There is no consistent banking policy for the 120 federal credit programs, as Michael notes. But no matter what standard is applied, their value is questionable.
For instance, some programs do require borrowers to demonstrate credit-worthiness. But if the borrowers are credit-worthy . . . they should be able to get capital in the private sector. Why should the government back these loans?
Other programs require that the borrowers show that they can’t get credit elsewhere — the Small Business Administration does this, for example. In that case, why should the government expose taxpayers to risk ordinary, risk-tolerant investors aren’t interested in?
Adding insult to injury, studying these government loans — at least the corporate ones – often reveals that parties borrowing under the pretense that they can’t get credit elsewhere can indeed get it elsewhere.
I’ve noted over and over again that many of the beneficiaries of the Ex-Im Bank were both credit-worthy and capable of getting private-sector capital, rendering them theoretically ineligible for help under Ex-Im’s charter. The same is true of green-energy loans and pretty much all other loan programs the federal government runs.
Its lending programs sprawl across 30 agencies at a dozen Cabinet departments, with no one responsible for managing its overall portfolio, evaluating its performance or worrying about its risks. The closest it gets to coordination is an overwhelmed group of four midlevel Office of Management and Budget employees known as “the credit crew.” They’re literally “non-essential” employees—they were sent home during the 2013 government shutdown—and they’re now down to three, because their leader is on loan to the Department of Housing and Urban Development. When I suggested to OMB officials that the crew seemed understaffed to oversee a credit portfolio 25 percent larger than JPMorgan Chase’s, someone pointed out that it’s hiring an intern.
He also touches on the public-choice reasoning behind why these bad programs are so durable, something I’ve also touched on a number of times:
One reason for the bank’s explosive growth is old-fashioned special-interest politics, as beneficiaries of credit programs—the real estate industry, for-profit schools, the farm lobby, small-business groups, even shipbuilders—push aggressively to grow them. A Washington money spigot, once opened, is almost never turned off. Since fishermen in the Northwest Halibut/Sablefish and Alaska King Crab fisheries got their own $24 million loan program, it’s a good bet that nobody’s paid closer attention to it on Capitol Hill than their lobbyists. But the federal credit boom has just as much to do with arcane budget politics. Critics believe the unorthodox government accounting system for credit programs dramatically understates their costs, encouraging Congress to spend hundreds of billions of dollars in expected savings that might never materialize. It’s not just a theoretical risk: The FHA has already received a series of unpublicized quasi-bailouts since the financial crisis, amounting to more than the $45 billion government bailout the corporate Bank of America received in 2008. Some critics believe student loans, budgeted as a government moneymaker, could be heading for a far worse fiscal disaster.
Trillions of dollars in liability for taxpayers, decisions driven by special interests, no one in charge . . . what coud evergowrong?
The federal government is playing banker with taxpayers’ money on a massive scale. It’s risky, it’s unfair and it’s, in many cases, thoroughly corrupt. Losses are often hidden by obscure accounting techniques, and beneficiaries sometimes resort to fraud to keep the goodies coming. The employees of the agencies extending the loans can be corrupted too, as we’ve recently seen happening at the Ex-Im Bank.
In other words, while the beneficiaries may like the programs and the perks they are getting through these loans, it’s hard to see how this benefits the economy overall, or the taxpayer.
Lastly, Politico has a nice table about the wide range of sectors of the economy that are getting huge federal largesse: