Ken Moser on abuse of free markets



Competition Is Good, Except When It Comes to Our Friends
Killing competition for student loans hurts students and raises federal deficit

By Ken Moser February 13, 2006
From the (Pennsylvania) Times News.

Economist Adam Smith was not a proponent of free markets, anymore than Isaac Newton was a proponent of gravity. Both of these groundbreaking scientists simply told us about these seminal forces, and left us to figure out we would be pretty stupid to ignore them.

If Adam Smith were here today and looked around the world, he would be happy to know about the power of this theory: Free markets create free people. Free people create prosperity. Pretty simple. And because it is practiced in the United States more than anywhere else in the world, it cannot be a coincidence that we are also the freest and most prosperous nation in the world.

Reliance on free markets is not a partisan issue, but the fact is, Republicans are more sympathetic to the teachings of Adam Smith than Democrats are.

That is why a recent Republican move to quash competition for student loan refinancing is so puzzling and why believers in the benefits of free markets who know about this action are so upset.

Republican legislation to kill competition for the 30 million people who hold student loans did not get that much attention. Which is hardly a surprise since it happened during the Holiday season on a Sunday morning at 3 a.m.

Most people were focused on how Congress raised interest rates on these federally guaranteed loans. But this action to restrict competition is potentially more far reaching, and more damaging to students and to efforts to reduce the federal budget deficit. It happened two ways: First, Congress continued a law called the Single Holder Rule, which says that once you have your student loans from one company, you cannot change companies. Second, once your refinance them once, you cannot do it again, no matter if a different company offers better rates, longer terms or better service.

Earlier versions of the law outlawed the Single Holder Rule, but in the wee, dark hours of that cold December morning that provision mysteriously disappeared. And along with it, any hope of competition, better rates, and better service for the 30 million student loan holders.

Imagine if someone tried to get away with that in the home mortgage market. They would either go out of business, or go to jail for price fixing or both. Then Congress went one step further. Led by Congressman John Boehner, then head of the House Education Committee, Congress took the single most anti-competitive provision in all of American law since the enactment of wage and price controls in the early 70's, and made it worse. They effectively banned anyone from locking in low rates for longer terms.

The people at the largest student lender, Sallie Mae, were ecstatic. They beat their competition, not in the marketplace, but in the lobbying place. Sallie Mae used to be a quasi-governmental agency, issuing the bonds that guarantee the student loans. Then a few years ago, their chief executive figured out that if he could get rid of its to the federal government, but keep all the rules that banned others from competing with it, that company would have a license to print money.

This is what the experts say is the way it has turned out, with Fortune Magazine calling Sallie Mae the second most profitable company in America. Its chief executive alone has received salary and bonuses of more than $200 million over the last five years!

Adam Smith did not have a problem with profits. Just the opposite: They are a signal for more competition and lower prices. But Smith warned that when government creates barriers to competition, monopolistic profits would result and consumers would lose.

What we have here today in the market for student loan refinancing is a gross monopoly. Columnist Dick Morris calls the anti-refinancing scheme an "obnoxious rip-off." Terry Savage, the financial columnist of, says there is "no way" borrowers should support this plan. The New York Times calls it "Robbing Joe College to Pay Sallie Mae," the country's largest student loan provider. The Times Union of New York calls plans to outlaw refinancing a "student loan shame."

Recently Fortune magazine documented how the largest student loan lender, Sallie Mae, depends on Boehner to protect them from competition to ensure their record results. The Chronicle of Higher Education said the legislation is designed to "force (Sallie Mae's competitors) out of the market.

With all the talk about reforms in Congress to deal with the influence of lobbyists, no better example of this need could be cited than here. You see Congressman Boehner has been the single largest recipient of donation from Sallie Mae. He has received over $100,000! What a shame that he sold out college students so cheap.

Using government to quash competition was a trick Adam Smith was well familiar with. So he would not be surprised that Sallie Mae has unleashed an army of lobbyists to put its competition out of business. He would be surprised, however, that we let them get away with it.

Ken Moser is Chair of the Adam Smith of California society.