22 Mar 2014

How the Banks are extorting money from the UK's Students and Taxpayers

When I was young and went to study at Oxford University,  my tuition fees were paid for by the local education authority (West Sussex in the UK), and I got a grant that while not huge, meant that I could get by doing a bit of work in the summer vacations. I remember that my parents (who were reasonably well off) had to contribute £50 a year to my grant. I left university with NO debts whatsoever.

How things have changed. When my first son Jonathan went to study at York University in 2001, fees were £1000 a year. When my second son Kieran went to study at Warwick University in 2006, the fees has tripled to £3000 year. Fortunately, we don't have a third son who wants to go to University in the UK now - because fees tripled yet again in 2013 to £9000.

We managed to cover the fees for our two sons ourselves so they were both able to leave university debt free too (it's useful to have parents that are pretty rich in this life).

But for the vast majority of students who want to study in the UK now, they will end up after a 3 year course with something like £53,000 of debt. 

Where did the money come from to make those loans? Well, the student loan scheme is currently run by the Government, which currently lends something like £10 billion a year to the next generation of students. Those students are then supposed to pay back the money (with interest at inflation + 2%) once they start earning £22000 a year.

However, there are reports in today's newspapers saying that the whole scheme is falling completely to pieces. Ex-students are simply unable to pay off their debts, and the default rate has sky-rocketted. An editorial in today's Guardian says this:
"New official forecasts suggest that the write-off costs have reached 45% of the £10bn in student loans paid out each year – a figure perilously close to the 48.6% (some say 47%) at which the arithmetic moves from ominous into fatal. At this point, the tripling of tuition fees will fail to produce any more money than would have accrued had the figure been left at the £3,000 where the coalition found it in 2010."
There is a Report published by the House of Commons library in January 2014 that includes the following graph of the growth in publicly held student debt. It reached £46.6 billion at the end of the 2012-13 year.

Earlier reports had already revealed that more than £5 billion is currently owed by people who can't be traced, and that total student debt is expected to increase to £200 billion by 2042.

The insanity of the current system is made even more obvious when you realise that the government doesn't actually have the £10 billion a year that it is lending to students to go to university. In the end, that money has come from money creation by commercial banks. As the Bank of England admitted last week (and as the Guardian courageously revealed on Tuesday), commercial banks create money out of thin air when they make loans. And there is no better place to make loans that to triple A rated governments. Banks are supposed to keep their risk-weighted assets at around 10% of their capital reserves. But as the Basel II and III regulations specify, lending to AAA rated governements has a Risk-Weighting of 0%. That means that if a commercial bank can find a government to take on debt, they can create as much money as they like - even with no capital to back it up. (Incidentally, that's part of the reason why Banks can have thousands of times more assets than they have capital - lending to governements doesn't count).

So, to find the £10 billion a year, the government can go to the commercial banking system, who will generate as much money as the government wants - with no risk attached (for the banks!) - and they can then charge tax payers what ever they can get in interest (currently 2.37%). That's for lending the government money that the banks don't actually have in their possesion.

The government then lends the £10 billion to students. But then, when the students can't afford to pay the money back, they default. And the tax-payer picks up the tab. Not the banks who created the money (read debt) to make those loans.

This has to be the biggest scam out there. Tax payers and students take all the risk, but the banking system walks away with 2.34% for abusing its ability to create money.

How about the Bank of England directly financing student tuition fees with sovereign money creation as proposed by Positive Money? Now that would be a real investment for the nation's future. Far more intelligent than throwing £375 billion of QE at the banking sector and praying.

At the Positive Money conference at the beginning of March, it was notable that the average age of the 400 or more people there was 50-ish. There were surprisingly few students there. Where were you all?

Come on you students! Start protesting!! Don't just sit there loading yourselves up with debt provided by banks who create "money" out of thin air to allow you to study at university and then force you to work effectively as their slaves for the rest of your lives. Do something about it now!

No comments:

Post a Comment