Our deluded local leaders have just announced that interest rates for student loans will be reduced - to 0.

It's another indication that the 'Keynesians" in control are getting worried that 'the music could stop' and the ones 'without a chair' could be them. The last thing they would want the people to do is reduce spending and save a dollar.

Tim Kelly is a columnist and policy advisor at the Future of Freedom Foundation in Fairfax, Virginia.

Putting the LIBOR Scandal in Context
by Tim Kelly, August 2, 2012

There has been much talk of the LIBOR scandal in the financial news and even the mainstream press. The LIBOR, or the London Interbank Offered Rate, is set by a committee of banks sending their estimates of the rate at which they could borrow from another bank. The banks on the committee are among the largest in the world; they include Bank of America, Citibank, and J.P. Morgan. The trade association discards the highest and lowest rates and averages the rest to arrive at the official LIBOR. This rate is then published by financial news services.

According to news reports, banks on the committee lied about rates for at least six years (2005-2010). This deception boosted the banks’ profits by lowering their borrowing costs on LIBOR-based contracts. It also presented a false picture of a healthy banking sector to the public, because a higher interbank lending rate is considered a sign of distress.

The arcane nature of this scandal may cause many people to tune it out. But once you get past the technical jargon, the fraud is easy to identify. In “fixing” the LIBOR, the banks were robbing depositors of interest income and defrauding the market as a whole.

Since the fraud is so obvious, shouldn’t we expect prosecutors to move fast in bringing the perpetrators to justice?

No, we should not.

The banks were not the only beneficiaries of the fixed LIBOR; debtors and all those with variable-rate loans also benefited by having lower borrowing costs.

At one level, the banks were also cheating themselves. After all, a lower LIBOR resulted in lower interest charges on customer loans. But the banks were willing to take that hit in order to spruce up their balance sheets. A higher rate would have exposed large losses and driven down the value of their assets. Moreover, the fixed LIBOR has helped maintain a regime of low interest rates, which has propped up bond prices during a time of exploding government debt.

So it could be argued that the greatest beneficiaries of the LIBOR scandal are the debt-ridden governments, like Uncle Sam.

Consider that interest rates in both the United States and the United Kingdom are below the rate of inflation. And in both countries, the debt-to-GDP ratio is rising. Yet investors continue to purchase bonds issued by those governments, which are paying less than the rate of inflation.

Why?

What is happening here is the bailed-out banks in the United States and the United Kingdom are “bailing out” their benefactors in Washington and London by rigging government bond prices with money provided by the central banks (Federal Reserve and Bank of England) at virtually zero percent. This debt-recycling scheme has the effect of propping up the bond market, which allows these governments to sell their bonds and thus go further into debt.

This collusion between Washington and London was revealed when the public learned soon after the scandal broke that the Federal Reserve had been aware of the LIBOR manipulation and apparently supported it.

Low interest rates keep the game of musical chairs going a little while longer for spendthrift politicians who don’t have the will to impose the large spending cuts necessary to address the huge imbalances their reckless spending has created.

What will they do when the music finally stops? I suppose to the extent they are even aware of how destructive their policies have been, they’re probably betting that retirement or death will come to them before the day of reckoning arrives.

So, what is the effect of this continued borrowing and monetary inflation?

Well, by pushing down interest rates, the Fed and other central banks are papering over their respective governments’ debts. This policy of financial repression punishes savers and encourages more debt and consumption. The deluded Keynesians in charge of fiscal and monetary policy hope more debt-financed consumption will ignite a recovery.

But by piling on more debt, governments are hindering economic recovery; their increased spending is siphoning off scarce capital from the productive (private) sectors of the economy. More debt also means more inflation and higher taxes in the future. This is hardly a pro-growth agenda. Indeed, it’s an agenda of plunder.

Economic growth requires savings to finance capital investments, which yield increases in productivity; and from that we get prosperity. But genuine capital cannot accumulate under a regime of zero interest rates, because people have little or no incentive to save capital. As investor Max Keiser says, “You can’t have capitalism without capital.”

And by manipulating interest rates, the central banks are destroying the capital markets. Sure, they declare an “interest rate,” but it does not reflect economic reality because it is not based on the savings rate. While central bankers have proven more than capable of creating money out of thin air, they have yet to master creating wealth out of thin air.

How can capital be allocated efficiently when you have a monetary politburo like the Fed manipulating the price of that capital? It cannot. What you get is a rigged casino economy where the profits of an elite few are guaranteed, and their losses are covered by the public at large.

Consider that the U.S. economy reportedly grew by 2.2 percent in the first quarter of this year. But most of this “growth” was consumption financed by Americans drawing down their savings. This is not a path leading to recovery. You cannot spend your way into prosperity. How will that level of consumption be maintained when their savings are exhausted?

Well, it won’t.

The nation, indeed, the entire Western world, has been living beyond its means for decades, and the debt levels are no longer sustainable. The federal government is $16 trillion in the red and borrowing more than a trillion dollars a year. This cannot go on forever.

The ugly truth is that consumption needs to drop significantly, and people need to save more. This means consumers need to buy less — much less — and governments need to slash their budgets. Such austerity is anathema to Keynesians, who believe in the “paradox of thrift” and the idea that spending is the key to recovery.

But it is not as if we have a choice in the matter. Austerity will come one way or another. When you borrow and spend too much, eventually you have to spend less, work more, and pay your bills — or default, and then someone else has to pay your bills. Either way, there is a reckoning. This is the recession, and contrary to popular belief, it is a time when the economy actually begins to recover. It’s not a pleasant experience, but you reap what you sow.

Too late for Trudeau, Cretien, Mulroney, John Crow et. al. but it comes down to what I've known since "Six and Five": Inflation is not the enemy.

Sorry if I don't take these goofs seriously.
Pure BS propagated they the crazies.

http://www.fff.org/aboutUs/index.asp

Fast buck. Any sucker will do.

I was under the impression that the LIBOR fixing was more sophisticated than merely lowering rates. Just from what I have heard, I have no sources, the rate was sometimes pushed up and other times down. Since there are $X00 Trillion that are tied to the rate then small changes up or down could result in great fortunes being made.

And even over consumption is not the major problem with artificially low interest rates, it is the distortion to the capital structure. Lower rates suggests to producers that there are plenty of resources to be borrowed for long term projects. Unfortunately there are not enough resources for all entrepreneurs to complete their projects, and the malinvestment must be liquidated during a recession.

I get the impression that the author has a casual understanding of LIBOR and Austrian economic theory. (Not that I am any kind of expert)

All i know is that it is one hell of a ponzie scheme.

Love how since the press conference was held at Holland College that people think this announcement will actually affect those students. In actuality, unless there have been other, drastic changes to the student loan qualifications process, this move will only affect UPEI students. Holland College students still get stuck with the interest on their loans.

Most Holland College students are approved for national loans, it's only when the borrowing need exceeds the national loan limit that you qualify for provincial loans. And the borrowing limit for the national loans is higher than the cost of tuition for most Holland College programs. (At least, that was the official story last August from both the provincial and national loans offices.)

That's even counting the unreported tuition hike at Holland College this year. (Granted, a $250-500 increase per program was announced in May. But weeks later, they changed from a semester based billing system to a course/class based billing. As a result? There's a $900 price difference between the first year tuition from last year compared to this year in my program alone. But still not enough to qualify for a provincial loan.

So not only are Holland College students getting hit with a giant tuition increase across the board, we're still stuck with the interest on our loans. Great to be a UPEI student, I guess.

Well here another one of those conspiracy sites that i visit from time to time. Seems like they are ahead of the MSM. lol They have been tracking the resignations of the bankers for sometime and have compiled a list of them. Seems like in the last year it's been a race to quit the banking system for the bankers.I thought this was a bit crazy but seems like there is truth in there somewhere.Damm conspiracy theorists lol

http://americankabuki.blogspot.ca/p/banker-resignations.html

Don't most student loans also include living expenses?

Yes, however that generally still won't put you above the mark. I was told by the loans officer that even factoring in living expenses, the total amount of the loan would have to be higher.

I'm finding this much harder to swallow after checking out the average full-time tuition at UPEI for one year - $6096. That's the same for an arts degree as it is for a science degree. Seems like Holland College students are getting the shaft, as the average tuition is only about $1000-1500 cheaper.

But Holland College programs are also only one or two years for the most part. So if you take a two year program, it's at least $2730 cheaper than going to UPEI for two years and you'll have your diploma for the vast majority of programs.

Post secondary education costs money. But the good news is, people who complete post secondary education make a lot more money than those that don't.