Federal Reserve Chair Janet Yellen gave a mostly “nothingburger” testimony to the House on Wednesday. She’s a dodgeball master, and she’ll likely avoid any real blows again Thursday when she goes before the Senate. Yellen even ducked straightforward questions about whether she would stay on for another term as chair if President Trump asked her. Her reply: “I really haven’t had to give further thought at this point to this question.”
The hearing was a snooze, except for one moment.
Rep. Jeb Hensarling, a Republican, demanded to know whether the Federal Reserve would ever buy student loans. Yes, THOSE student loans that total over $1.4 trillion and are owed by 44 million Americans.
It was one of the rare moments when Yellen looked stumped. Here's the full exchange between the two.
Rep. Hensarling: “It is my understanding that the Fed can legally purchase student debt guaranteed by the Federal government and municipal debt that matures in less than six months. Is that your understanding as well?”
Chair Yellen: “I’m not sure about student debt. We’re able to purchase Treasury and Agency Securities.”
Hensarling: “Has the FOMC ever discussed the possibility of either purchasing student debt or municipal debt?”
Yellen: “Not to the best of my knowledge.”
Yellen left it up in the air, but a former Fed official told The Washington Post that it would be legal for the Fed to buy student debt ... as long as the debt is “fully guaranteed by a federal agency.”
Guess what? A lot of student debt meets that requirement. The $1.4 trillion in student debt in the U.S. is broken up into three buckets: About $1 trillion is owned by the Department of Education, about $300 billion is private debt that is guaranteed by the federal government and the rest is private debt without government backing.
“The Fed can buy from anyone,” says Joseph Gagnon, a former associate director of the Fed's Monetary Affairs Division. He's now a senior fellow at the Peterson Institute for International Economics. “If the Department of Education fully guarantees the loans, the Fed can buy them.”
Hensarling was right: It's legal for the Fed to buy a lot of student debt. But why the fuss? Yellen basically said no one at the Fed is planning to do it. The reality is the Fed is trying to shrink its $4.5 trillion balance sheet right now, not go on a new shopping spree.
But there may be a deeper reason for Hensarling probing Yellen on this: He wants to know if the Fed has any plans to forgive student loans. If the Fed bought up a loan, it could conceivably tell college grads they no longer have to pay.
It sounds outlandish, but Green Party candidate Jill Stein actually proposed this on the 2016 campaign trail. She pitched the idea that the Fed should buy as much student loan debt as possible and then forgive it all.
“The Federal Reserve basically cancels the debt, it doesn’t cost taxpayers one penny,” Stein argued last year. She tried to compare it with the Fed's $4.5 trillion quantitative easing program.
Massive outcry followed — from across the political spectrum. As many pointed out, including TV host John Oliver, Stein totally misunderstood what happened with QE. The Fed has been making a lot of money on that program because the entities that took out the loans in the first place still had to pay up. The loans weren't forgiven.
Hensarling compared Stein's plan to communism.
“If we are not careful, we may wake up to find our central bankers have instead become our central planners,” he said, gazing at Yellen.
Some on the left also pointed out that if the goal is to actually help poor people, Stein’s proposal is terrible policy. Slate Moneybox columnist Jordan Weismann noted last year that doing something like that would “spend a whole lot of money while doing a very poor job targeting the people who need help.” Student loan debt is growing, but most borrowers are still able to pay the money back. It's a small chunk of people who are really struggling and most of them took out very large sums of money and/or went to for-profit colleges. Bailing everyone out doesn't make a ton of sense.
The whole notion of the Fed buying student loans seemed dead ... until Hensarling brought it up this week. It appears that he wants to make sure Yellen — or any future Fed chair after her — doesn’t give it any further consideration.