Federal credit programs have nearly tripled in size over the past decade, fueled by an explosion of sweetheart deals for special interests.
In an op-ed for Politico Magazine released Monday, Michael Grunwald investigated “America’s largest bank” — the federal government — which “currently has a portfolio of more than $3 trillion in loans,” about 25 percent more than the country’s largest private lender, JPMorgan Chase.
The majority of those loans are extended to homeowners and students, but the rest are awarded to “a motley collection” of small and large businesses, politically favored industries and even foreign governments. (RELATED: Economist Richard Vedder: Federal Student Loans ‘Fuel Academic Arms Race’)
Unlike private banks, the government has no consistent lending policy. Instead, it has about 120 different credit programs with separate objectives and guidelines, and oversight spread across 30 agencies at 12 cabinet departments.
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According to Grunwald, these “virtually unsupervised federal credit programs are now the fastest-growing chunk of the United States government,” nearly tripling in value over the last 10 years.
One factor in that growth was the reduced political support for deficits brought on by the Great Recession, which made credit programs more appealing because “they help politicians dole out money without looking like they’re spending.”
Unfortunately, Grunwald says, “A Washington money spigot, once opened, is almost never turned off,” because the beneficiaries of credit programs have strong incentives to support their continuation or expansion. (RELATED: Senate Democrats Propose Student Loan Bailouts)
Supporters of federal credit programs often point out that they are “profitable on paper,” and contend that they benefit the nation as a whole by boosting economic activity, but Grunwald counters that those advantages are largely illusory.
The Export-Import Bank, for instance, defended itself against efforts to close it down “by highlighting its 0.2 percent default rate,” which Grunwald says “raises the question of why a government entity is needed to make such low-risk loans to corporate behemoths like Boeing and General Electric.”
Similarly, the Department of Agriculture is known for making loans to rural electric cooperatives and telecoms — Grunwald describes them as “boondoggles that subsidize rural ratepayers” —that are “so safe they’re sometimes described internally as ‘profit centers.'” (RELATED: Google-Owned Solar Company Requests $540 Million Bailout to Help Pay $1.6 Billion Loan)
Moreover, “Critics believe the unorthodox government accounting system for credit programs dramatically understates their costs,” leading to numerous “quasi-bailouts” that have cost more taxpayer dollars since the beginning of the recession than the $45 billion government bailout of Bank of America in 2008.
Perhaps the most well publicized example is the $1.7 billion bailout of the Federal Housing Authority in 2013, caused by defaults on mortgages the agency had guaranteed during the Great Recession. (RELATED: Congressional Approval Not Required: Federal Housing Agency to Take $1.7 Billion Bailout)
The FHA bailout was described as the first of its kind, but Douglas Criscitello, the former chief financial officer at HUD, told Grunwald that, “in fact the FHA had been receiving silent taxpayer-funded bailouts throughout President Obama’s first term,” and that those bailouts had gone unnoticed because “the accounting obfuscates the costs.”
The $1.7 billion figure does not include “tens of billions of additional dollars in unpublicized budget re-estimates after FHA mortgage losses repeatedly turned out worse than expected.” Such adjustments do not require congressional approval, or even a public announcement, but Grunwald estimates they have reduced profit forecasts by at least $73 billion since the housing collapse.
“The agencies have a natural inclination to make their credit programs look cheap,” Grunwald points out, which aligns their interests nicely with the members of Congress and special interests who favor “generosity over fiscal responsibility.” (RELATED: Biden’s ‘Good Friend’, Donor Receives $20 Million Federal Loan to Open Luxury Car Dealership in Ukraine)
Several recent reports from the Congressional Budget Office suggest that if the government were to use “fair-value” accounting to assess the market value of federal loans the way a private bank would, the profits projected by many credit programs would instead be scored as costs.
A 2012 CBO review of 38 credit programs scored as profitable, “found 33 of them would be money-losers under fair-value accounting,” and that the projected earnings for all federal lending programs in 2013 would decrease from a $45 billion profit to an $11 billion loss.
Another CBO report, released in May, claims “student loans and FHA guarantees would be scored as costing $118 billion through 2024” under fair-value rules, rather than producing $198 billion in budget savings, as currently projected.
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