Wednesday, April 29, 2009

Government Loan Guarantees Are Not New

When Goldman announced that it was raising capital to pay back its TARP money, there was a palpable outrage in the blogosphere. The main theme was that TARP money wasn't the only form of government aid Goldman received, so paying it back shouldn't free Goldman from the TARP restrictions (e.g., executive compensation, H1B visas). Josh Marshall said "the idea that simply paying back the TARP money means [Goldman is] back on their own is really a crock." Matt Yglesias said that it was "farcical" to think that "if Goldman Sachs repays its TARP money that it’s no longer a ward of the state." The main forms of government aid the critics focused on were the AIG bailout and the FDIC guarantee on new bond issues. Regarding the AIG bailout, for the eight millionth time, Goldman had hedged its exposure to AIG. The fact that AIG paid Goldman $13 billion after it was bailed out doesn't say anything about how much Goldman would have collected on its hedges had AIG been allowed to fail. This is a silly criticism. As for the FDIC guarantee, this was important, but it's not like a government guarantee on private sector loans is some new privilege available only to Wall Street banks. The SBA guarantees thousands of small business loans every year through the 7(a) loan program (and the guarantee was recently upped to 90%), but I don't hear any outrage over the small businesses in the 7(a) program benefiting from "government largesse." The government also guarantees well over $70 billion in student loans every year through the Federal Family Education Loan Program (FFELP), which includes Stafford loans, Perkins loans, and PLUS loans. Yet in contrast to TARP's restriction on the use of H1B visas, FFELP loans don't require beneficiaries to work for U.S. companies when they get out of school or anything like that. But again, I hear no outrage over the FFELP program—probably in part because a substantial portion of the blogosphere benefited from the "government largesse" of the FFELP program (I know I did). So let's not kid ourselves—the government guarantees private sector loans all the time. If you want to start demanding that government guarantees come with tough restrictions attached, that's fine. But you better be willing to follow that argument to its logical conclusion.

17 comments:

Steve Waldman said...

EoC -- Agreed that government guarantees loans all the time. This always represents both a form of subsidy and an intervention into the economy.

But usually that is discussed pretty openly when the programs are debated and approved by Congress. TGLP is a much larger scale program than most of the loan programs, and yet it was not and would not have been approved by Congress (except perhaps in a TARP-like pass-this-thing-or-we're-all-gonna-die atmosphere).

There is nothing illogical or inconsistent about wanting government fiscal exposures, subsidies, and distorting interventions to be considered and approved by Congress concomitant with a deliberate public debate. TGLP is a scandal, SBA loans are not, and there's no hypocrisy in saying so.

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Economics of Contempt said...

Steve,

Clearly, you're too young to remember the extremely lengthy debate over the FDICIA back in 1991. Sadly, I am not. There was plenty of debate over whether the least-cost requirement should apply always and everywhere, or whether there should be an exception for worst-case scenarios. Congress explicitly adopted the infamous "systemic risk exception," which purposely grants the FDIC very broad powers in narrow circumstances. The SRE wasn't slipped in at the 11th hour or anything. The fact that the FDIC's broad powers under the SRE haven't been debated by Congress recently doesn't mean that the FDIC's use of those powers is in any way undemocratic.

The TGLP is also, by its nature, temporary, whereas the 7(a) program and the FFELP programs are permanent. The TGLP ends in June. By contrast, I doubt either one of us will live long enough to see the end of 7(a) loans or the FFELP.

I definitely don't share your enthusiasm for Congressional involvement. A few years of working on the Hill will cure you of any such earnest idealism. Believe me, it's not a pretty picture.

Anonymous said...

A few points (some for at least the fourth time)

1) Just because GS says they are 'hedged' with AIG doesn't make it so.

2) It has been repeatedly explained to you that PAUG CDS on ABS cannot be collateralized unless AIG puts up the full face amount.

3) I suspect that the total dollar amount of loans guaranteed by the SBA in its fifty + years of existence is less than the amount of the $120 billion guarantee provided to a single bank

4) Applicants for student loans or SBA loans rarely are given acess to the Discount window or have their applications expdited over the course of weekend.

Steve Waldman said...

EoC — My enthusiasm for Congressional involvement isn't because I think they necessarily do a good job of anything. I'm very aware of the sausage-making aspect of politics. However, it's important to note that the alternative policy factories are also imperfect. There is no technocracy I would trust any more than Congress to "fix the financial system", though I mistrust Congress very much.

The reason I want Congressional involvement is because it is the only point in the policymaking process where public opinions has some shot of creating binding constraints for officials determined, for whatever reason, to do something the public would not abide. I think that -- veto power against positive policy that motivates adamant popular disapproval, is the least we must insist on if we still want the name democracy at all. The taxes that are implicated by bank guarantees and the like are taxpayer dollars, the Constitution places supervision of those dollars in the most populist body of government, and for good reason. Taxes drawn for purposes whose worthiness is not only in doubt, but for purposes the public actively opposes, deeply undermine democratic legitimacy.

Your discussion of the systemic risk exception I think supports rather than conflicts with my insistence on Congressional involvement. The SRE is a huge loophold in FDICIA, I know. That it was widely debated and perceived to be such a huge loophole means that even the populist house was persuaded (yes, in part perhaps corruptly, but there had to be at least a degree of public acquiescence) that such a loophold was necessary. And when the Congress created the loophole, they embedded it in a context of severe constraints -- the requirement of a double-checked formal finding of systemic risk with respect to a particular institution -- which implies a medium-term death sentence for the institution so stigmatized.

In all the muck we've seen over the past year, Treasury and FDIC have not had the balls to formally invoke the SRE! I wish that they would, name and shame. In my view, FDICIA is an astonishing example of Congress done good, of reasonable compromises made but strong protections included. Would that we had the courage to abide by that law.

Steve Waldman said...

err... should have previewed. sorry for the grammatical and punctuation errors in the previous post... i hope the main points are clear...

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