Friday, February 27, 2009

Obama Nationalizes Student Lending

Resurrecting the failed policies of the Clinton era, President Obama has proposed the nationalization of the student lending industry. Beginning in fiscal year 2010, the federal government will become the sole underwriter and issuer of government backed student loans. Previous attempts to absorb these operations into the government bureaucracy have ended in utter failure. Undeterred, President Obama ignores previous failures and dooms large student lenders, such as Sallie Mae and Citigroup, by forcing them to compete exclusively in the smaller and risky private student loan market. With funding for these loans extremely scarce, Presendent Obama has effectively doomed Sallie Mae and others to allow their portfolios to runoff, close their government lending operations, and teeter on the brink of failure.

The Democrats’ most recent attempt to revert to their socialist tendencies and sabotage the existing student lending network occurred when they took control of Congress under the Bush administration. In 2007, they voted to reduce the subsidy that facilitates the below market rate federal student loans. Their actions destroyed the narrow margins inherent in the origination of federal student loans, driving many banks and specialized lenders to exit the market. This caused severe disruption in the student loan market leaving students scrambling to find funding. Amidst the turmoil, Sallie Mae continued to underwrite new loans, despite losing money on each, leaving them with approximately 35% market share in a disrupted market.

President Obama now wants to take the process one step further by fully nationalizing the underwriting and approval of federal student loans. He claims immense savings by eliminating the subsidies provided to private student lenders, but fails to account for the significant infrastructure and bureaucracy required to execute an efficient loan origination process. All the rhetoric and promise of a brave new world complete with socialized medicine, nationalized industries, and expansive government bureaucracy is now coming to fruition just one month after President Obama took office.

On news of the nationalization of student lending, Sallie Mae’s stock promptly declined more than 30%. Further government involvement in industries of all stripes will become a self-fulfilling prophecy as random acts of capital destruction will drive investors out of the market and discourage risk-taking. No sensible long term investor would deploy precious resources in an industry subject to whimsical government intervention, the nullification of existing contracts (e.g. Obama’s mortgage proposals), or abrupt changes to the rules of the game. The current recession will be more severe and protracted now that Obama has attacked the tenants of capitalism and perpetuates the uncertainty that challenges long term capital investment. Be cautious with whatever wealth you still possess because the socialists and income redistributors are empowered by a critically ill economy and a false sense of post-election validation of their dangerous policies.