For many of us, British Author A.A. Milne charmed and delighted our childhood with tales of a lovable, but often very confused and naïve character named Winnie the Pooh. In one account of his adventures, Pooh finds some tracks in the snow and, surmising it might be those of a “Woozel”, he follows the trail around a clump of trees. Piglet joins him and shortly the two find the Woozel now has a friend. As the pursuit continues around the trees, another two join the Woozel, then two more. Pooh and Piglet kept repeating this process of finding their own foot prints and regarding them as a confirmation that they were hot on the trail of a Woozel and his growing number of friends.
When Winnie the Pooh commits this error of circular reasoning, it’s cute. When our government commits these cartoonish errors, the outcomes are pernicious–often especially so to those the government originally sought to help. But this is exactly what takes place: our government creates a problem and seeks to solve the problem with the same “solutions” that initially caused the problem– employing the same kind of circular reasoning as Winnie the Pooh did when he was following himself.
Invariably, the foot print in the snow is government-backed easy money or easy credit. For example, the recent mortgage crisis began with the federal government funding, backing, and guaranteeing loans that Fannie Mae, Freddy Mac, and commercial banks made to homeowners who often had poor credit, inadequate incomes, and no down payment. By backing up the loans made by banks, the government removed the risk in bank lending creating what economists call a moral hazard. Once the risk is removed, those involved in a contract behave differently–usually recklessly. In this case, taxpayers were left with a multi-trillion dollar bailout for toxic home loans.
The same mechanisms are taking place with the looming student loan bubble which now has risen to about 1.2 trillion dollars, a debt surpassed only by mortgages. The government’s policy of easy money backing and funding uncollateralized student loans has also caused similar moral hazards. Colleges now essentially charge as much money as the federal government will loan students. The cost of education has skyrocketed about five times that of inflation since the 1980’s. Moreover, the easy money has increased default rates that make another taxpayer bailout likely – especially given high unemployment among recent graduates.
Enter Democrat Julia Brownley who is now pushing a petition to refinance student loan debt making it easier to borrow, further putting taxpayers at risk. No different than Winnie the Pooh in hot pursuit of his own footprints, she wants to make borrowing from the government easier which will result in a greater need to make borrowing from the government easier with the risk shifted to taxpayers.