won the seat over her opponent, Scott Brown. Off to Washington went Professor Warren, where she was assigned a chair on the Senate Banking Committee and from which she has offered her first piece of legislation: The Bank On Student Loan Fairness Act.
In support of her bill, which would set the interest rate on federally subsidized student loans at the same rate of interest the Federal Reserve charges banks for short-term loans, Warren, in what could be perceived as class-warfare terms, argues: “If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive and grow our middle class.”
However, Sen. Warren might be misleading Congress about the interest rates offered to banks. This has upset some commentators. Ian Tuttle offers a scathing deconstruction of Senator Warren’s inaugural legislative offering in National Review’s on-line magazine. Here is a sample of Tuttle’s critique:
In pushing her bill, Warren, for her political convenience, has studiously misrepresented the interest rates extended to banks. “The banks pay interest that is one-ninth of the amount that students will be asked to pay,” she complained. “That’s just wrong. It doesn’t reflect our values.” Warren derided the notion that “the banks get exceptionally low interest rates because the economy is still shaky and banks need access to cheap credit to continue the recovery,” adding, “our students are just as important to our recovery as our banks.”
What Warren is alluding to is the Federal Reserve Discount Window, which the Fed defines 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.” Warren may have been a professor in a past life, but even the most rabid deconstructionist is unlikely to associate an “institution” that has “temporary shortages of liquidity” with a typical college student.
But it is not confusion; it is misrepresentation. The Discount Window is an emergency measure used to prevent runs on banks; it is offered “short-term.” And these measures are typically very short-term: frequently, overnight.
As the Daily Beast’s Megan McArdle observes, “No one except possibly a lunatic has told Elizabeth Warren that banks are getting 0.75 percent at the discount window as a thank-you for all the hard work they’re doing helping the economy.” Banks get those low rates for three sound reasons: “The borrowers have assets and income that are easy to seize, the loans are quite short term, and the banks are required to put up collateral. . . . Students, on the other hand, are borrowing for a decade, and the only thing they’re putting up as a guarantee is their character.”
Isn’t it time to stop painting banks as the villain?
Do you think Warren is misleading Congress to further her own goals?
The student loan market is the next bubble to burst. It used to be good business for banks to make federally subsidized student loans. Students received cash for college at favorable interest rates and lenders had credit enhancement from the federal government. But that was then, and this is now.
