Studebaker is Wrong about Stein but Right about Student Debt

Ben Studebaker is defending Jill Stein from John Oliver, to an interesting effect. Studebaker is wrong about Stein; her proposal is nonsense. Studebaker’s incorrect interpretation of her proposal works out, but turns out to be a bit banal when you step back from it.

Stein is arguing that the Federal Reserve can cancel student debt through something called Quantitative Easing. Ben does a good job explaining the policy of QE in only a handful of words, which is (no sarcasm) a public service:

To understand why Stein thinks it might make sense to have the Federal Reserve eliminate student debt, you have to understand what quantitative easing is. Quantitative easing (or “QE” for short) is a form of unconventional monetary policy in which the central bank prints money and buys things with it to inject that money into the economy and encourage investment and consumption. Many people instinctively think that QE will generate inflation, but because QE is generally only introduced in economies that are already underperforming the large inflation does not materialize–QE is replacing investment and consumption that was lost during recessions rather than adding additional investment and consumption on top of what went before.

I’ve bolded things because the whole argument rests on that word being used correctly. It should say assets, but this would be pure pedantry if not for a problem—hang on a second. Assets are anything you can use to buy something else. We’re going to be concerned with two kinds, cash and debt. All debt is an asset because you can sell it for cash. If you have student debt and you are thinking, “Golly, I cannot just sell my debt for money or else I’d be rich!” you are right. If you are owed student debt, however, you can sell it rather than collect the interest and principle in due time. Being owed debt is an asset. While we’re still in the vocabulary part of this, I’ll add that owing debt is called a liability because you will have to pay it later.

Studebaker and Stein seem to be saying different things about what the Fed is going to buy, though I would be doing everyone a disservice if I pretended that Stein has been crystal clear about this. She said, “I am the only one who will do for our young people what our misleaders saw fit to do for Wall Street not that long ago.” Studebaker is interpreting this as buying assets from Wall Street again. From what Oliver put on air, it is fair to interpret what she said as referring to assets, but she has said elsewhere:

[The bailout involved] about $17 trillion if you include the free loans. And the free loans largely got paid back. … Forget about the free loans and just consider the debt that was canceled. That was $4 trillion in the form of quantitative easing. So that’s not money that was transferred to them. It’s simply a debt that was bought up by the U.S. government, and then essentially zeroed out, canceled. So it didn’t put money in their pockets so to speak. But it rid them of all that debt that they would otherwise have to pay. So that’s exactly what we are calling for here, a quantitative easing which is not money in their pocket. It’s essentially that the government has bought up that loan and it tears up the contract. It’s over.

I don’t have time to go through everything that is wrong, misleading, or garbled in this paragraph, so let me focus on that part I bolded. This is simply not true, not even in a “heavily digested for a policy pitch” sort of way. It did not rid anyone of debt they would otherwise have to pay, but rather rid people of uncertain debt they were owed. (The Fed is a much better position to wait out bad contracts and eat bad debt—though the practice comes with some risks.) Jill Stein evidently thinks QE buys liabilities, even if she may not be so clear-headed in that belief. So, when Studebaker says, “the Fed would buy student debt from the banks (and from the federal government, which owns a lot of student debt) and then cancel it,” I think it is worth clarifying two points:

  1. Studebaker, not Oliver, misunderstands Stein. I want to be very fair to Studebaker: I had to dig around awhile to find a quote that confirmed she was proposing buying liabilities. Even with the evidence I found, it is possible, with some squinting, to think Stein was proposing buying assets. But, I think the evidence shows insofar as Stein has a coherent position, she thinks QE bought debt that was owed, or liabilities.
  2. Stein’s proposal will not work. Not only would it not be QE, the Fed shouldn’t buy liabilities for the same reason other banks don’t buy them; namely, on the order of a trillion dollars, it would make the Fed insolvent and literally end the dollar.

Recognizing that Studebaker’s position is not Stein’s raises another interesting question: would Studebaker’s proposal work?

Yes, but mostly because the Federal Government has other, better options. But…yeah, subject to some constraints he does not mention, we could do this.

The Federal Reserve is a bank. In almost all ways lot of ways a bank like any other, except it only takes banks as clients. (The Fed’s money creation powers are not even unique; the main difference between the Fed and, say, Chase is the institutions’ goals.) Like all other banks, it must remain solvent, a fancy way of saying it must have no more liabilities than assets. This means that the Fed only has the difference between its assets and liabilities to play with any given year. QE works, whatever its long term consequences, because it creates a liability to buy an asset; if you cancel that asset, the same cannot be said. The Fed has about $100 billion it sends back to the Treasury each year, suggesting that is about what it feels it has to spare.

Therefore, the Fed can easily buy $100 billion in student debt a year and cancel it. It can hold the profits as an asset—an unusual but legal step—and print money to buy the student debt. When it cancels the debt, the profits are no longer profits, but assets critical to holding the recently printed money afloat. All else equal, the Fed could cancel this all in about 20 years*. Too much faster than that and the dollar collapses.

The reason this works is because Congress could do this too. It could make $100 billion available a year to pay down student debt at the financial institutions it is currently housed at. Because those assets back debt, it would be important to put money from the Treasury, either borrowed or taxed, towards this or else whatever institution they are at would take a possibly fatal it. It works at the Fed because the Fed has earmarked that money for the Treasury; the Fed could just as soon send the money over to have it sent back.

Studebaker’s proposal is not only different from Stein’s, but not especially revealing. Congress could pass a law forbidding The Fed from collecting interest, collect that money as a tax instead, send the money to the Fed, and require they use it to purchase student debt and cancel it. Functionally, Studebaker’s proposal is indistinguishable from Congress passing a tax to fund debt relief. This does not make him wrong, just that we’ve spent a lot of words saying that The Fed could use Congressional power (money and authority) to do a job we’ve long known is in Congress’s power. And because Congress has more relaxed solvency constraints, they could do it faster! QE’s just not a very good trick for this problem.

To summarize: Stein is wrong about student debt and Studebaker misunderstands her garbled rhetoric. Oliver is right on most of his major points. Studebaker’s proposal to have the Federal Reserve cancel student debt would work over a pretty long horizon, provided the Federal Reserve did not compromise solvency. But its not that different from any other proposal to have Congress loosen its purse strings to pay down debt.

And really does not suggest if we should or not.




*I figure this way: Student debt is 1000 billion dollars and adding 50 billion a year. The Fed has the capacity to cancel about 100 billion right now. This suggests:

1000+50t-100t=0

which solves to make t equal 20. This assumes that the Fed does not wind down or increase other QE, that the market does not price in this program, and a number of other dubious things, but it gives you a good idea about the magnitudes in the status quo.

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