Direct Loans vs. Guaranteed Loans

Let’s pretend for a moment that you’re a bank.  You make money by loaning people money and them paying you back with interest.    So what stops you from loaning money to whomever wants it?  The risk is that the person won’t be able to pay you back.  Let’s say though, that some guy comes into your bank and asks for a loan, and tells you that his rich uncle will co-sign the loan.  You then do a credit-check of this uncle and find out that he has unlimited money.  That means no risk to you.  What a deal!  Just one question though, why doesn’t that rich uncle just loan the guy the money?

That is my question when the government does so-called “Loan Guarantees”.  Often when the fed wants to encourage a private enterprise they will guarantee their loans so that banks will lend them money.  The banks take the deal – there’ is no risk to them after all.  The company then does their thing.  If they succeed the bank makes money and every body is happy – including the fed which owes no money.  If they fail, the bank is happy because they still get their money, but the tax payer is left with the bill.  If it’s something worth doing, like researching a new technology, encouraging business in a poor area, or developing a natural resource, I don’t mind risking government money on it for the greater good, but why give the banks a free ride?

If the congress thinks something is worth doing and banks won’t loan the money, why not loan the federal money directly from our government?  Worse case scenario is that the enterprise fails and the fed is on the hook for the same amount as if it was a guaranteed loan, but if it succeeds, then the taxpayer can actually make money on the deal.  This seems like an obvious benefit to the fed and banks no longer get a free ride.

So why doesn’t congress loan money directly?  My guess is that it’s all about perceptions over the budget.  If congress guarantees a loan in 2010, it doesn’t cost anything for the 2010 budget.  In fact, it may never show up on the budget if the enterprise is successful.  However, if the enterprise fails, it won’t show up as a cost to the budget until years later.  Probably long after the president that approved it is out of office, the congressman that voted for it are now Senators, and the Senators that voted for it are dead or retired.  In other words, the people that agreed to guarantee it will be long gone by the time there’s a default and it shows up on the U.S. budget.

So why not stop loan guarantees and start doing more direct lending.  There is a recent precedent where this was successful and the federal government came out ahead.  It was with student loans.  For a long time our government would guarantee student loans to get banks to loan to students for college.  The public benefit is obvious – a better educated work force is a more productive work force.  However, starting last year, the government quit guaranteeing those loans and started loaning directly to students.  Now, according to the non-partisan Congressional Budget Office, the fed is on its way towards saving billions of dollars a year thanks to this decision.

So, why not expand this to all services.  For the last month I’ve been reading about all sorts of programs where the government guarantees loans.  I think it’s time for politicians to quit hiding our obligations in the short term, and save us some money in the long run.

Banks come first, then the poor, then maybe the economy

As I mentioned before the giant increase in the 2009 budget deficit that everybody is acting so freaked out about was  caused by a 400$  billion loss in tax revenue as well as an almost 562$ billion increase  in outlays.  Where did all that money go?  A lot of that extra spending was made directly as a result of the Great Recession.  Of the 562$ billion extra spending, 397$ billion of it was a direct result of the recession and  most of that was just bailing out the banks.  Here’s how I arrived at these numbers.

The 397$ billion doesn’t include money meant to stimulate the economy.  I included all the money spent to bailout the banks as well as unemployment and increases in domestic spending on the poor.    While I didn’t include most stimulus money, however, I did include unemployment and other income security programs that may have been extended as part of the American Recovery and Reinvestment Act.

So here’s how it all broke down(The individual accounts can be found here):  (Numbers are in millions of dollars)

  1. TARP – 151252
  2. GSE Bailout(FannieFreddie) – 86830
  3. FDICNCUA – 3813
  4. First time buyer Mortgage Credit – 9386
  5. Medicaid – 49498
  6. Unemployment – 77545
  7. Food and Nutrition – 18407

I know I’ve talked about the spending increases in2009 before and  already graphed the biggest increases.  This time I wanted to break down the spending a little differently to demonstrate a couple different points.  First, the graph:

2009 Spending Increases
(Click on the Chart of a larger view)

So two points.  First of all, after adding up TARP, the GSE bailouts, and the increase in Deposit insurance it adds up to be more than the increased costs of Unemployment, Food and Nutrition(food for the poor), and Medicaid.  So that means of that extra 562$ billion that our government spent in 2009, significantly more of it went to help the bankers and “investors”-the ones that helped get us into this mess, than those that are now poor or unemployed because of the recession.  That’s messed up!

Now to the second point.  Look how little actual stimulus spending actually occurred in 2009 over 2008.  Once you take out all the spending to bail out the banks and the money that’s meant to keep people afloat, that only leaves 165$ billion left in the budget plus another 9.3$ billion for the housing credit.  That’s assuming all of it when to stimulus spending and not just natural increase of government cost.   That remaining money was spread out amongst various departments and block grants to states and local governments.  I’m not sure how that bit of money was meant to jump start a 14 trillion dollar economy that is in it’s worse recession in over 70 years.  I think I’m starting to understand why the recovery is starting to sputter and why so many people are calling for a “jobs bill.”  The first stimulus just wasn’t enough.

Vice President Joe Biden once said in a debate, “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”  If that is true here’s what our government valued in 2009:

  1. Rescue the Bankers and investors.
  2. Help the Unemployedpoor barely get by
  3. Stimulate the Economy

I don’t know about you, but that’s perverse values.  Hopefully Fiscal Year 2010 will look a bit better.