Market Watch

Obama School: The New Free Market Thinking

Forgive the surprised expression. I fear I have wandered into an old episode of the twilight zone. Another hairy fanged politician ripping apart the wing of free market thinking while a storm distracts its weary passengers. Anyone with any sense at all understands that the current decade of price spikes and bubbles, especially in student loans, is a result of guaranteed money. It is the easy credit which stems the compulsory valve of innovation and competition. Guaranteed loans make it easier for colleges to spend money without having to evaluate their product. This produces an inflated price and general low grade output. We have some good and bad news on the front lines of the student loan bubble to report here at Deth.  Lets start with the “good” news.

Good News: This bubble, as all bubbles do, will end. A parabolic move does not last forever. Never has and never will. How does one then know when this expansion has exceeded its volume limit? A good indicator this week was a report showing the first slowdown in student loans/enrollment for last quarter. This however could be just another blip on the chart (unlikely due to its extended vertical move). However, when JP Morgan says it will stop making student loans. Period. Now its time to prepare for the pain train that is just about to leave the station. They can say what they like but they know that gravy train has ended. Reuters reports HERE.

JPMorgan Chase & Co (JPM.N) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business. The company will stop accepting applications for private student loans on October 12, at the end of the peak borrowing season for this school year, according to a memo from the company to colleges.

The Chase portfolio includes $5 billion of private loans and $6 billion of loans backed by government guarantees that were granted under programs that have been discontinued. The portfolio has been shrinking by roughly $1 billion to $2 billion a year since mid-2010, when Congress acted to bypass the banks and have the government lend directly to students.

The exit by Chase means one less competitor for other lenders still in the market. SLM Corp (SLM.O), often known as Sallie Mae, (SLM.O) Wells Fargo and Discover have bigger portfolios, according to company disclosures and research by stock analyst Moshe Orenbuch of CreditSuisse.

Not to worry. One less “competitor” in the market isn’t going to change the easy credit application process nor the standards by which loan applicants are measure against before receiving loans.  Nor will it change the “single loaner” system the Feds want in place. As the private market drops out you will begin to see the first signs of panic from the Federal Government as debt surfs feel the weight of their own making and reality pops the student loan bubble. The Fed will be left holding the bag and will panic accordingly. Speaking of panic, I wonder what the Fed has in the works? Lets see below…

Bad News: The Feds panic and try to implement government controlled competition. Yes, you heard that right. Government….Controlled…….Competition. Reported via Hedge.

The president gave a speech on August 22 in Buffalo outlining his proposal to “reform” the student loan program. He acknowledged that the program has some problems, but assured the audience they are easily fixed. Just take the principles behind Obamacare and apply them to education. The president personally “guaranteed” that his proposals would make college more affordable.

Here’s the plan. The government will rate colleges based on fees (the lower the better) and graduation rates (the higher the better) and student success in finding a job. Then student loan funds will be allocated to schools according to the rating. Students will also be guided to the best-rated schools via government web sites. And schools will get more funding if they set up demonstration projects to reduce costs. This will all encourage more “competition” among schools. Yes, you heard that right: more government control of colleges will increase market “competition.”

The 250 percent increase in fees (mitigated somewhat by increases in student aid) has specifically been driven by government’s mistake in flooding schools with student loan money. That money did not help students; it enabled schools to keep raising fees. What students mostly got out of the loan program was an early initiation into massive debt. If leaving school with heavy debts is not exactly slavery, it certainly represents some kind of indentured servitude.

Obama School. Coming to a nation near you…