American taxpayers have been funding the bad decisions of top US exporters since 1934!
The Export-Import bank (EX-IM Bank) of the United States is, essentially, a self-sustaining agency that provides loans and credit guarantees for exporters’ products being shipped and sold overseas. It was started in 1934 through an Executive Order by President Franklin D. Roosevelt to assist with the failed economy of the Great Depression (www.exim.gov). The EX-IM bank was an ambitious attempt to stimulate exports by providing loans and backing for the exporting companies within the United States. This bank was founded under the principles of economic security and stability under the Keynesian School of Economics but has evolved into a loan-machine for top companies; its fate is now tied to the national security of the United States.
1934 also saw the dramatic decrease of bank reserve requirements and a spike in the FED’s interest rate; this was all an aggressive attempt to stimulate economic growth by providing an incentive to lend in the economy. What happened was quite the opposite; the seemingly improving economy received the wrong attention at the wrong time, triggering a deflationary spiral, and slipping America into a deeper depression than it had originally experienced (Bartlett, 2009).
This is a graph showing the 2014 general ledger of the EX-IM Bank’s loan recipients. There is a clear disconnect in record keeping and a lack of austerity in the bookkeeping process. They have reported several figures on their website and to the Congressional Budget Office, but were unable to provide documentation for many of these loans and their recipients. (Source:http://mercatus.org/publication/biggest-beneficiaries-ex-im-bank).
Two different bills are being proposed in the House of Representative in regards to the abolishment or restructuring of the EX-IM Bank. Unfortunately, neither of them has made it through the House of Representatives as of today’s date. H.R.2263, also called the “Export-Import Bank Termination Act” was introduced to the 113th Congress in the Senate and House of Representatives, calling for the abolishment of the bank. The bill states that the government must freeze all future expected loans, restructure the terms of existing loans, re-staffing the members of the bank into the Department of the Treasury, and allowing the Inspector General to dissolve relationships and agreements as he sees fit, within the confines of the law. This bill calls for the total abolishment of the bank and spells out, oin detail, how it will succeed in doing so.
The second bill: S.819, calls for restructuring, not abolishment, and was introduced in the first session of the 114th Congress. This bill is a little more realistic, in that it calls for a review of fraud controls, the implementation of a Risk Officer that reports to an independent auditor, and an increase in loss reserves. It also shows an ambitious proposal to eliminate discrimination in the industries the bank funds and an increase in small business lending. As responsible as this bill sounds, reading through it doesn’t provide any realistic accountability measures or addressing the economic implications of reforming the lending practices. Abolishment of the bank may cause an investment vacuum; meaning that where there is a demand for this type of service and the bank is abolished, it is inevitable that someone else will step in to provide the exact same service. With that, an entirely new set of problems may arise; sometimes the Devil we know is better than the Devil we don’t know. But like all government funding programs, once it is created it is next to impossible to kill, so maybe reforming the bank is the only realistic proposal in the current political climate?
Nobody of consequence even paid attention to the EX-IM Bank until the Congressional Budget Office (CBO) published that, with new accounting techniques called Fair-Value Accounting, the bank was showing a $200 million loss based on future projections, as opposed to the $675 million profit that was reported for 2014 (www.exim.gov). $200 million dollars may seem like a lot of money but when the top borrower (Boeing: refer to above graph) is responsible for $8.3 billion and the total lending balance is $27.4 billion, this is only a loss of 0.73% as compared to the reported profit of 2.5%. This information only came to light only after reliable sources determining an accounting loss as well as the unpopular lending practices of the bank, it’s no wonder there has been a call to abolish the bank and its unsavory lending practices. The EX-IM Bank website continues to advertise that over 164,000 domestic jobs are supported by the bank’s activities. Considering the US economy, whose 2014 GDP was $17.4 trillion (World Bank) added 215,000 jobs in the month of July alone and 3,116,000 (Bureau of Labor Statistics) jobs in 2014; 164,000 jobs is a drop of water in the ocean compared to any serious contribution to the state of the economy.
The EX-IM Bank exists today to provide loans and guarantees for exporters that couldn’t otherwise find funding in the private sector. In 1934, we desperately needed economic stimulation with exporters and it’s understandable why Roosevelt felt compelled to create this bank. However, the principles of free market enterprise suggest that if nobody in the private sector will fund a project, maybe it’s not a lucrative investment. Allowing the markets to adjust naturally is the backbone of the Classical School of Economics, created by Adam Smith, which fundamentally worked up until about 1929. Five years later, we adapt untested principles by a man named John Maynard Keynes and he is a celebrity overnight. I’m not undermining Keynes’ brilliance or contribution to the world; I’m saying that the EX-IM Bank was founded with untested principles that were successful in the short-run, but highly volatile and unpredictable in the long-run. In response to Adam Smith’s paradigm stating that over time, markets will adjust; Keynes’ response was that over time, we’re all dead. Meaning that long-run faith in markets adjusting to their natural levels has little traction when people are hungry today. Adam Smith’s school omitted behavior economics entirely, assuming that people will always produce what demand dictates and had no concept of credit; Keynes micro-managed the economy until every aspect of the markets were saturated with fiscal and monetary policy.
The role of the government is not to grow wealth, create jobs, manipulate markets, or determine which industries and corporations get a pass on bad investments through handshake agreements; the role of the government is to protect freedoms and provide for the common good. The idea of this bank existing in the first place is unethical, unconstitutional, and terrible economics. Boeing is threatening to take its business out of the United States if the EX-IM Bank is abolished (Forbes magazine). This makes politicians nervous and is arguably a detriment to national security; however, in the long run, the system will adjust or they will come to agreement through other means. Empty promises and shallow threats by politicians and industry leaders mixed with fear and uncertainty are not reason enough to keep a bank as corrupt, un-American, and unsustainable as the EX-IM bank in power.