Little Fannie Mae: The Export Import Bank of the United States
By: Steven Russell
Two weeks ago, members in the House of Representatives submitted a bill to end the government-sponsored Export-Import Bank of the United States, which provides around $10 to $20 billion in subsidies to American exporters a year. Supporters of the bank oppose the bill on the grounds that the bank is self-financing, creates jobs, and increases exports, but Americans should be wary. The Export-Import Bank should be shut down because of its ever-growing cost to taxpayers.
The Export-Import Bank is like a smaller version of Fannie Mae or Freddie Mac focused on exports. It provides a number of subsidies in the form of generous loans, insurance, and guarantees to American exporters and their foreign customers in order to help American companies. Although the bank is privately run, the federal government backs all of its loans. If the bank ever fails, taxpayer dollars are must bail it out.
Despite its own optimistic claims, the financial future of the bank is questionable. The Export-Import Bank reported $800 million in profit last year. However, the Export-Import Bank’s accounting methods are outdated causing the bank to overstate its profits significantly according to the Congressional Budget Office. In fact, a recent study by Massachusetts Institute of Technology found that the Export-Import Bank is actually losing $200 million a year when one uses a newer “fair-value” accounting analysis.
And the losses are only going to get worse. The reason the bank is losing money is no secret. The bank provides loans to exporters that would not otherwise be available through the private sector. The private sector is not providing these loans for a reason; these loans are too risky. Companies are unlikely to pay them back. Indeed, the Export-Import Bank has been bailed out by taxpayers in the past. In 1987 the bank received $3 billion in taxpayer dollars from the federal government to keep it afloat. Due to the inherent riskiness of the bank’s loans, it is only a matter of time before it happens again.
The chance of a bailout is even more likely given recent political intrusion into the Export-Import Bank’s decision-making. After a lawsuit brought by a number of environmental groups, the Export-Import Bank now is required to issue at least 10% of its credit towards renewable energy exports and energy-efficient technologies. Although the bank has failed to meet these requirements and has not been punished for doing so, the trend is alarming. Millions of taxpayer dollars must guarantee projects even too risky for the Export-Import Bank’s guidelines to satisfy an arbitrary standard. The ruling only encourages more Solyndra fiascos, which, the Export-Import Bank had a large hand in financing.
The lesson from the bankruptcy of Fannie Mae and Freddie Mac is clear. Government-chartered banks that provide loans when the private sector is unwilling to do so are inherently flawed. Private institutions, not the government, should finance America’s exports. If companies fail to pay back their loans, the losses are rightly borne by shareholders rather than the American taxpayer.
Like this post? Chip in $5 to AFP.