Scandal & Common Sense: Priority Lending in the US

The press would have us believe that the government is throwing our taxpayer dollars into scandalous and spurious ventures. News about the Solyndra and Beacon bankruptcies has thrown DOE into the hotseat. The failure of Open Range has thrust USDA and rural broadband programs into view and most recently, HUD is being called to task for throwing hundreds of millions of dollars into affordable housing programs that have never been finished (and in some cases, never even started).

Two important points apply to all three of these “scandals”. First, the overall track record of these government agencies is actually decent. USDA claims total loan guarantee write-offs in the range of 1% and DOE boasts low default numbers as well. HUD doesn’t have good statistics at hand, but it seems likely that total write-offs are a bit higher than in the other two agencies, but reasonable given the overall size of the housing portfolio (not to mention the crisis that has affected this sector in recent years). Given the scope for conflict of interest and limited mandate/budget for supervision and management, these programs do a reasonable job of managing tax-payer resources. The real question is, however, are they achieving the results that were intended through these financing programs?

Which brings me to my second point. Why are these various non-financial government agencies pursuing financial activities in the first place? Isn’t there a fundamental conflict between DOE’s role as a regulator and policy-making organization versus the fiduciary responsibilities of a creditor? Does it make sense that USDA administers rural broadband financing because agriculture happens in rural areas? And how many decades of HUD scandals will it take before the agency begins to collect hard data on what’s working & what isn’t?

Setting aside the muddled question of politics, there is only one answer – US government agencies provide financing for priorities in their sectors because there is no alternative. We don’t have a domestic development bank. If you want to build low-income housing in the third world, you can turn to OPIC. If you want to export your goods and services, you can look to Eximbank for support. Small businesses have access to a variety of programs through the SBA. If, however, you want to finance domestic infrastructure, including infrastructure related to telecommunications, energy, transportation, housing and education, you’re pretty much on your own. Projects with high profit potential can (sometimes) attract commercial financing, although that’s been harder since the global financial crisis. Projects that offer modest financial returns but potentially significant long-term returns to people and planet are stuck between a rock and a hard place. Programs like the DOE loan guarantee program, or the USDA rural broadband guarantee program are meant to fill this gap – which they do, but not necessarily as effectively as possible.

Let’s stop pretending that the land of the free and home of the brave is a perfectly developed economy, and let’s stop asking government agencies to be creditors as well as regulators and policy-makers. The US needs a domestic development bank – let’s call it “Home Bank” – that can leverage taxpayer dollars to encourage private financing of quasi public goods. A single financial intermediary that covers energy (especially renewables), housing, telecommunications, infrastructure and perhaps social innovation as well would provide better control and coordination of financing activities. Collecting and analyzing performance data would also be easier, since we’d be looking at metrics on a single portfolio instead of comparing diverse numbers from a range of portfolios scattered across different non-financial actors.

I’ve worked in economic development my entire career, focused on emerging markets. Almost every country I’ve ever worked in had some type of domestic development bank, agency or financing window that centralized access to finance and allocated resources based on appropriate, policy-related criteria. Sure, there’s corruption and waste in many of those countries, but recognizing that something is difficult to do well is no reason not to try at all. The United States of America is an amazing country, but we’re not perfect. Instead of protecting a status quo that’s working only for the 1%, let’s aim higher and look for ways to use our resources more effectively.

We need Home Bank now. Don’t limit it to infrastructure – instead, let’s consider this the domestic equivalent of Eximbank. Any business trying to finance a market-driven policy-mandated outcome (like universal rural broadband access) should be able to turn to a single, well-managed, domestic development finance organization. We encourage and fund this type of activity in other countries through the World Bank, the International Finance Corporation, the Inter-American Development Bank (and other regional development banks) and even through the Millenium Challenge Corporation. Let’s give us much attention to funding progress at home as well.


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