More Taxpayer Losses, But Not Many Long-Term Jobs

by: Matt Stichnoth

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 a 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.