Thanks to the Atlantic’s new-ish Thread feature in this Notes section, I think you will see the previous items in this ExIm discussion grouped along with this one. Just in case you don’t, here’s the precis: No. 1 is “Idiocracy: It’s Not Just a Movie Any More”; No. 2 is “When Is It Fair to Call a Policy Position Idiotic?”; No. 3 is “Another Thing to Blame the Boomers For?”; and No. 4 is “Complex Facts and Intense Feelings.”
By the way, about No. 4: only one reader ever figured out the actual identity of “the Atlas Shrugged guy” whose writings I quoted extensively back during the 2012 election cycle and who now lives in Alabama (and who never carried out his threat to close his company if Obama got a second term). But yesterday three people immediately wrote to say that they had figured out the real name and location of the profanity-bound West Point grad I quoted recently, prompting me to further vague-up the description of him in the post.
Two reader messages this time. The first is from an ExIm bank critic. He thinks, incorrectly in my view, that there has been no discussion of the substance of how the bank works. But let’s hear some specific criticisms from him:
I encourage you to read his note carefully, since it sums up many of the “serious” as opposed to splenetic critiques of the bank:
I find myself rather surprised that your examination of the ongoing debate regarding the Ex-Im Bank seems to merely focus on the opinions of those concerned regarding the Ex-Im Bank, rather than the mechanics of what the Bank actually does, and whether these functions should be undertaken by a government entity.
One of the chief functions of the Ex-Im Bank, as you are aware, is the insurance of payment to exporters. While this may seem like a relatively low-risk endeavor (only a 0.2% default rate!) the same sort of consideration was given to FHA loans not long ago. Obviously in hindsight we now realize that such insurance exposed the U.S. government to an enormous amount of risk, and now the government has absorbed many hundreds of billions of dollars in losses on defaulted loans.
This same thinking can be extrapolated to the Ex-Im Bank portfolio. [JF note: Yes, sure — if there were anything in its portfolio remotely comparable to the “securitized” but ridiculously valued sub-prime real estate of the early 2000s.] What would happen if just a single large customer of Boeing defaulted on loans totaling several billion dollars? Boeing would be made whole by the Ex-Im Bank at an enormous cost to taxpayers.
Meanwhile the secondary function of the Ex-Im Bank, the origination of loans to foreign purchasers of exports, is fraught with complications as well. While it may seem at first glance to be wholly beneficial to the U.S. economy for a government entity to issue loans to purchasers of exports, this has unintended consequences.
When a foreign airline receives a substantially below-market rate loan to purchase airplanes from Boeing, this is indeed beneficial for Boeing, but what is the effect on U.S. airlines, which directly compete with the foreign entity? As U.S. airlines are unable to access Ex-Im loan rates, their cost of capital is higher than that of the foreign entities, putting U.S. airlines at a competitive disadvantage, one that is solely attributable to the existence of the Ex-Im Bank. [JF note: see if you can find anyone working in the aircraft or airline industries who thinks this is a significant real-world problem. In the first installment, I mentioned the gap between economics-textbook situations and the operations of the real world.]
Aside from the anti-competitive aspects of the Ex-Im Bank and the accompanying market distortions, we are left puzzled as to why such loans could or would not be offered by private entities. General Electric, a massive international corporation, has an in-house financing arm, G.E. Capital, that amounts to more than half of the corporation's revenue, a sum of many billions of dollars. Yet G.E. Capital is apparently unable or unwilling to perform the financing and insurance functions of the Ex-Im Bank, despite the origination and guarantee of similar loans being a core, commonplace occurrence for the business, and such business being apparently quite profitable for the Ex-Im Bank.
Why would G.E. Capital not want to compete in such a lucrative, profitable field that would seemingly complement existing business? Obviously the answer is that the Ex-Im Bank's loans and guarantees are priced significantly below market rates, and that the Ex-Im Bank is willing to bear a much greater risk than private entities would be comfortable with at a given price point, given that the Ex-Im Bank has the ultimate backstop on defaults, which private entities do not have.
The conclusion to be drawn [JF note: the passive voice is our enemy. What the reader means is, “The conclusion I draw from this is...”] from this is that the Ex-Im Bank is performing a dangerous function for which the risks and market distorting effects have not been properly considered. The past performance of the Bank should not be considered predictive of future results, as the financial condition of foreign entities has become increasingly perilous in recent years.
The two entities most in favor of national trade finance agencies, the E.U. and China, now sit on far more precarious financial footing than in the past, and defaults have become increasingly likely. The time to end the Ex-Im Bank is before taxpayers are hit with crippling defaults, all for the purpose of ensuring that Boeing and General Electric bear no risk in exporting goods.
OK, that is a fair sample of the reasonable, non-ad-hominem criticism of the ExIm bank. Judge for yourself. On my side I am sounding a little judgmental, because I have considered such theoretical points for decades, since my own days as a graduate student in economics, and I don’t find them matching the actual world.
But, you don’t have to listen to me. I give you Robert Rackleff, a former ExIm bank official (and a friend and colleague of mine from back in the Carter administration days). Two years ago he heard a very similar “horrors! this is mercantilism!” analysis from a Washington think tank. You can click here to read the whole thing. Two points of relevance to the preceding discussion:
Cost to taxpayers. How big a burden, really, is ExIm? Rackleff answers:
Ex-Im finances its operations from fees and interest from customers and receives no appropriations of taxpayer funds... Ex–Im borrows from the Treasury, paying the same interest rate that money center banks pay the Treasury when they borrow.
Ex-Im returns more to the Treasury than it borrows. It is a “negative subsidy program,” which the GAO defines as “those in which the present value of estimated collections is expected to exceed the present value of estimated payments.”
Ex-Im transferred $1.1 billion in excess earnings (also known as profits) to the Treasury in fiscal year 2012 and the first quarter of 2013.
Exposure to risks, of the sort the previous reader mentions:
[Another critic] raise alarms about risks of defaults on bad loans, but cites no evidence that this is bound to happen. She fails to acknowledge that Ex-Im’s very low default rates (0.26 percent as of July 2013) could be the result of prudent management by Ex-Im staff and directors.
This prudence is deeply imbedded in its policies and procedures, which include the following.
• Ex-Im authorizes financing only when there is a “reasonable assurance of repayment” determined by rigorous due diligence by a staff with a proven record of success.
• Ex-Im finances no more than 85 percent of a transaction, requires risk-based “exposure fees” and, when advised, additional collateral.
• Once they disburse the funds, staff update a transaction’s risk rating at least annually after assessing an obligor’s capacity to repay, the value of pledged collateral, ability to weather adverse market changes, and on-site visits....
• Fiscal year 2012’s default rate was only 0.34 percent of its active portfolio. (It was 0.26 percent in the most recent quarter ending June 30, 2013.) That reflects a steady decline of defaults in recent years, and was significantly less than 2006’s default rate of 1.6 percent.
Much more to read. We’ll see if any of this makes its way into the Congressional “debate.”