Inside Financial Services

More Taxpayer Losses, But Not Many Long-Term Jobs

That's what the White House's planned "Infrastructure Bank" will produce. Fannie and Freddie redux.

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Based on hearing what President Obama had to say in Detroit on Monday, I fear that a key part of the jobs plan he’s going to lay out to Congress tomorrow night will be the establishment of an government-sponsored “infrastructure bank” to finance public works improvements. Ugh. It will be a bad, bad idea.

Put aside, but just for a moment, the fact that the federal government has a long track record of not being able to put capital to use in ways that are especially fruitful. If you doubt it, recall that “bridge to nowhere” in Alaska a few years back or, more recently, the government’s big push into subprime mortgage lending. Or the money wasted in the 2009 stimulus. Let’s just say these tend to not be high-multiplier, productivity-enhancing investments.

Worse, though, the scheme would amount to a bit of an accounting scam designed to hide the true amount of money the government might ultimately be on the hook for once the bank got going. Here’s how it would work: the federal government would invest a relatively modest amount of money–$30 billion or so is the number being mentioned-that would serve as the core capital for a separate, public-private partnership that could then go lever up and lend just like any other bank. Call it a government-sponsored enterprise! The problem, of course, is that no matter how emphatic lawmakers and regulators will insist to the contrary, the debt taken on by the new entity would implicitly have the full faith and credit of the federal government-the same way Fannie’s and Freddie’s debt did. And we all know how that ended. (Gratuitous, bonus piece of investment advice, should the bank ever get up and running: whatever you do, don’t go near the preferreds.)

All of which is to say this would be a way for the federal government to issue hundreds of billions of dollars in new debt that wouldn’t show up on the federal balance sheet. The White House knows that if it proposed to fund the bank via direct borrowing that would cause an overt increase in the deficit, the plan would go nowhere. So it’s resorting to the same sort of off-balance sheet financing that was an early symptom of the credit crackup.

And what do you think the credit quality will be of the loans the bank writes? For a hint, look at what happened to the original GSEs. As part of the government’s big home-ownership push, Fannie and Freddie were basically directed by Congress to guarantee subprime mortgages that we now know were doomed the moment they were written. There’s no reason to imagine that the infrastructure bank’s lending won’t be driven by politics in the same way. I don’t think I’m going out on a limb if I say the losses figure to be vast. And they will come straight out of taxpayers’ pockets.

In the meantime, there’s plenty of lending capacity available from private lenders. BloombergBusinessweek reported last month that the nation’s depositories have nearly a trillion dollars in cash on their balance sheets-roughly four times what they had, as a percentage of assets, before the recession. Banks would love a chance to put that cash profitably to work. But would-be borrowers are said to be spooked by all the new regulations-environmental, financial, health-care related, whatever-that the administration has heaped upon them, or threatens to. So small businesses aren’t interested in doing any more borrowing, investing, or hiring than they absolutely have to. If the administration were serious about kick-starting growth and employment, it would forget about dreaming up new pseudo-government bureaucracies, and would ease the burden on the private sector instead, so that companies could get on with the job properly.

What do you think? Let me know!

22 Responses to “More Taxpayer Losses, But Not Many Long-Term Jobs”

  1. Michael Collins

    and anyone who tries to stop it will be labeled “anti job creation”

  2. Finney53

    I do not understand what is happening to us. Corporate America needs to step in and hobble government “business practitioners”.

  3. jsc173

    You’ve gotta believe that this “virus” approach to administering our federal government has got to stop. By “virus” I mean implanting a bureaucracy that will take a supermajority to shut down in the future (or be impossible to shut down) and will continue to create (government) jobs and increase the power wielded by the administration at the expense of the economy and the creation of real jobs in the private sector. Can’t say we weren’t warned.

  4. david miller

    – RIGHT ON AS USUAL——MORE MONEY IN BANKS THENEVER BEFORE—FEW LOANS THAT ”BANK EXAMINERS” WOULD APPROVE—CONGRESS WOUL HAVE PRIVATE BANK TO MAKE LOANS BACK HOME TO HIGH RISK-NON BANKABLE BORROWERS—WOULD BEE CONSTNATLY PUSHING REGS AS THEY DID

  5. bethyname

    Until the baboon is voted out you can expect more of the same pandering to the great unwashed.

  6. Ken Greenberg

    Tom,
    Right on. If the White House really wants to stimulate the economy they should staff up the US Patent Office and stop raiding it. Henry Nothhaft had some great suggestions in WSJ last week, including that one. He noted that if the USPTO could clear the 1.2 million backlogged patent apps, it would create up to 2.25 million jobs by 2014! Wow. And, lets not forget Sarbs-Oxley. Exempt businesses under half a billion. This was supposed to protect us from the big banks – they already complied. It’s killing IPOs and job growth. Throw Dodd-Frank out with it.

    And, let’s bring back the 100% tax deduction on meals and entertainment – even if they want to sunset it in two years – guaranteed it will boost the hospitality and food industry. Likewise, let’s bring back the deduction for ALL interest – credit cards, personal and auto loans – and sales tax. THAT will stimulate consumer demand and lead to more hiring.

  7. Concerned Banker

    This sounds just like the Government Debacle from the 30″s. Its not the governments responsibility to provide what appears to be another return to trying to stop the recession. Let the large and small businesses do the creating and get out of the way. I just finished reading the “Forgotten Man”. Roosevelt tried it then and Omama is trying it now. It just won’t work and our families will end up paying for it.

  8. FOGROVER

    It’s not about “would-be borrowers … spooked by all the new regulations–environmental, financial, health-care related, whatever–that the administration has heaped upon them, or threatens to” Tom. It’s about lack of demand for products and services in an uncertain economy. Negative psychology feeds upon itself. And bank lending standards have gone up. (I would gladly refinance my primary residence but can’t because of depressed property values and lack of comparables.) The way out of this mess is to foster consumer optimism!

  9. FSDA

    Wasn’t $30 billion the government’s investment in the small business investment fund? Not only hasn’t that fund turned out not to be “shovel ready”, but was entirely more government legerdemain, saying that it was for one purpose (small business lending) when it really had a political purpose (a reward to the Independent Community Bankers Association for its support of Dodd-Frank).

    By the way ICBA, how has Dodd-Frank worked out for your membership?

  10. FSDA

    Who’s going to regulate the new “Infrastructure Bank”? The FHFA? The Fed? The CFPB? How can we tell if Obama has thought this through?

  11. c smith

    “…these tend to not be high-multiplier, productivity-enhancing investments.”

    Of course they aren’t, because they aren’t meant to be. Any investment which enhances productivity BY DEFINITION reduces labor input and REDUCES employment in the short run, freeing up resources for further investment. Jobs shouldn’t be the goal. Creating jobs is easy as long as you’re willing to waste resources. The trick is to create jobs and generate economic PROFIT at the same time. The private economy is very good at this, if given the freedom to function as it should. Government simply cannot do it.

  12. Bill

    Yeah, let’s crap down the President’s throat at every opportunity he tries to stimulate the economy. Where are the rest of you private sector hiring managers? Mostly busy not hiring anyone and shipping jobs out of the country.

    He’s making an effort, which is a lot more than Tom or anyone else in the banking industry who are busy laying off as many people as humanly possible.

  13. Lion

    The bigger the pile of money, the larger the pack of jackals. OBAMA moving money to his friends….in very large amounts…hidden from public view. Wealth re-distribution from the working class to the lying, cheating, stealing class. Wake up and see the thief!

  14. Mitch Rapp

    Just what we need – another Loans for losers program.

    What are they teaching in schools nowadays. Hasn’t anyone heard or Skin in the Game?

    WE have a Congress and an Administration loaded with incompetents – who have never held real jobs, never had to perform and never met a payroll.

    WE need some tar and feathers to get back to reality, it would appear

  15. C. A.

    When will you stop saying that the stimulus didn’t work? Do you not understand that the economy would be in much worse shape without it? Contrary to what you pass off as fact, the government has a long track record of infrastructure improvements handled quite well – spending to pull the country out of the Depression and the interstate highway system to name a couple. Stop beating the drums for tax cuts; if they worked so well, how come the economy tanked after Bush’s two massive tax cuts. Why didn’t they stimulate the “job creators”?

  16. C. A.

    When will you stop saying that the stimulus didn’t work? Do you not understand that the economy would be in much worse shape without it? Contrary to what you pass off as fact, the government has a long track record of infrastructure improvements handled quite well – spending to pull the country out of the Depression and the interstate highway system to name a couple. Stop beating the drums for tax cuts; if they worked so well, how come the economy tanked after Bush’s two massive tax cuts. Why didn’t they stimulate the “job creators”?

  17. Dr. Roberts

    “Put aside, but just for a moment, the fact that the federal government has a long track record of not being able to put capital to use in ways that are especially fruitful”…..one of the most ignorant comments this observer has ever read on this site. Do you drive to work Tom? Perhaps you use the Interstate Highway System. Ask residents of Appalachia what they think of the TVA. Ever heard of Hoover Dam Tom? The list goes on and on. Please, let’s not forget history when presenting our current views.

  18. Subprime Govt

    Lets don’t forget. Below is NY Times article from 1999. Live and learn.

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets – including the New York metropolitan region – will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates – anywhere from three to four percentage points higher than conventional loans.

    ”Fannie Mae has expanded home ownership for millions of families in the 1990′s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional l

  19. SGR

    Why are we supposed to give credit to Obama for “trying” something? When someone is “trying” something that is patently idiotic, you don’t applaud the effort. You try to make sure the dumb idea doesn’t have the opportunity to do more damage than this train wreck of an administration has already done.
    And, yeah, sure… private businesses are laying off workers because that’s the American dream. We grow companies in order to enjoy firing people. Stop blaming companies for doing the last thing they want to do, but the very thing they need to do to survive in this toxic business environment.

  20. MiddleClassFedUp

    And remember, those government employees that will work in the “infrastructure bank” will get a defined benefit pension plan, and premium subsidies heath care when they retire!

  21. MiddleClassFedUp

    And remember, those government employees that will work in the “infrastructure bank” will get a defined benefit pension plan, and premium subsidies heath care when they retire!

  22. MiddleClassFedUp

    And remember, those government employees that will work in the “infrastructure bank” will get a defined benefit pension plan, and premium subsidies heath care when they retire!

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