May 11

Written by: Steve Erbach
Sunday, May 11, 2008 7:03 AM

You'd think that federal programs (as Joseph Sobran says, anything called a "program" is unconstitutional) would at least be more carefully constructed than, say, a water plant in Appleton or a steam plant in Menasha.  Not so.

The federal student loan program was fiddled with last fall because the lenders were making too much money.  So, after the lenders decided to scale back their student loan offerings because they couldn't make as much money off of them, there were fewer student loans available.  Now we're being treated to the spectacle of the federal government "bailing out" the very same lenders it punished for making too much money.

This is how government works.  The Wall Street Journal has an excellent editorial on this topic:

An Education in Bailouts

May 5, 2008; Page A14

Congratulations! You and your fellow taxpayers will soon be the proud owners of a multibillion-dollar portfolio of student loans. And a leading Member of Congress promises that this pretty bundle of debt comes to you with no cost and no risk. President Bush apparently agrees.

Recently we told you about Congress's feverish effort to clean up the mess it made in the student loan market. Convinced that private lenders were making too much profit on federally insured loans, Democrats enacted changes last fall that rendered most new student loans unprofitable. As numerous firms abandoned the market amid the credit crunch and just before the peak of college financing season, the anxious pols realized their blunder and are now seeking a bailout of the same lenders they had just finished punishing.

Their first stop was to ask the Federal Reserve to backstop student-loan debt the same way it has dodgy mortgage-backed securities. Chairman Ben Bernanke resisted at first but on Friday he relented, as he always eventually seems to do. The Fed has now agreed to accept student-loan-backed securities as collateral for borrowings under its Term Securities Lending Facility.

The Fed has justified its mortgage-securities guarantees on grounds of preventing damage to the larger financial system, but we're not sure where the "systemic" risk is in this case. Sounds more like systemic political risk for Mr. Bernanke's next testimony on Capitol Hill. "I am pleased that the Federal Reserve Board has changed its policy," declared Senate Banking Chairman Chris Dodd, whose joy is understandable considering that he was one of the authors of this mess.

You may read the whole article at the Wall Street Journal.

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