April 5, 2010 |

Intervention and uncertainty stalling economic recovery

Few people know that tucked into the massive new federal health reform law was a federal takeover of the student loan program.

Begun in 1965, the Federal Family Education Loan (FFEL) program was a public-private partnership in which banks provided federally guaranteed student loans. In the early ’90s, the federal government created a “government option” of direct federal loans as an alternative.

With the passage of the health-care bill, private lenders are pushed out and starting July 1, all students will get their student loans directly from the Department of Education.

Rep. Cathy McMorris Rodgers, who represents Eastern Washington’s 5th Congressional District, says, “The Department of Education will become one of the country’s largest banks—originating more than $100 billion in federal student loans each year.”

Student loan companies say the federal takeover will cost 35,000 private sector jobs, a figure proponents dispute. What will actually happen? No one knows for sure, and that’s the problem.

Federal takeovers of private industries create uncertainty, and uncertainty kills the prospects for an economic recovery.

We will not emerge from the Great Recession until private investors have the confidence to take risks. But the expanding role of government and growing federal intervention into private businesses have piled up massive debt and created uncertainty that keeps private investment capital on the sidelines.

The federal takeover of the student loan program comes on the heels of federal ownership of General Motors, intervention into the banking industry and creation of a “pay czar” who determines executive compensation at private companies that took taxpayer-funded bailouts. According to Equities Magazine, even companies that repaid the bailout money will have their financial records reviewed “to insure salaries and bonuses did not exceed an amount cooperative with public interest.”

Now the Obama administration is announcing a new intervention into the banking system by requiring lenders to temporarily reduce or eliminate mortgage payments for borrowers who are unemployed. Banks and other lenders would have to reduce mortgage payments to no more than 31 percent of a borrower’s income for up to six months. In some cases, a borrower would make no payments at all.

Officials will fund the program with money from the $700 billion taxpayer-funded bailout of the financial sector.

All these federal programs are intended to help people and restore the economy. But will they work? History provides some perspective.

President Obama’s policies have been compared to those of President Franklin Roosevelt’s during the Great Depression. But even Henry Morgenthau, Jr., Roosevelt’s own Treasury secretary, admitted the programs didn’t work.

In 1939, Morgenthau wrote, “We have tried spending money. We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”

In addition, we have borrowed so much money that our children and grandchildren will struggle their entire lives just to pay the interest on our reckless debt. Now, the credit ratings agency Moody’s says the U.S. could lose its AAA rating, which would make it even more expensive for the government to borrow money.

The situation could go from bad to worse if President Obama keeps his promise to pursue cap-and-trade legislation. It will cost trillions to administer and give countries like China, which happens to hold nearly $900 billion of our federal debt, a competitive edge. Even some environmentalists say cap-and-trade will not curb global warming. What it will do is kill jobs.

A 2009 Treasury Department memo obtained under the Freedom of Information Act says the United States could lose one percent of its gross domestic product, send manufacturing jobs out of the country, and experience energy rationing if cap-and-trade became law.

No one knows the true impact of the bailouts, the cost of health reform, mounting debt, rising taxes, weakened credit ratings, federal takeovers and cap-and-trade. That’s the problem.

Ask yourself: Would you risk everything you have to start a business these days? Would you take a chance and hire new people with Uncle Sam looking over your shoulder and reaching deeper into your wallet?

About the Author: Don Brunell is the president of the Association of Washington Business. Formed in 1904, the Association of Washington Business is Washington’s oldest and largest statewide business association, and includes more than 6,900 members representing 650,000 employees. AWB serves as both the state’s chamber of commerce and the manufacturing and technology association. While its membership includes major employers like Boeing, Microsoft and Weyerhaeuser, 90 percent of AWB members employ fewer than 100 people. More than half of AWB’s members employ fewer than 10. For more about AWB, visit www.awb.org.

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