In declaring the president’s plan to cancel student loan debt unconstitutional, the U.S. Supreme Court did not rule on the morality or advisability of forgiving the loans. While I am personally a strong proponent of people fulfilling their contractual obligations, there is a logical inconsistency at work in Washington. I can forgive student loan borrowers who wonder why their poor college funding/studies decisions aren’t treated similarly as big companies that foolishly ignore FDIC insurance limits.
The FDIC mistakenly released a document that revealed private information about the largest depositors at the failed Silicon Valley Bank (SVB). These companies included venture capital firm Sequoia Capital ($1 billion of SVB deposits in excess of FDIC insurance limits), Chinese tech company Kanzhun ($903 million), cryptocurrency company Circle Internet Financial ($3.3 billion), and Roku ($487 million.) These companies all knew the FDIC insurance limits, yet failed to manage their exposure. In total, the SVB failure cost the FDIC insurance fund $16 billion – of which $13.3 billion went to the bank’s 10 largest depositors. That is $16 billion that should have been borne by the people who made the poor decisions: the depositors. Instead, it will ultimately end up being indirectly borne by all bank customers, via new FDIC fees assessed on the banks that weren’t managed into bankruptcy.
Because those depositors were bailed out, all depositors now expect to be made whole if their bank fails. Maybe the government will do that; maybe it won’t. But logical consistency would require that all depositors be held harmless in all future bank failures, which simply encourages depositors to ignore the stated insurance limits.
Just like somehow forgiving $1.6 trillion in student loan debt will encourage all future students to expect forgiveness of their student loan debt.
But if we can bail out a Chinese tech company, why not do the same for 43 million student loan borrowers? That’s a tough explanation. And why not the 105 million Americans with auto loans? Or the US consumers with a trillion dollars in credit card debt? Wouldn’t people’s lives be better if they didn’t have to pay 24% interest on their restaurant loans?
For the record, I don’t think we should bail out student loan borrowers. They borrowed money with the presumed intent and clear expectation that they would repay their loans. But neither should we bail out stupid or careless bank depositors. Or people who buy too much house or vacation.
But if we use the FDIC bailout of foolish depositors as rationale for cancelling student loan debt, we ought to use the FDIC model in paying for the student loan bailout: recoup the cost by assessing a fee on all colleges and universities.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.