There’s something the federal government can do right now to help students caught by our terribly unjust higher-education financing system. … Under an income-contingent loan system, … students pay a fixed percentage of their income toward their loans. Payments are automatically deducted from their paychecks by the IRS. .. After an extended time period of 20 or 30 years, any remaining debt is forgiven. … The concept has been proven to work—Australia and Britain have used it for years— and … the Nobel Prize-winning economist Milton Friedman proposed the idea all the way back in 1955. …
There are lots of ways this could be handled, and banks could all be issuing dollars printed by the treasury. There are any number of private institutional frameworks which could manage the risk. There is no reason that customers would need to take on extra risk. It's my understanding that in the 1800's banks belonged to trade associations that would issue IOU's when there was a run on the bank. It seems as though this would have worked better if banks could have simply issued dollars, and private insurers, bondholders and/or trade associations would have dealt with claiming assets of an insolvent bank, except that regulations prevented many of these things from happening.Consumers could treat dollars from all banks equally, and bank associations could handle the issue where the value of a bank's dollars was in question.
But, I'm now hijacking the thread, so I'll leave it at that.
If I were to start a bank, I would never run out of money? I believe the idea is that, like government fiat currency, if a bank prints or mints too much of its own currency, confidence in that currency will plummet, reducing its exchange rate. Whether this is a feature or a bug is debatable – the bank and its customers assume more risk, while society at large shoulders less and bank solvency is, as previously noted, considerably more transparent – but I thought I'd clarify. I also see no reason why you couldn't have both government funny money and private issue legal tender and let them compete for users. It'd at least be an interesting experiment.
Cyan,I don't see much value in the financial innovations of central banking and even deposit insurance. It creates moral hazard, leaves huge economic rents to be grabbed by those with political power, and arguably 'hides' systemic risk by failing to purge the system of rottenness leading to huge panics that involve ALL banks not just a few. And I see much simpler ways to deal with the safety of personal savings such as insurance and diversification.There is value in the ruggedness of a system that has lots of small failiures instead of the instability of fake smoothness.
If I were to start a bank, I would never run out of money? Nice. Sign me up. Yes, I'm sure regulations will be designed to prevent me from simply issuing money to myself. I'll do my part to make sure regulations are as effective as possible by identifying the loopholes and demonstrating how they may be abused.
Totally agree. In fact, in a remarkable coincidence, I blogged about the conceptual reasons for financing education through equity, rather than loans in my blog http://ulyssesmusings.blogs...
An alternative funding mechanism – income taxes – looks a lot like compulsory government stock ownership of people living in the country.
Hence the expression advanced by some more extreme anarcho-capitalists that (income) tax is slavery.
Of course the reason insolvent college grads get little sympathy from the American public at large is because they are a privileged class who had the choice to go to university. Conscripting people into college would certainly change that; but until then, Rudd-O’s preemptive jab at statists notwithstanding, it is not a meaningless difference for all the people who never had a shot at higher education.
The ed loan industry is a train wreck, but equating bankruptcy-proof debt to slavery is basically Godwin’s law for consumer economics. A more apt analog would be indentured servitude. Even with that, however, most of the European émigrés who indentured themselves were not among the well-to-do or even middle-class. One could at least argue the tired, the poor, the huddled masses yearning to breathe free had less viable options than the last several generations of matriculating young Americans, and do so without the actual poor looking on in bemusement.
I agree with Robert Wilbin. This is not stock. This is a loan with generous terms on repayment.
The very reason why we don't allow private sector players to make such loans is that in a free market the interest rates would adjust to take account of the generous repayment terms, and then it really would become a stock-like interest. Which is generally thought to be bad (although I am personally open-minded).
Income contingent loans are good but are not equity/'stock' in human capital because in none of those countries (Oz, UK, NZ), can you pay back more than you originally 'borrowed' if things go well for you. The govt accepts the downside risk but has no upside. Nobody has criticised income contingent loans as slavery, though they have of human capital equity.
The analogy to conscription is not so good because that is involuntary while human capital equity would not be. An alternative funding mechanism - income taxes - looks a lot like compulsory government stock ownership of people living in the country.
"This is how a lot of market failures go these days – they are real failures, but failures caused in large part by refusing to allow private actors all the tools we allow governments."
I agree. A good example is default. Any sovereign can default at will on anything and everything. Normal people can't.
I don't think you all took my comment to its conclusion. If a bank was able to issue or access currency without limit, there could never be a run on the bank.Issues about insolvency would be handled by clearinghouses, trade associations, bondholder agreements, etc.
And these wise investments in human capital have led to... per capita incomes that are 70-80% of the United States.
There are a lot of countries that charge almost nothing for very good universities. Come to Europe!
There are lots of ways this could be handled, and banks could all be issuing dollars printed by the treasury. There are any number of private institutional frameworks which could manage the risk. There is no reason that customers would need to take on extra risk. It's my understanding that in the 1800's banks belonged to trade associations that would issue IOU's when there was a run on the bank. It seems as though this would have worked better if banks could have simply issued dollars, and private insurers, bondholders and/or trade associations would have dealt with claiming assets of an insolvent bank, except that regulations prevented many of these things from happening.Consumers could treat dollars from all banks equally, and bank associations could handle the issue where the value of a bank's dollars was in question.
But, I'm now hijacking the thread, so I'll leave it at that.
If I were to start a bank, I would never run out of money? I believe the idea is that, like government fiat currency, if a bank prints or mints too much of its own currency, confidence in that currency will plummet, reducing its exchange rate. Whether this is a feature or a bug is debatable – the bank and its customers assume more risk, while society at large shoulders less and bank solvency is, as previously noted, considerably more transparent – but I thought I'd clarify. I also see no reason why you couldn't have both government funny money and private issue legal tender and let them compete for users. It'd at least be an interesting experiment.
Gosh. You're right. It's that simple. I rescind my statement. I hadn't thought of this.
Peter Theil and Charles Murray argue for society to overcome it's biases regarding higher education:
http://intelligencesquaredu...
I agree with all their points (except maybe C.Murray's admiration of the "classical education" that teaches useless stuff but with rigor).
Of course, the fact that people have to borrow huge sums of money for college for a paper certification is the root cause of the problem.
Like everything else the government subsidizes, college costs go through the roof year after year.
Cyan,I don't see much value in the financial innovations of central banking and even deposit insurance. It creates moral hazard, leaves huge economic rents to be grabbed by those with political power, and arguably 'hides' systemic risk by failing to purge the system of rottenness leading to huge panics that involve ALL banks not just a few. And I see much simpler ways to deal with the safety of personal savings such as insurance and diversification.There is value in the ruggedness of a system that has lots of small failiures instead of the instability of fake smoothness.
So...
If I were to start a bank, I would never run out of money? Nice. Sign me up. Yes, I'm sure regulations will be designed to prevent me from simply issuing money to myself. I'll do my part to make sure regulations are as effective as possible by identifying the loopholes and demonstrating how they may be abused.
Totally agree. In fact, in a remarkable coincidence, I blogged about the conceptual reasons for financing education through equity, rather than loans in my blog http://ulyssesmusings.blogs...
Also, touched upon the slavery metaphor in this
For those interested in true human capital equity investments, this paper gives a description of how they would work: http://www.cato.org/pubs/pa...
An alternative funding mechanism – income taxes – looks a lot like compulsory government stock ownership of people living in the country.
Hence the expression advanced by some more extreme anarcho-capitalists that (income) tax is slavery.
Of course the reason insolvent college grads get little sympathy from the American public at large is because they are a privileged class who had the choice to go to university. Conscripting people into college would certainly change that; but until then, Rudd-O’s preemptive jab at statists notwithstanding, it is not a meaningless difference for all the people who never had a shot at higher education.
The ed loan industry is a train wreck, but equating bankruptcy-proof debt to slavery is basically Godwin’s law for consumer economics. A more apt analog would be indentured servitude. Even with that, however, most of the European émigrés who indentured themselves were not among the well-to-do or even middle-class. One could at least argue the tired, the poor, the huddled masses yearning to breathe free had less viable options than the last several generations of matriculating young Americans, and do so without the actual poor looking on in bemusement.
I agree with Robert Wilbin. This is not stock. This is a loan with generous terms on repayment.
The very reason why we don't allow private sector players to make such loans is that in a free market the interest rates would adjust to take account of the generous repayment terms, and then it really would become a stock-like interest. Which is generally thought to be bad (although I am personally open-minded).
Income contingent loans are good but are not equity/'stock' in human capital because in none of those countries (Oz, UK, NZ), can you pay back more than you originally 'borrowed' if things go well for you. The govt accepts the downside risk but has no upside. Nobody has criticised income contingent loans as slavery, though they have of human capital equity.
The analogy to conscription is not so good because that is involuntary while human capital equity would not be. An alternative funding mechanism - income taxes - looks a lot like compulsory government stock ownership of people living in the country.
"This is how a lot of market failures go these days – they are real failures, but failures caused in large part by refusing to allow private actors all the tools we allow governments."
I agree. A good example is default. Any sovereign can default at will on anything and everything. Normal people can't.
I don't think you all took my comment to its conclusion. If a bank was able to issue or access currency without limit, there could never be a run on the bank.Issues about insolvency would be handled by clearinghouses, trade associations, bondholder agreements, etc.