01:00 AM EST on Wednesday, March 8, 2006

SAN DIEGO -- Economist Adam Smith was not a proponent of free markets, any more than Isaac Newton was a proponent of gravity. Both of these groundbreaking scientists simply told us about these seminal forces, and left us to figure out that we would be pretty stupid to ignore them.

If Adam Smith were here today and looked around the world, he would be happy to know about the power of this theory: Free markets create free people; free people create prosperity. Pretty simple.

And because his theory is practiced in the United States more than anywhere else, it cannot be a coincidence that we are also the freest and most prosperous nation.

Reliance on free markets is not a partisan issue, but Republicans are more sympathetic to the teachings of Adam Smith than Democrats are. That is why a recent Republican move to quash competition for student-loan refinancing is so puzzling, and why believers in the benefits of free markets are so upset about this.

Republican legislation to kill competition for the 30 million people who hold student loans did not get that much attention in December. Most people have been focused on how Congress raised interest rates on these federally guaranteed loans. But this action to restrict competition is potentially more far-reaching, and more damaging to students, and to efforts to reduce the federal budget deficit.

It happened two ways: First, Congress maintained a law called the Single Holder Rule, which says that once you have your student loan from one company, you cannot change companies. Second, once you refinance the loan, you cannot do so again, no matter if a different company offers better rates, longer terms or better service.

Earlier versions of the law outlawed the Single Holder Rule, but in the wee, dark hours of a cold December morning, that provision mysteriously disappeared -- and, along with it, any hope of competition, better rates and better service for the 30 million student-loan holders. Imagine if someone tried to get away with that in the home-mortgage market. They would either go out of business or go to jail for price-fixing -- or both.

Then Congress went one step further. Led by Congressman John Boehner (R.-Ohio), then head of the House Education Committee and now House majority leader, Congress took the single most anti-competitive provision in all of American law since the wage and price controls in the early '70s, and made it worse. Congress effectively banned anyone from locking in low rates for longer terms.

The people at the largest student lender, Sallie Mae, were ecstatic. They had beaten their competition -- not in the marketplace but in the lobbying place.

Sallie Mae used to be a quasi-governmental agency, issuing the bonds that guarantee the student loans. Then, a few years ago, Sallie Mae's chief executive figured out that if he could get rid of its obligations to the government but keep the rules that banned others from competing with it, the company would have a license to print money.

This is how the experts say it has turned out, with Fortune magazine calling Sallie Mae the second most profitable company in America. Its chief executive alone has received salary and bonuses of more than $200 million over the last five years!

Adam Smith did not have a problem with profits. Just the opposite: They are a signal for more competition and lower prices. But Smith warned that when government creates barriers to competition, monopolistic profits result and consumers lose.

What we have today in the market for student-loan refinancing is a gross monopoly.

Columnist Dick Morris calls the anti-refinancing scheme an "obnoxious rip-off." Terry Savage, the financial columnist of TheStreet.com, says there is "no way" that borrowers should support this plan. The New York Times calls it "Robbing Joe College to Pay Sallie Mae." The Times Union, of Albany, N.Y., calls plans to outlaw refinancing a "student-loan shame."

Fortune magazine documented how Sallie Mae, the largest student-loan lender, depends on Boehner to protect it from competition to ensure its record results. And The Chronicle of Higher Education said that the legislation is designed to force Sallie Mae's competitors out of the market.

With all the talk about reforms in Congress to deal with the influence of lobbyists, no better example of this need could be cited than here. You see, Congressman Boehner has been the single largest recipient of campaign donations from Sallie Mae, receiving over $100,000!

What a shame that he sold out college students so cheaply. Using government to quash competition was a trick Adam Smith was very familiar with. So he would not be surprised that Sallie Mae has unleashed an army of lobbyists to put its competition out of business. He would be surprised, however, that we let them get away with it.

Ken Moser is chairman of the Adam Smith of California Society (kenjmoser@abac.com).