The Government is Fast Becoming an Investment Bank. Is That What We Want (Part I)

Several years ago Ezra Klein wryly called the U.S. Government “an insurance conglomerate protected by a large, standing army.” If you look at the major budget drivers, he’s right. The federal government spends vast sums of money on insurance-like items like Medicare, Medicaid and Social Security, which make up more than 40 percent of the budget, and on the military, which makes up about 23 percent of the budget.

The problem with Klein’s observation is that the budget is increasingly becoming a poor indicator of how Washington is actually spending our money. Of course, that’s not the way it should be. The U.S. Constitution says, “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time.”

It’s a quaint concept, but one that our federal government continues to play along with according to the letter, but certainly not the spirit, of the law. Every year the president submits his budget request to Congress. That document, which has become more a political screed than an honest accounting of the budget, is talked about on cable news for a week and then promptly set aside. Then the House and Senate Appropriations Committees sometimes meet, draft 12 appropriations bills relating to subject matter under their committee’s jurisdiction, take them up for a vote, and then send them to the president to sign. In recent years the Senate couldn’t pass one appropriations bill, much less 12, so an omnibus bill—which crams funding for the entire government into one piece of legislation—is generally passed to keep the government open and operating.

But the omnibus—as opaque as it already is—still doesn’t come close to telling the full story. Behind the façade of budget documents and appropriations bills exists a shadow bank with $3 trillion worth of loans and no one really responsible for its portfolio. Michael Grunwald reports for POLITICO:

That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one.

That bank, of course, is the United States government—the real bank of America—and it’s unlike any other bank.

For starters, its goal is not profit, although it is profitable on paper, and its loans are supposed to help its borrowers rather than its shareholders, better known as taxpayers. Its lending programs sprawl across 30 agencies at a dozen Cabinet departments, with no one responsible for managing its overall portfolio, evaluating its performance or worrying about its risks. The closest it gets to coordination is an overwhelmed group of four midlevel Office of Management and Budget employees known as “the credit crew.”

The federal government’s free-wheeling, unsupervised loan portfolio has nearly tripled in size over the last decade, operating outside of government regulations and market pressures despite its operators being ill-suited to determine the credit-worthiness of borrowers or the projected return of a project. And yet, outside a few stories on loans-gone-bust like Solyndra, it garners almost no Congressional attention and even less press coverage.

That’s astounding considering the various credit operations have default rates that would make private banks run for the hills. But it’s also not surprising given the questionable accounting practices used by the federal government.

“The government accounting is unfathomable. I never saw anything like it as a banker,” Gary Perlin, a former adviser to the Obama Treasury told Grunwald. “It’s just: ‘Gee, we thought it would cost X, but guess what, it cost more. Oh, well.”

One of those “oh, wells” was $73 billion in “re-estimates” – the amount of money a loan overshot its projected budget in a given year – of Federal Housing Administration losses after the housing crisis.

That’s an enormous sum of money, even by Washington’s standards, that deserves more than a shrug of the shoulders and an “oops.” But even the “small” dollar loans in the government’s portfolio deserve some serious scrutiny. The story mentions Farm Credit loans to help a billionaire’s wife launch a winery and an American Idol producer to build an equestrian center. Both went bust, but nobody seemed to bat an eye.

(Please continue to Part II)