-----Original Message-----
From: Electronz <ezine@electronz.cjb.net>
Date: Sunday, February 25, 2001 11:02 PM
Subject: Special Edition
The Student Loans Scam in New Zealand
By Don Bethune
Researchers for this story have been constantly frustrated at the mixture
of deviousness and / or ignorance of people you would expect to know the answers to basic
and relevant questions. We feel provoked into listing the names of MP’s and
their weird answers to the straight question, “Where did the funds originate to meet
the current $3.5 Billion Student Loan Debt?” WINZ, who handle the actual funds,
have provided several quite different answers. One referred to the wording on the Student
Contract. It asserts that the loan is from the Queen, which might impress and
satisfy a 6 year old, but not us.
Another, in more helpful mood, replied that WestpacTrust won the contract to supply WINZ
with banking services, but when we asked if that would include overdraft facilities,
clammed up. Another inquirer was told that they were appropriations from Parliament,
but the question of whether the loans deficit formed part of the National Debt was
ignored. What raised our eyebrows most was a note at the end of the message saying that if
this information was intended for someone else, it must
be destroyed!
When the whole Loans Scheme can be shown as unnecessary, but forced on to the community by
government legislation, then it can rightly be described as a scam, so let’s consider
some fundamental questions to see whether it is actually necessary.
In essence, the tertiaries concerned, being mainly polytechs and universities have to set
up a loans contract with every student wanting to borrow money for survival and fees.
This not only has to be paid back, but allowing for concessions while studying,
interest will be compounded until both interest and principal are fully paid off. It
is accepted that those who are not continuously employed at or above the average wage,
their debt may continue growing right through their lives and involve more in interest
than the initial borrowing. People who for whatever reason cannot get or hold down a
job at even minimum wage rates can be expected to die with a loan debt several times the
size of their initial borrowing unless there is a change.
With the State ostensibly guaranteeing these loans, what happens on death? The
inference is that the state as guarantor will have to pay off individual debts to the
lender, but those who administer the lending are very reluctant to say anything at all.
Enquirers just get fobbed off.
Does the borrowing or mortgaging process actually make any resources available which are
not available now? The answer is clearly “no”. Main costs in education
involve human resources; teaching; sustenance of students (which means food, clothing, and
shelter which humans need whether they are studying or not); and use of equipment, which
has to be provided even for small numbers of students, and so increased student numbers
can be serviced to some extent by re-scheduled usage rather than
increased equipment numbers. This means that with human resources being the main
so-called cost in education, and those being mainly in existence here and now, it is
mainly irrelevant whether students go into debt to study or not.
In the last 12 months between Waikato Polytechnic and Massey University alone 120
qualified staffers have been made redundant. Student loans do not make any resources
available which are not already in existence, and literally crying out to be used.
So the implied need for borrowing to provide “unavailable” resources is
inaccurate. Either resources are available, or they are not! The alternative “accurate”
shortage of budgeted funds is different altogether. Now see if the borrowing does
really involve taking the ownership of something belonging to someone else, or some other
quite different mechanism.
Although there is difficulty in obtaining details of just what bank it is which has the
lucrative privilege of funding the Student Loans Scheme, it is agreed that is it being
bank funded. Everyone who has done Stage 3 Economics knows that banks cannot lend
their liabilities – which their Deposits are – and so their so-called “lending”
is actually creating credits in their books out of thin air, which increases the money
supply as it is drawn on, and lends that to the students, at a commercial rate of
interest. Currently that is 7% per annum.
SO WHERE DOES IT COME FROM?
While this may come as a shock, especially to people who diligently took their 10 cents to
school every week to bank so businesses were able to borrow it, the facts are quite
different. Bank loans are new credit, created out of nothing, within what are
thought to be prudent margins, usually backed by the borrowers assets, but in this case
the government’s own guarantee.
It is then transferred as a credit into the student’s tertiary Fees or into his / her
bank account for spending and adding on to whatever debt he or she may already have.
Then, leaving out interest while students are still studying, the bank acquires
customers by the thousand, many into lifelong bondage at compound commercial interest.
All the physical work of form filling, identity checking and so on is done by
tertiary administration staff and WINZ; while the government automatically backs
every loan as the guarantor.
Now if the bank was actually lending something it had borrowed from another party and was
paying them for the use of it, and sharing some of the risk of borrower defaults, it may
not seem so repugnant when stripped of the surrounding myths. Viz: The government
requires administration staff it indirectly pays to sign up students as bank debtors,
knowing that by using its commercial license the bank will create new credit to build up
potentially perpetual interest-bearing debts in favour of itself and then, after all that,
the government also guarantees the repayment of principal as well as accumulated interest.
Not only is it clear that the scheme itself fails to bring into existence educational
resources which are not already crying out to be used, but if that amount of credit is
needed for distributing existing resources then it can and morally should be created by
the government’s own Reserve Bank. On past performance it did for decades
finance state accounts, public works, dairy co-operatives and so on at an actual cost down
to only 1% per annum. There is no question of its ability to do
this because from when the first Labour Government bought up the ownership of the Reserve
Bank, it did these things almost continuously for the next 20 years. And Godzone
benefited by the greatest increase in living standards at any time in its history.
Naturally this did irritate commercial banks and their political friends.
GRADUATES CHASED OVERSEAS
Consequences of large student debts at commercial rates of interest are extensive, and
both financial, and psychological, with negative implications all round. These include:
? Student debt encourages trained people to go overseas to earn bigger wages to be debt
free much sooner.
? It then discourages them from returning, at least until they are debt-free, depriving NZ
industry of their services and skills for many years.
? It reduces their ability to secure a home or other stake in the country which involves
taking on debt, which is a criteria distinguishing solid citizens from the others.
? For the population sector which accepts the invitation promoted to them by the
tertiaries, this means signing into bondage, but if for whatever reasons they find
themselves unable to get work at pay related to bobtailed or unconsummated qualifications,
one has to contemplate long periods of unemployment, these people become social time
bombs.
? Debts create a social and ethnic time bomb in this way: The individual with a high debt,
and inability to draw the rate of pay he was given to expect, sees this system as a
government controlled swindle: His “luckier” friends are able to wipe
their debt and then buy equity into some sort of appreciating property, while the debt he
was forced into, has not only failed to give him a fat meal ticket, but because of the
compounding of interest to the bank, which he probably suspects with an element of truth
created the figures out of nothing, will be a millstone round his neck for the rest of his
life – “so if society double-crosses me like this, who can blame me for lashing
out when I try to escape?”
Many institutional inmates have rationalised along these lines in the past, when education
was virtually free, but the potential for that number to increase dramatically is obvious
if the state persists with the present policies.
Nor is there much chance of the government defending its policies in frank debate if the
relevant facts are exposed to the public gaze.
WHY IS FREE EDUCATION NOW UNAFFORDABLE?
This discussion sees the government on the back foot with the questions that the
generation running the country were all educated at state expense, and since then we’ve
had the technological revolution, so why can’t the country now educate the young even
easier than before? Or are the young in some way picking up the tab for the sky
rocketing growth of the previously minimal number of filthy rich?
It cannot be held that the Loans Scheme makes resources available which are not there
available for use regardless. Even if that is overlooked, and we accept that for
economic reasons there needs to be an increase in the M1 Money total, then the present
scheme of using commercial banks is so indefensible that it moves into the area of
legislative treason.
The essence of the existing arrangement is so gold plated for commercial banks that when
the facts come out, cynics will be asking whether this is continuing as an agreed
Labour-and-National policy deal with the banking world? Or is it a golden handshake
for a particular piece of Labour legislation or for financial help in elections?
At present, with fees and living costs above the income threshold of most students, they
are offered funding for the shortfall under the Student Loans Scheme and institution or
government staff supervise and process all the paperwork, and in due course, hopefully
with less botch ups than before, the credit figures flow into the correct accounts, and
can then be spent. It all looks straightforward.
But what the public neither sees nor understands, up to the present, is what is really
happening. To minimise misunderstandings it will be described in simple terms.
As the thousands of forms are filled in and processed and eventually approved, the credit
figures start flowing into the right bank accounts, and innocent recipients may find
themselves thinking how fortunate it is that the generous bank is allowing them to have
the use of other people’s deposits so they can finish getting educated. But those of
us who look behind the bankers’ façade know that the deposit-lending myth has as
little substance as the tooth fairy and is only used to pacify a misinformed public.
THE GIGANTIC CHARADE
In reality, the bank that the government has given the privilege of providing these funds,
like all other licensed banks, just increases the deficit figures in its computer system
to cover the loans, and transfers that into the appropriate bank accounts.
Although there is a widespread misconception still being promulgated by friends of the
banking sector to the contrary, the truth of the matter is that commercial banks cannot
and never have lent their deposits, but instead create new credit out of nothing, limited
only by opportunities and the group concept of what is prudent. That newly created
credit is the figures lent to students, and for which they in effect accept a lifetime
bondage for it. And behind them, the state also stands as a guarantor to the bank.
Also standing over them when they do get to work is their employer who must at his
own administration cost deduct
prescribed amounts from every week’s pay to service the continuing Student Loans.
In effect the employer becomes an unpaid collector of principal and interest for the bank,
as he has also become for the
state. And you can guess how high is the “prudent” limit when there’s
a state guarantee to repay it? The sky’s the limit. Note also that the
favoured bank, like others, does not lend against its assets, but either the assets of the
guarantor or of the borrower, yet the new credit it is allowed to create is treated as its
own – and you risk going to jail if you try to rob a bank of that ownership.
This issue of ownership of what many see as really community credit should also be
put on the table
for public debate. But firstly we should recognise what is involved in the Student
Loans scam, and see how it could and should be handled without giving golden handshakes to
some of the world’s biggest businesses.
For anyone who may have doubt about whether bank loans are creations of new credit, all of
the three Royal Monetary Commission’s reached the same conclusions in different
countries and times, the NZ, the Canadian, and UK (MacMillan) Commissions, and those
reports are still readily accessible.
We know that it is new credit being pumped into the Student Loan scheme, and it is public
knowledge that it is drawing commercial rates of interest, around 7%, compound, so for
those who cannot pay interest or principal it will double its size about every 11 years.
That published figures already say Student Loans are approaching $4 billion
indicates
that if not nipped in the proverbial bud it will escalate like the proverbial pet tiger.
UNNECESSARY USURY IS INDEFENSIBLE
The worst aspect is the immorality of existing arrangements. As the sovereign NZ
Government has its own bank and in past decades has with excellent social results used it
for all sorts of purposes from financing dairy co-operatives, to public works, house
building, and so on, at down to 1% interest, there is no possible question of whether the
Reserve Bank is able to create the necessary credit to use existing physical
resources. And furthermore, it can do it for only a fraction of the existing
costs.
There is even the option, if the Government wanted to use it, of the loans being made
suspensory so that subject to certain conditions qualifying loans could be literally
written off in the future. Such was done extensively after World War II with the 3%
business and farm purchase loans.
The existing situation, in which the government has the demonstrated ability to create and
lend students whatever credit is necessary to continue their education at only a fraction
of the commercial costs, sets a benchmark. Against this, for the government to
instead legislatively force the students into the arms of wealthy debt merchants to fleece
them mercilessly for years or decades is not too distant from the state as a heartless
parent selling its children into financial slavery.
While the N.Z. public is watching the Education Minister run for cover, Minister of
Finance Cullen and Prime Minister Clark should be asked when and how the existing “scam”
is going to be terminated and replaced by something honest and favouring kiwis rather than
wealthy foreign bankers?
The Student Loans Scam in New Zealand is reprinted
from Electronz - The NZ Monetary Reform
Weekly E-zine