I’ve written before (here and here) about the damaging risks run by governments intervening in a free market.  I want to talk about a couple of additional examples of such intervention, and then I’ll leave the subject alone for a while.

The Daily Caller wrote today about the President’s attempt, by Executive fiat, to ease the debt burden on students.  The plan, according to early information, is to allow some of the (now graduated) students to ease their debt burdens by consolidating their loans into one loan.  Further, after the original loan contracts have been solemnly entered into, the President’s plan seems to be to allow borrowers to cap their loan payments at 10% of their after-tax income (with the signed contracts capping these payments at 15%).  Finally, unpaid balances can simply be walked away from—”forgiven”—after 20 years, instead of an originally contracted-for 25.  This plan is available, though, only to students whose loans were obtained through a Federal loan guaranty program or directly from the Federal government.  (Thus, not only is a select group being singled out for preferential treatment, only an especially favored subgroup is eligible for this particular intervention.  This, though, is beside the point of this post.)

Early word is that this will be “paid for” by “savings” claimed to occur from the 2010 nationalization of the student loan business which was included in Obamacare legislation.  There are a number of problems with this; I’ll confine myself to the market intervention problem.  With one party able unilaterally to alter the terms of a loan contract, costs will be imposed on the other party absent his agreement—even his discussion.

These costs will include lost interest income and principle repayment from the smaller payments of the loan’s repayment stream, and they will include outright loss of the principle loaned through that earlier forced “forgiveness.”  That five year chop, given the way loans are amortized, means that about 25% of the principle (assuming a 7% loan; the principle loss increases as the interest rate increases) can be written off.  Look at your home mortgages for an example: most of your payments are interest, with only a little principle being paid down until the last years of the loan.  These costs, as I’ve noted, are imposed solely on the borrower’s call.

Then there is the loss to the rest of us taxpayers by using the alleged savings from that nationalization to cover these costs rather than returning those savings to the Treasury to pay down the nation’s debt.  Of course some will point out that these savings, compared to our national debt, is just chump change.  This is disingenuous.  Ask any discount store about the importance of everyone’s nickels and dimes to the millions in profit those chain discounters make in the aggregate—on a slim margin compared to the millions in costs those chains experience, but a positive margin.  And as an Illinois Senator once said, “A billion here, a billion there, pretty soon, we’re talking about real money.”

Then there’s the cost of consolidating those loans—small, generally, compared to the loans themselves, but the fees add up across the six million, or so, prospective eligibles.  This is an unnecessary cost to the taxpayer, though, as anyone who ever has gotten into credit card debt trouble knows: loan consolidation is a standard means of containing, and ultimately paying down, excessive personal debt, and the mechanisms for this are already well established in banks and credit unions.

Some (others) might point out that students might have trouble getting a loan consolidation loan from a bank or credit union; their credit ratings will be too poor.  But wait: if they’re poor risks for a bank, aren’t they poor risks for the National Bank of Taxpayer?  And wasn’t freely lending to poor risks a major contributor to our present mess?

Finally, there’s the moral hazard being created here.  Given that the borrower from, or through, the government can simply change the terms at will, or take advantage of the myriad of loopholes in our current tax system (which I’ve heard no Democrat willing to change) to hold down the dollar size of that 15%10% cap, or simply to wait a now shorter while and then legally walk away from his loan contract, where is the incentive to take his loan obligation seriously in the first place?  Where is the incentive for private lenders to involve themselves in the student loan market?  Oh, wait—what student loan market…?

Another, brief, example is  the travesty of the Chevrolet Volt, built by a car company and union that were the individual, specifically targeted, beneficiaries of an historically huge market intervention.  I suppose, in the end, though, the Volt itself isn’t much of an intervention: even after a taxpayer-funded $7,500 rebate, the $40,000 (post-rebate) Volt isn’t selling, so the taxpayer’s funds aren’t being tapped too hard here.  There’s also no reason why it would be a large intervention.  This marvel of “green” technology gets around 40 miles per charge before it needs help from an on board internal combustion engine (in fairness to the Volt, this is pretty typical of other hybrids, too).  But so does the 1896 [sic] Roberts Electric Car; although the Roberts doesn’t have an internal combustion engine at all, and it’s missing some (unrelated to “green”) comfort features.

In short, what are we getting for these government interventions into our market place?  Moral hazard, higher costs to the taxpayer—and the consumer—and loss of market participation.    This is a big price to pay for interventions that, by their nature, cannot work.