Useful Idiot

The two most notable things about Megan McArdle's work are the weakness of her arguments and the grateful fervor with which they are received. The first has nothing to do with the latter, of course; weak or strong, numerate or innumerate, moral or immoral, one can always find a small chorus of supporters for her arguments. It's difficult to be a follower unless someone tells you what to do and the right is very grateful to their leaders for sparing them from the burden of free will and choice.

Which explains why McArdle keeps revisiting the Elizabeth Warren well, despite her embarrassing Elizabeth Warren-related failures in the past. Warren is an official enemy of the right and especially the financial industries. She disavows allegiance to the elite instead of sucking up to it in the hope of enriching herself, which is so alien a concept to McArdle that she is certain Warren must be dishonest. If Warren is right then McArdle is wrong and we all know how McArdle feels about that.

And to make all these matters worse, Warren succeeded where McArdle failed; making a name for herself in the financial world, within touching distance of trillions of dollars whirling around in virtual space like the world's best snow globe, only with money instead of glitter and McArdle on her hands and knees instead of a snowman.

Elizabeth Warren Wants the Fed to Get Into the Student Loan Business 

How foolish of Warren to want the government involved in the government-backed student loan business.

Should students get the same loan rates as banks at the discount window?

 

Senator Elizabeth Warren (D-MA) has just introduced a new bill, the Bank on Students Loan Fairness Act, to offer student loans at the same rates that the Federal Reserve charges big banks through its discount window lending program. At the moment, that rate is about 0.75%. The rates on federally guaranteed student loans, meanwhile, is set to double to 6.8% this summer.

"Some may say we can't afford this proposal," said Senator Warren as she introduced the bill. "I would remind them that the Federal Government currently makes 36 cents in profit for every dollar it lends to students . . . meanwhile, the banks pay interest that is one-ninth of the amount that students will be asked to pay. That's just wrong. It doesn't reflect our values." 

"Some explain 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." She sighed loudly. "But our students are just as important to the economic recovery as our banks, and the debt they carry poses a serious risk to that recovery." [my bold]

Note that this is Megan McArdle's reporting, not a quote from someone else. The woman does not have the faintest idea of how to be a journalist. This post is far more journalistic in style than most of her posts but even when she tries she cannot be professional. She doesn't know how, or maybe  just can't overcome her biases long enough to write an impartial news item.

Maybe obtaining your journalism training from a Koch institute isn't the best way to develop professional skills and ethics.
 

It's probably true that some say banks need low interest rates to keep the economy growing. But no one except possibly a lunatic has told Elizabeth Warren that banks are getting 0.75% at the discount window as a thank you for all the hard work they're doing helping the economy. Discount window loans are cheap for three 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.

Elizabeth Warren did not say that banks are getting 0.75% at the discount window as a thank you for all the hard work they're doing helping the economy.  She said, "Now some explain 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." Those two sentences are not the same, in word or meaning, which means McArdle is, SIGH, not telling the truth once again.
 

As you'll have discovered with your own mortgage or car loan, the shorter the term of the loan, the lower the interest rate. You will also have discovered that loans secured by collateral, like your car loan or mortgage, carry lower interest rates than loans such as credit card expenditures, which are secured by nothing more than your heartfelt promises to pay. You may even have noticed that the more durable the collateral, the more attractive a rate your banker will extend on it.

So it is with loans to other people, and businesses. Banks get a very low rate because they're borrowing for very short periods of time--often overnight, always less than a year. The Fed correctly figures that the bank is unlikely to go out of business by next month--and anyway, they're putting up collateral, which is unlikely to lose all its value in such a short period of time.

This jaw-dropping bit of elision is more comprehensible when you remember that McArdle is doing her best to forget that 2008 ever happened. The banks were likely to go out of business, which is why they were bailed out in the first place. But these are unfriendly facts, the kind that make a person question her every assumption, and therefore must be repressed.
 

Students, on the other hand, are borrowing for a decade, and the only thing they're putting up as a guarantee is their character. How good a collateral is their character? In 2011, 9.1% of borrowers had defaulted on their student loan within the first two years of the payment period.

McArdle took out a student loan for $100,000, which paid for the MBA that is the basis for her claim of economic literacy. Her English degree wouldn't have gotten her gigs at The Economist or The Atlantic, and probably wouldn't have gotten her a place at the aforementioned Koch institute. She is repaying every penny of her loan and by God you will too.

The interest paid by the folks who don't default is the only thing keeping this program from hemorrhaging money. Elizabeth Warren proposes to cut that interest rate to less than the rate of inflation. 

Of course, this isn't really a serious proposal, in the sense that it has any chance of getting passed. Elizabeth Warren is a very smart woman who knows how the financial system works; she's very well aware of why student loans are expensive relative to the Fed's discount window. And I presume that she is aware that the CBO will score her bill as costing rather a lot of money.

But passing this bill probably isn't the point. Rather, it's a populist values statement: we like students, we don't like banks. As such, it's probably going to be quite effective. But only among people who don't know much about the banking system.

Simple-minded slogans for simple-minded people. She knows her audience. McArdle ignores the whole issue of crushing student debt. She ignores Warren's statements on investing in people or her concern that a generation of new workers saddled with out-of-control debt will harm the economy. No, the problem is that Warren is a liberal demagogue, as McArdle's commenters insist, and therefore doesn't like banks. And liberals will applaud because unlike McArdle, who comes "from a family of academics who are actually intellectually intimidating," they know nothing about anything.
 
Edit: Weird html thing corrected.