The government has many better ways to stimulate the economy through fiscal policy, but that requires action by Congress, which isn't interested.
The independent central bank, the Federal Reserve ("the Fed"), has its mandates from the government with regard to the economy, and a sharply limited set of monetary policy tools with which to pursue them.
> If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?
No, because the Fed issues the currency, and DoE doesn't. That makes what each can afford very different.
More importantly, aside from the issue of what they can afford, the Fed makes its own decisions on interest rates, DoE's decisions are made by Congress. Decisionmakers at the Fed have different priorities and preferences than those in Congress.
If the Fed started buying up Student Loan Paper at even half the rate of the MBS program - let's go with $30 billion a month - I would probably faint out of disbelief because that action might actually benefit the economic engine of the United States.
The key would be for the Fed to restrict its activities to existing student debt, to prevent pushing down rates on new originations.
Second, loans are principle and interest. Some people are still paying off loans made by the federal government with an interest rate of 8.5% (PLUS graduate loans from 7/1/06–6/30/10). Other loan programs or origination times are lower, but still fairly high.
There's a private market to refinance these high interest rate loans at a lower rate, but it still pretty small and selective. If the Fed were to buy repackaged refinanced loans it would tend to increase demand and capacity by companies to refinance loans and thus decrease the average interest rate paid and the number of loans refinanced.
The same thing has happened (and is still happening) in residential real estate. The Fed isn't forgiving anyone's mortgage or writing any new mortgages, but by buying up enormous amounts of repackaged mortgage debt it is driving private companies to seek out mortgage debt to repackage and thus lowering mortgage rates. That was the entire point of the exercise.
+Under FFEL loans were made by private companies but guaranteed by the federal government. Many of those loans could be refinanced without losing the government guarantee.
Mortgages are closely linked to a lot of ongoing economic activity, and homes and home-related activities make up a large part of the economy. I don't think student loans have the same place.
The average student loan debt is about ~29k [1], which is about as much as a good car. Someone with a good job should be able to handle that kind of debt without help.
If the Fed is going to do stimulus, it should focus on stimulus that gets those indebted college grads and people without student debt better jobs, rather than getting those grads a little more spending money in their current crappy jobs.
How about incentives for companies to pay their employees better? I know it's sacrilegious to even think such a thing...
As for tuition skyrocketing, I think that will slow down or even reverse soon. Colleges thought that they could raise rates now, and expect the economy to catch up with higher salaries later. That didn't happen. In fact the opposite happened: the economy tanked, and a bunch of people were left with lots of debt and jobs that can't support it. I think the market will correct itself, especially as online/remote education becomes more prevalent, state schools show that your earning potential is not really linked to the prestige of your school's name anymore, etc.
It isn't possible to open more colleges and create competition. That wouldn't work in this case, because as stated unlike every other good or service in the world colleges are special and don't work like that.
Glad we cleared that up, now we can just do nothing about the problem.
Schools distort true cost through murky financial aid processes. Then the gov't continues the scam by calling loans "financial aid."
Plus the customers are 17 year olds whose most expensive purchase before this was saving up for that really cool concert that one time. And now they are borrowing tens of thousands (sometimes hundreds).
It's also impossible to judge the worth of college.
It's just a mess. We shouldn't be giving kids and young adults that much rope to hang themselves with.
The government should institute price controls for anyone using federal loans. 30k tuition is a total scam.
I fundamentally disagree that
"Schools distort true cost through murky financial aid processes. Then the gov't continues the scam by calling loans "financial aid.""
Couple that with the fact that public colleges are much cheaper than their private counterparts and community colleges are cheaper still and I don't know exactly where this argument comes from.
There is a lot of high cost options which loans unfortunately do cover, but to blame the price distortion on the availability of the loans seems backward.
Private K-12 schools are just as outrageously priced with no loans available to fund them.
I think there is a stigma (depending on your area maybe justified) around public educational institutions, which allows profiteers to do their thing.
Instead of fixing the underlying problem, we throw money at it. Which is the American way.
Uh, what? Are you being sarcastic?
Because it's pretty much a basic rule of economics that if demand for a good increases its price will increase (at least until new supply is introduced).
My undergrad is probably thought by most on HN to be a diploma mill (UCF) - University of Central Florida. But, UCF has done something really special. They said screw it and they worked really hard to keep tuition low. The median Tuition is just $6,368. That low tuition + easy Florida scholarship money has worked well for the University as the acceptance rate has fallen below 50% (That is comparable to many universities in the top 100 globally).
I think UCF's bet that they need to compete on price is going to work in their favor. The biggest downside is massive class sizes, but that is made up for with more online learning and better lecturers.
When someone asks me where I would go, I tell them pick one: Really, really prestigious or cheap and decent. UCF does not provide the opportunities that Harvard does, but it will still beat out an unknown liberal arts college charging $200,000 for 4 years.
https://www.washingtonpost.com/local/education/with-54000-st...
Who the hell thinks UCF is a diploma mill?
In reality, there is really only one criterion: affordable.
The really elite universities will make themselves affordable if you can get in, and if you can't then you're better off going somewhere cheap. There's no point in paying for the expensive middle.
Hopefully, this will do more to eliminate degrees as a (useless) hiring signal.
It would have been fun to galavant around Europe for fun instead of paying off my loans, but I guess I'm the sucker for being responsible.
I'm totally fine with people being able to refinance their loans to market rates, if those rates happen to be negative then good for them. I'm annoyed by this prevailing view that everyone with student loans are unemployed and can't pay them back. I know plenty of people with lots houses, cars, and taking vacations that haven't paid off their student loans yet. Outstanding balance left is not a good measure of the loan's burden or the circumstances under which the student took out the loan.
As for how to handle the mountain of student loan debt -- inflation used to work as a soft form of debt relief but banks screw with people by jacking up private student loan interest rates in lockstep. We need something stronger -- actual debt relief.
Or wage regulations (increasing the minimum wage)
Or labor organization (ie Germany)
Or tax regulations (shift tax incentives from machinery to labor)
> which is most likely to be caused by increased economic growth.
Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan). EDIT: We can argue this point if you'd like, in a thread about the strongest world economy planning for negative interest rates, while other central banks have already gone (and continue to hold) at negative rates (can't "push the string"!, ie stoke demand with free money).
Evidence on this is mixed at least; the majority of the studies go against this being an effective policy. The Card and Krueger findings are somewhat convincing, but do not hold over a longer period of analysis.
>"Or labor organization (ie Germany)"
Labor organization may help transfer wealth from shareholders, suppliers, or consumers to the workers, unless it kills the host companies or causes them to move away. I have not seen evidence that labor organization helps the average citizen, though there is some evidence that it may help the unionized people; unless labor organization improves productivity, it can only change distribution, and I'm not sure who it really transfers wealth from.
>"Or tax regulations (shift tax incentives from machinery to labor)"
This may help raise demand for labor, but pay can never go higher than productivity, which usually requires capital investments.
>"Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan)."
I disagree, and it is difficult (if not impossible) to prove which of us is right.
This is by design. If we can transfer more wealth to workers instead of shareholders, we should. If workers can't receive an appropriate wage from a company, than the business is most likely not viable (see: people complaining their business won't work with a $15/hour minimum wage).
>"Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan)."
> I disagree, and it is difficult (if not impossible) to prove which of us is right.
I agree that this will be determined by India, China, and to a lesser extent Africa. I believe these economies are growth-limited now, due to the fundamentals around how their economies are structured.
note: I removed a quote child comment responded to, referenced below.
This is a normative goal, but you are assuming that unions always transfer wealth from shareholders to workers, and I am not convinced of this. Shareholders will refuse to invest if the returns are not attractive, so it is difficult to retain them. It seems more likely that unions will transfer wealth from consumers or suppliers to the union members, which is a much less appealing prospect.
>"Can you explain the rational as to how zero interest rate policies can stoke demand on-par with middle class consumers, versus simply enriching lending institutions? If I'm wrong, I am happy to concede the point."
I'm not convinced that the Federal Reserve has much impact on consumer and corporate interest rates. All central banks believe that international bond markets are relatively free. All central banks also believe that they control their national interest rates. These beliefs are not compatible.
note: the second quote in this post was edited out of the parent
In the last decades pay for the average worker has not kept up with productivity.
Also, if monetary policy is driving rates negative, technically, capital "required" for productivity is literally free.
This is only superficially true. Real interest rates also take inflation risk and investment risk into account, so they could easily be quite signiifcant even when the central bank says there is a negative interest rate.
Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million.
Obviously this won't happen but it's a thought that should be brought up from time to time.
There might be more demand for the consumer goods popular for low-middle income citizens, but then again, this could reduce capital investments and reduce productivity in the long term, thus reducing wage growth in the future. I suppose my answer is that I can't imagine how much 'demand' there would be if average wage growth kept up with productivity, largely because the economy is a complicated beast, and 'demand' is not a simple thing.
Supply and demand works the same for industrial buildings, robots, software, and trains as it does for homes, couches, and cars. The primary (economic) difference between these goods is their impact on long-term productivity.
Poor people have to spend money on essentials as soon as it comes in. Rich people don't. That's pretty much the simplest possible definition of being poor. So that is not a valid assumption.
>If this assumption is true, both will create the same total 'demand', but for different goods.
This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?
Poor people spend money on essentials, and perhaps a little distraction and entertainment.
Why would the total demand from both somehow be the same?
> The primary (economic) difference between these goods is their impact on long-term productivity.
Which is the crux of the problem - speculative casino "investment", which is based on gaming markets, isn't economically productive. Neither is an economy that leans heavily on usury.
Productive investment in R&D, small business development, and wage growth stimulates economic capacity and increases confidence.
Speculative investment - including speculative gambling, systems of forced debt like student loans and payday lending, and asset inflation which drives up rents and property prices - destroys demand and economic capacity.
The fact that we're even discussing negative interest rates while in the middle of severe commodity deflation proves the core problem hasn't been addressed.
Rich people invest money in capital goods as soon as it comes in, either through a direct purchase, or because the investment bank where they hold the money gives it to someone who spends it.
>"This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?"
I said 'as a proportion of income'; rich people spend far less on living expenses than the poor do as a proportion of income. They might have a car that is 10x as expensive, but with 100x the income to pay for it.
>"Poor people spend money on essentials, and perhaps a little distraction and entertainment."
This agrees with my previous statement.
>>"If this assumption is true, both will create the same total 'demand', but for different goods."
There are two problems with that: the most obvious is that differences in velocity at the first level is one of the main bases on which distribution differences are held to effect demand growth, so you are just assuming away the main issue.
The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)
Demand growth for what? CNC machines and tools, or LCD televisions? Making a capital investment in semiconductor fabs will affect production and inspection equipment demand, as well as driving down production costs for a wide variety of goods, whereas buying an LCD television will increase demand for TFT screens, backlights, and slightly increase demand for television production machinery. I am making an assumption because we have to. No one has ever make a comprehensive economy-wide microeconomic model that worked, and no one ever will; this is the essence of the calculation problem.
>"The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)"
I agree that there is probably a difference between velocity of spending between rich and poor, but I'm not sure which one is faster (; please provide a link to such information if you have it). It seems likely that the poor spend more money on low cost foreign imports (stuff made in China) than rich people who are investing in very expensive specialty goods made in the West, so I think it likely that allocating more money to the rich is beneficial from a mercantilist point of view.
How about lowered student loan rates with an inflation adjusted cap? Then perhaps schools would be motivated to increase the number of students educated, as opposed to getting more money out of each student.
Only at for-profit schools, which are currently a small fraction of all universities.
http://www.bloomberg.com/news/articles/2014-11-13/college-tu...
And contrary to right-wing pundits, growing student populations are not a problem, they are the stated goal of public universities. You can't just raise tuition to discourage people from applying because the entire point is to get as many applicants as possible.
Nope. The Fed is independent of the government and, most importantly, does not answer to Congress. So it can adopt measures to attempt to stimulate and improve the economy which Republicans would surely block if given the opportunity.
The DoE, however, is an executive agency and has its budget determined by Congress. Changing the interest rates would require an act of Congress.
Well, Yellen recently said something along the lines of 'being part of the team' and Bernanke claimed something similar in his book or talks iirc ( sorry, no references atm ).
The whole independent claim is just smoke and mirrors.
No, its actually legally substantive (though its more independent within the government than independent of the government.) Within its scope of granted authority, the Fed can (and does, regularly) act independently of the President and Congress. OTOH, actions outside of the Fed's legal powers require actions by Congress and/or the Executive Branch.
Now, certainly, the Fed, the President, and the Congress all interact and share their opinions, preferences, etc.
The Dept. of Education's policy decisions are tightly constrained by Congress. If there's a law on the books giving the DoE freedom to determine student loan interest rates, then they can. I don't think such a law exists, though, so the Congress would need to pass one.
The Fed was created by Congress, and has a multi-part mission that it must meet, which has been set by Congress. But beyond that, it has great freedom to determine how to meet that mission on a day-to-day basis.
The Fed is part of the federal government, though. It even has its own federal police force.
However, the Fed often dramatically disagrees with Congress and/or the President when it comes to the best ways of fulfilling their shared values. Witness the consistent complaints from Congress over Fed policies like QE.
> The whole independent claim is just smoke and mirrors.
It's a lot more than that and has a legal basis. If the Fed weren't legally independent, I'm quite sure that Congress would have forced it to adopt different policies than it has.
The economy was destroyed by passing it onto the consumers through subprime lending (and a bunch of other things - not trying to assign fault for the subprime crisis here), so high risk trading is not mutually exclusive to passing it onto consumers.
I don't see your point with b) at all.
If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.
Many actions made the lending crisis worse, but it would not have come about without the huge pool of money that went looking for debt. [5]
The point is, it's really easy to make things worse rather than better with a huge amount of money.
1. "Homes never lose value" https://books.google.com/books?id=i2FKCAAAQBAJ&lpg=PT115&ots...
2. "Real Estate Risk Model Inadequate" http://pages.stern.nyu.edu/~lpederse/papers/MeasuringSystemi...
3. "Fraud in Real estate Market" http://www.nytimes.com/2015/02/13/upshot/how-mortgage-fraud-...
4. "Novel financial instruments in home lending" https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page 127 (156 in pdf)
5. https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page xxv (26 in pdf)
This is loan the government takes to pay for its expenses. The interest rate the government pays on these securities is determined by the FED, and it is one powerful weapon to regulate an economy. The government is the lowest risk debtor in a country, so anybody who wants borrow must pay more than what the government does. If the FED raises the rate, the rest of the economy follows, financing goods and investing get harder, but inflation tends to recede. The opposite happens when the rate is lowered.
If the government pays negative rates on its securities, the banks have to pay TO the government in order to keep money invested in securities. The effect is that the government's debt will decrease, money will flood the market, possibly resulting in a bit of inflation, but maybe kickstarting the economy (and your student loan rates might get lower, if they are not regulated and/or subsidized, which I'm not of sure since I don't live in the US).
I'm not entirely sure that is how it would work. They use Denmark as an example, but I believe that the negative interest here was for deposits in "National Banken"/treasury bonds. Meaning that the banks can't just park their money with the state, at least not without incurring a lose.
Some still bought Danish treasury bonds, because at least the lose would be predictable and with no real risk.
It forces the banks to actually do something with what ever money they have, but you're right in as so fare that the customers aren't going to benefit. Most likely the money will just be placed in stock or treasury bond of other stable countries.
Regulatory changes following the financial crisis make it harder [1] for banks to engage in proprietary trading and pose stricter limits [2] on how much risk they can take on.
Here in New Zealand, we have interest free student loans. There are minimum repayments (as a percentage of income), and the loan is no longer interest free if you go overseas for more than 6 months of the year.
Since inflation is a given, student loans are effectively negative interest over time.
It also means that if you graduate, and can't find a high paying job, you're not crippled by interest payments (there's also a minimum income threshold).
I agree about the banks, but how stimulating would lowering rates on student loads really be, though? While students overburdened by debt get a lot of press, it seems like too small of a demographic to help much. I think we'd get more bang for the buck with programs that target lower skilled and unemployed people.
One thing to keep in mind, they're young. If they save the extra money, they've got a loooong time for compound interest to work on those dollars.
[1] https://en.wikipedia.org/wiki/Student_debt#United_States
But isn't that the exact opposite of what you want to happen? It you want to stimulate the economy, you want people to spend more money now. College graduates taking the money they save from reduced loan payments and putting it in a 401k doesn't do that, but giving a formerly unemployed person a job so they can buy new clothes and a car does.
But, as another commenter said, that'd require Congressional action, which doesn't seem to be happening anytime soon.