This month on Wall Street, traders hyperventilated into paper bags, and ordinary citizens feigned understanding of terms like "securities trading" and "wealth management." The long and short of it is clear: bad stuff is happening. The times are turbulent, and we're all in a lot of trouble.
Bear Stearns (BSC) stock value collapsed so badly that the Fed had to rush JP Morgan in for a shotgun wedding. Uncle Bernanke married the two off before the world saw BSC for the cheap whore she really was. And I do mean CHEAP: On March 13th, BSC stock sold for $55.13 a piece. Just days later on March 16th, JP Morgan was throwing BSC stocks from the rooftops for $2 a share.
But few people (especially American youth) realize how the turbulent stock market affects their lives. For instance, their tax money bought that shotgun wedding between BSC and JP Morgan. When JP Morgan Chase Bank rushed in to save BSC from collapse, they didn't use their own money to keep the giant firm afloat. No, they used cash from the Federal Reserve - the money of hardworking Americans.
But what's the harm of a few (read: a lot, like billions) altruistic dollars funneling between American citizens? Why is this a bad thing? Well, for starters, it's not between citizens. It's between citizens and huge corporations, firms, and banks, which for some curious reason, share the legal protections enjoyed by people. It's called Corporate Personhood, and it's been the bane of Ralph Nader's existence. Second, citizens have no say in money matters, which is weird, because it's THEIR MONEY. Yet, they have no say in what their military or politicians do with their tax dollars. Their money goes toward ammunition fired into Iraqi citizens, and their money goes toward keeping American warships afloat, the same ships that nearly got into a disastrous hostile confrontation with the Iranian Revolutionary Guard in Gulf waters early this year. Of course, Americans never voted to send their tax-dollar-purchased ships to the Gulf. As usual, they have no say where their money goes.
So it was business as usual when the Fed used taxpayer dollars (without taxpayer consent) to save BSC, an act in itself that was hardly the altruistic deed of Big Brother bailing out the little entrepreneur. Let's examine why BSC failed in the first place.
BSC used to buy and sell equity and debt securities for large corporations, financial institutions, and domestic and foreign governments. Investors started pulling money from BSC in the wake of the subprime mortgage disaster, since a huge part of BSC's business was mortgage-based. Despite BSC executives' very convincing public display of shock, no economic expert was legitimately surprised this happened. For more than five years, credit has been too cheap and too easy to get. Furthermore, there's been no oversight committee examining the sometimes shady lending practices of loan companies. When loans are given to poor citizens (frequently minorities,) they're called NINJA loans (as in No Income, No Job, or Assets).
When introductory interest rates on home loans evaporated, and homeowners were swallowed in debt, and lost their homes, huge firms like BSC made a boatload of money. It was only when experts stepped back and saw just how large the housing bubble had grown that investors freaked out, pulled out their money, and left BSC to rapidly (and rightfully) deflate. BSC was a bad apple firm, full of bad citizens, who knowingly took advantage of poor people.
Lucky for BSC, taxpayer money saved them. Many taxpayers feel outraged, but the youth of American, those with few assets, don't see the BSC-JP Morgan scheme as their problem. But it is their problem, especially if they have student loans, or hope to obtain loans in the future.
The fear inspired by the shady lending practices of firms like BSC seeped into the area of student loans. There has been a steady increase in the defaults of private loans, leading some experts like Undersecretary of Education, Sara Martinez Tucker, to publicly declare that increasingly popular private education loans could become "scarcer and more expensive." Martinez's predictions are accurate. Private lenders are afraid to go the way of BSC, and that includes smaller companies like Nelnet Inc. to big loaners like Sallie Mae, which has recently cut back from lending to students it considers "unlikely to graduate or who are attending schools with inferior graduation rates," a troubling statement ripe for lots of different interpretations, all worrisome.
Students with federal loans are safe...for now. Thus far, it appears the BSC crisis will only affect private lenders, though if loan conditions continue to worsen, and more lenders withdraw from the program, no one is sure whose loans will be safe.
In a letter sent on Monday, Rep. Paul E Kanjorski (D, Pennsylvania) and 31 other lawmakers urged the Federal Reserve chairman, Uncle Bernanke, to use his emergency authority to help the student-loan market. It's curious that representatives practically have to beg the Fed to rush in and save education, but the second a major Wall Street player flails for aid, Bernanke stumbles over his own limbs, rushing to the rescue.
The National Association of Student Financial Aid Administrators (NASFAA) has been assured by federal lawmakers, the U.S. Department of Education, and other federal agencies that they will take "appropriate actions" to ensure students receive the federal loans they need. No doubt, "appropriate actions" entails hoping loan providers continue to step into roles when other providers back out, investors regain confidence in the loan market, and Uncle Bernanke doesn't need to borrow too much American cash from the cookie jar to bail out any more major firms.
Now is not the time for fear, but for skepticism in a system that seems better equipped to assist the private sector than its own citizens. On Bernanke's "Wish List," it's a safe bet that "Protecting the big CEOs," is planted well above "Protecting the students."
Many experts believe the BSC fallout will actually help students. While federal loans may not buy their way into Harvard, students will surely find the lower interest rates tacked onto federal loans much more appealing than the twenties years of debt guaranteed by a fat private loan. Plus, if more schools stop using risky private loan companies, and start using more federal loans, then theoretically that means there's more money, at cheaper interest rates, for everybody.
This is a myopic way to examine the situation. Okay, so everybody came out safe this time, but taxpayers still have no say in where their money goes, even if that includes: Iraq, Iran, or Bear Stearns and other predatory-lending vultures. There is no voting system in place to predetermine where the dollars go. The best Americans can hope for is to elect an official, who will appropriately spend their money.
But Americans cannot vote to punish corporations, even when those corporations function in predatory ways, fully secure in the knowledge that they will enjoy citizenry protection in courts. Corporations are people, according to the United States government, even when they premeditatedly stalk poor black and Hispanic citizens in their own communities, and sell them loans with outrageous interest rates. Corporations are people, even when they jeopardize the future of students.
Corporations are above the law. In fact, elected officials rush around to accommodate them, even when it requires stealing taxpayer money to mend the damage the corporations caused in the first place. Yet, there is still no purely democratic way for Americans to stand up and say: Thanks, Uncle Bernanke, but I'd rather have my money go to students than CEOs.