Rethinking Federal Credit: Managing Loan and Loan Guarantee Programs - PowerPoint PPT Presentation

Rethinking Federal Credit: Managing Loan and Loan Guarantee Programs in a Changing Environment Thursday, May 17, 2018

Changing Economic and Policy Environments for the World’s Largest Financial Institution Doug Criscitello , Executive Director, MIT Golub Center for Finance and Policy Kyle Shohfi , Research Associate, MIT Golub Center for Finance and Policy 2

B Y EXTENDING CREDIT & PROVIDING INSURANCE , THE U.S. GOVERNMENT FUNCTIONS AS T HE W ORLD ’ S LA LARG RGES EST F INANCIAL I NSTITUTION A SSETS TS OR OR I NSURED RED O BLIGATI NS IGATIONS 20 15 Trillions of $ 10 5 2.563 2.256 1.931 1.864 0.907 0 FEDERAL JPMORGAN BANK OF WELLS FARGO CITIGROUP GOLDMAN GOVERNMENT CHASE AMERICA SACHS

D IRECT L OANS & L OAN G UARANTIES I NSURANCE & O THER S UPPORT R EGULATION & O VERSIGHT FSOC

World’s Largest Financial Institution - Direct Loans & Loan Guaranties 5

Historical perspective (thru 1950s) • Federal credit origins: post-World War I – Farm loans refinanced – Loans to railroads returned to private control after wartime nationalization • Expansion during ‘30s to counter depression & moderate impact – Loans to farmers, businesses & homeowners • NBER (Saulnier, 1958), Federal Lending & Loan Insurance – Comprehensive look at fed credit during 1950s – Purpose: counteract depression, fill gaps, respond to emergencies, give preferential treatment – Key Qs: • Do credit programs reallocate resources to promote the general welfare & achieve beneficial outcomes? • What are the economic impacts? • How best to organize agencies to deliver programs?

Historical perspective (thru 1950s)

Historical perspective (1960s) • New programs created & others expanded • JFK Presidential Committee on Federal Credit Programs (1962-63) – Reduce/remove credit gaps – gov’t support disappears over time – Subsidize credit – if valid need remains, no reasonable expectation of gov’t withdrawing • President’s Commission on Budgeting Concepts (1967) – Basis for Congressional Budget Act (1974) • Created CBO • Later amended to include FCRA (1990) 9

Historical perspective (1960s) Face Value of Federal Credit Outstanding Dollars in billions 180 160 Combined 140 120 Loan Guarantees 100 80 60 Direct Loans 40 20 0 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

Historical perspective (1970s-1980s) • OMB – Reagan-era OMB questioned need for some credit programs – Options for credit budgeting & reform • CBO focus – Some of its earliest work focused on size & growth of credit programs across government • Attempts to quantify performance of guaranteed loans • Concerns about poor data & definitional differences regarding delinquency/default – Testimony • Rivlin (1981): Guarantee programs shifting from actuarially sound insurance programs to programs providing subsidy; need to assess costs • Penner (1986): Budgetary treatment of federal credit assistance fails to depict costs accurately • Reischauer (1990): Need to reform credit budgeting “ Rationing in Markets with Imperfect Information,” (Stiglitz, Weiss 1981) • – No special role for gov’ t credit in perfect market – But credit markets are not perfect – asymmetric info between borrowers & lenders: – Beneficial for gov’ t to fill credit gap when it leads to socially desirable outcomes where value exceeds taxpayer costs

Economic rationale for government credit support Perfect market for loans Credit gap: no market-clearing interest rate supply (actual) supply supply in perfect market Interest Interest rate rate demand demand credit gap Quantity of loans Quantity of loans • Higher rates => lower borrower quality

Historical perspective (1970s-1980s) Face Value of Federal Credit Outstanding (2018 Dollars) Dollars in trillions 1.8 1.6 Combined 1.4 1.2 Loan Guarantees 1.0 0.8 Direct Loans 0.6 0.4 0.2 0.0 1970 1975 1980 1985

Historical perspective (1990s-2000s) Improvements in gov’t financial management FCRA enacted & effective for FY92 focused on or applied • Implementation focus during 1990s & into early 2000s to credit programs Cash Management and Improvement Act Amendments of Accountability of Tax 1992 Dollars Act of 2002 (ATD) 2000 2010 1990 The Federal Credit Government Management Federal Information Reform Act of Reform Act of 1994 Security Management Act (GMRA) 1990 (FCRA) of 2002 Chief Financial Officer Act (CFO Debt Collection Improvement Act of Improper Payments Act) 1996 (DCIA) Elimination and Recovery Act of 2010 Information Technology Federal Debt Collection and Management Reform Act of 1996 Procedures Act of 1990 (Clinger-Cohen Act) Government Performance and Federal Financial Management Result Act of 1993 Improvement Act of 1996 (FFMIA) Act of 1982 (FMFIA) 16

Historical perspective (1990s-2000s) Federal Participation Rate in Credit Market 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *Outstanding federal direct loans & guarantees divided by total liabilities of domestic nonfinancial sector

Historical perspective (2007-2010) Post-crisis Growth Dollars in billions 2500 2000 1500 Energy SBA USDA 1000 VA ED HUD 500 0 2007 2010 2007 2010 Outstandings Commitments

Historical perspective (2010-present) • Today, it is clear that government loan programs to finance the acquisition of homes, businesses, farms, and college educations have become a well established part of U.S. credit marketplace – Two departments with portfolios exceeding $1 trillion – Others managing significantly larger portfolios than in past • Questions – Have we receded from concerns about role of government in credit marketplace? – Has the government’s role post -financial crisis, combined with FCRA budgetary treatment, created complacency in addressing appropriate role of government in credit markets? – How will advances in data & technology be used to assess & revise programs? 20

Bringing it all together Face Value of Federal Credit Outstanding (2018 Dollars) Dollars in trillions 4.4 4.2 4.0 3.8 3.6 3.4 3.2 Combined 3.0 2.8 2.6 Loan Guarantees 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 Direct Loans 0.6 0.4 0.2 0.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Bringing it all together Federal Credit Obligations/Commitments (2018 Dollars) Dollars in trillions 1.4 100% 90% 1.2 80% 1.0 70% 60% 0.8 50% 0.6 40% 30% 0.4 20% 0.2 10% 0.0 0% Dollars Percent of Credit Market

Looking forward: President’s FY19 Budget Federal Loans Outstanding (Direct & Guaranteed) 5,000,000 $4.34 Trillion 4,500,000 4,000,000 3,500,000 2017 $ (in millions) 3,000,000 Other 2,500,000 Business Education 2,000,000 Housing 1,500,000 1,000,000 500,000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019