Central Planners Cause Another Casualty – Student Aid


Tuition at most universities in the US has grown at an astounding rate over the past 30 years. In some instances, tuition has risen 6,7+% year even as government-measured consumer prices as measured by the Consumer Price Index (CPI) was much tamer (interestingly, this might be one way that the average person could see the REAL cost of living increase in the US as opposed to that gamed measure, the CPI).

Some universities have offset this by the combination of higher donation levels to endowments and good investment return on endowment portfolios. With larger endowments, many universities have been able to offer need-blind admissions and higher grants to incoming students. Today however, a story appeared in Bloomberg announcing that Williams College, a top-rated liberal arts school in Western Massachusetts, will stop its No Loan Policy of student aid:

Read here

Why are central planners at fault? Our “Central Planning Committee”, i.e. the Federal Open Market Committee (FOMC), responsible for setting interest rate policy (which sounds foolish if you analyze that statement – though few do), helped inflate bubbles in all kinds of asset markets leading up to the crash of 2008 (not just real estate – many markets rose due to the ability to borrow money cheap), including government bonds, which now yield paltry returns (10 year bond is under 4%).

Endowments should be able to buy bonds and earn a decent return to balance a portfolio and prevent serious downdrafts. This ability has been tremendously hampered by the FOMC’s abuse of power over interest rates. Investors of all kinds chased stocks, commodities, real estate, wherever they could get a ‘decent’ return. unfortunately for them, now there is a another problem coming to head – market rejection of lending to the US government long term could lead to interest rates rising which would cause a serious downdraft in stocks AND in government bonds – therefore the picture could get a lot worse for endowments and other investors. Of course one could argue that endowments benefited from the asset price inflation when their stock, real estate, and commodity investments rose from 2000 and on. But I’m sure looking back, many fund managers would have preferred a more prudent approach.

By playing around with interest rates, and pretending to be in control in order to prevent anyone (at least on Wall Street) from feeling any pain, the FOMC with its chairman Ben Bernanke, could be shaping up to deliver us a tremendous injury which may scar and even disable many for a long time – to the point that feeling a little pain from 2008-2009 would have been PREFERABLE.

And this is the lesson of free market vs central planning – the pain would have been much moreĀ  intense had we let markets correct and refused the temptation to bail out companies in 2008 and 2009. But by bailing out many, we ensure that one of our better case scenarios might be a Japan type economy – a worse case scenario is too horrible to think about.