General Discussion
In reply to the discussion: Students Across the Nation are Planning Something Unprecedented to End Student Debt Forever [View all]Jim Lane
(11,175 posts)Let's leave Bob for a moment and consider Ann, who takes an $8K loan and wants cash. The bank debits Notes Held and credits Cash. Ann then skips town. The cash is gone and the note the bank holds is worthless. Ann is up by $8K so the bank must have lost $8K. If the bank booked the anticipated interest income when the loan was made, then it should now also take a charge to earnings to recognize that that income won't be received, but whatever it does with the anticipated income, it also has a loss of $8K, representing the principal that won't be repaid.
Now back to Bob. He took his $8K loan in the form of a deposit to his checking account. Then he wrote a check to a car dealership, which deposited the check to its account at the same bank. Now suppose Bob jumps in his new car and he skips town. Again the bank has made a bad loan and is stuck holding a worthless note.
You seem to be saying that in Bob's case, because there was no cash involved, the bank suffers no loss except for the forgone interest income. I still don't see how that can be the case. The bank is still looking at a liability in the form of the car dealership's checking account, which has now grown by $8K. Even if Bob didn't want cash, the dealership might, or it might write a check on that account to the guy who fixed its broken air conditioner, and he then needs cash to buy groceries.
Your answer seems to be that "canceling that asset by government fiat isn't substantially different than canceling it by transfers of liabilities from Bob's employer's bank." I think it's hugely different. As I understand it, Bob's bank and his employer's bank each have an account at the Fed. The employer's direct deposit means that the Fed transfers the money from the employer's bank's account to Bob's bank's account. The employer's bank reduces the employer's account by that amount, and Bob's bank increases his account by that amount. Thus, the Fed and both banks all come out even. If the note is just canceled by fiat, however, then Bob's bank doesn't get the benefit of an increase to its account at the Fed.
I appreciate your taking the time to try to explain what you're saying, but I'm still not seeing it. The bank makes a loan, receives a note, and eventually, if all goes well, receives the principal plus the interest in exchange for surrendering the note. If all does not go well (borrower skips town, or government decrees the loan to be canceled), then the bank receives neither principal nor interest. In the latter case the bank is worse off. Hence, if the U.S. Government passed a law canceling all student loans and declaring it wouldn't pay a dime on the ones that it had guaranteed, and if the law survived the inevitable court challenge, then the lending banks would collectively be out a trillion dollars or so (not just the lost opportunity to earn interest).