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Climate Progress

Major Analysis: Federal Loans And Loan Guarantees Have A Huge Benefit But A Low And Predicatable Cost

the low and predictable cost of federal loans

by John Griffith and Richard Caperton

The U.S. government is arguably the largest and most influential financial institution in the world, with about $2.7 trillion outstanding in loans and loan guarantees. Among other things, these federal credit programs help college students afford tuition, first-time homebuyers access affordable mortgages, and budding small businesses get the capital they need to expand.

In these and many other cases, the private sector will simply not lend to certain borrowers or will lend only under unaffordable or unmanageable conditions. That’s why we rely on federal credit programs: The U.S. government can bear certain risks that the private sector cannot to achieve certain public goals such as increasing the global competitiveness of our workforce, returning stability to the U.S. housing market, and adding jobs through business expansion.

These programs typically run at very low cost to taxpayers. On average, every $1 allocated to loan and guarantee programs generates more than $99 of economic activity from individuals, businesses, nonprofits, and state and local governments, according to our analysis.

But in the wake of certain widely publicized credit blunders, most notably this past summer’s bankruptcy announcement from solar company Solyndra LLC, some have called into question Washington’s ability to manage financial risk. Conservative critics contend that the government is incapable of accurately pricing risk, and that political pressure encourages government agencies to routinely underestimate the risk to taxpayers when extending credit.

Government underpricing of risk is a convenient theory for free-market ideologues but it runs contrary to the overwhelming evidence.

Our review of federal government credit programs back to 1992 shows that on average the government is quite accurate in its risk pricing. In fact, the majority of government credit programs cost less than originally estimated, not more. Specifically, we found that:

  • Based on initial estimates over the past 20 years, the government expected its credit programs to cost taxpayers 79 cents for every $100 loaned or guaranteed. Based on recently updated data, those cost predictions were reasonably accurate but slightly underestimated. The current budgetary impact of these programs is about 94 cents per $100 loaned or guaranteed.
  • There’s little evidence that credit programs are biased toward underpricing risk. In fact, a little more than half of all nonemergency federal credit programs will cost the government less than what they are expected to over the life of the program.
  • The remainder is accounted for by the losses suffered by the Federal Housing Administration on loans made in 2008 during the peak of the housing crisis. Excluding that book of loans, all nonemergency federal credit programs cost slightly less than expected.

Conservative critics often portray a world in which government bureaucrats haphazardly issue loans and loan guarantees without considering taxpayer exposure to risk. That’s simply not the case. This issue brief explains how the government prices credit risk in the federal budget, how well those cost estimates have reflected reality over the years, and why the government is in a particularly good position to assume certain types of risk.

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Security

Obama Announces Measures To Counter Iranian ‘Electronic Curtain’ Against Free Flow Of Information

Following on Secretary of State Hillary Clinton’s message for the Iranian New Year, or Noruz, President Obama released his own video to the Iranian people today. At the end of the message, Obama told Iranians in Farsi, “Eideh shoma mobarak,” the equivalent of “happy holidays.” But the message was not all pleasantries: Obama also focused on the suppression of the free flow of information in Iran, and announced steps to counter it.

Obama initially listed some heartening interactions between Iranians and Americans — such as the best foreign language film Oscar for the Iranian movie A Separation. He continued that Iranians and Americans both use the same tools on the internet to communicate, but that Iran’s increasingly repressive government hinders the free flow of information:

OBAMA: Because of the actions of the Iranian regime, an ‘Electronic Curtain’ has fallen around Iran, a barrier that stops the free flow of information and ideas into the country, and denies the rest of the world the benefit of interacting with the iranian people who have so much to offer…

Even as we’ve imposed sanctions on the Iranian government, today my administration is issuing new guidelines to make it easier for American businesses to provide software and services into Iran that will make it easier for Iranian people to use the internet.

Watch the video:

Indeed, the Iranian government cracks down on satellite dishes (somewhat futilely) and jams signals by international broadcasters over U.N. objections.

Amid the increasingly severe internet restrictions of the Electronic Curtain, the Obama administration today released new Treasury Department guidelines removing some of the ambiguities that hindered American software producers from allowing their products to be used in Iran. In a blog post, Deputy National Security Adviser Ben Rhodes expanded on the new guidelines and wrote:

Today we are taking another step, by making it easier for Iranian citizens to get the software and services they need to connect with the rest of the world through modern communications methods. The U.S. Office of Foreign Asset Control (OFAC) today issued guidance that will facilitate the availability of software and services that Iranians have told us are essential in order to effectively use the Internet.

A Treasury release outlined some of the specific areas where allowances are now made to export software to Iran, including software for chatting and voice-over-internet-phonecalls and related mobile apps, data storage like Dropbox, web browsers, RSS readers, and more.

The benefits of the free flow of internet information to and from Iran was on full display last week when a Facebook page drew Iranians and Israelis — two peoples whose countries are seemingly approaching the brink of war — to share messages of mutual admiration, solidarity, and speak out against confrontation.

NEWS FLASH

U.S. Receives Record Demand For Its Bonds Under Obama, Helping The Deficit | Bloomberg News reports that the U.S. government received record demand for its bonds in 2011, “pushing longer-maturity treasuries to their best performance since 1995 in a sign that President Obama may have little difficulty” financing the budget deficit. The European debt crisis is driving investors to buy U.S. assets, allowing the government to get an “all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero interest.” Despite the GOP’s factually-challenged fear-mongering about the deficit, the high demand for U.S. bonds are “helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses.”

Security

Treasury Official: Senate’s Iran Central Bank Sanctions ‘Risk Fracturing The International Coalition’ Against Iran

The Obama administration, while wanting to apply additional pressure on Iran, came out today in a letter to a key Member of Congress and in a Congressional hearing with “strong opposition” to a Senate amendment to the Defense Department budget that would level hard-hitting sanctions against Iran’s Central Bank (CBI). The Kirk-Menendez amendment, named for the sponsoring Senators Mark Kirk (R-IL) and Bob Menendez (D-NJ), would bar any companies or central banks abroad that do business through Iran’s central bank from doing any business in the U.S. Kirk has said the legislation was designed to collapse Iran’s currency and expressed indifference to the suffering of ordinary Iranians as a result of doing so.

At a Senate Foreign Relations Committee hearing today, two administration officials pushed back against the Kirk-Menendez amendment, offering a critique that while they shared the goals that underly the bill — pressuring Iran — they feared consequences of the legislation might be counterproductive.

Under Secretary of the Treasury for Terrorism and Financial Intelligence David Cohen, who recently returned from a trip to Israel and the United Arab Emirates to work with U.S. allies in pressuring Iran, told the committee that the Kirk-Menendez amendment could shatter the international coalition that has been successful in slowing Iran’s nuclear progress:

COHEN: [It] risks fracturing the international coalition that has been built up over the last several years to bring pressure to bear on Iran, especially today in the aftermath of what has occurred in Tehran over the last several days, in the aftermath of the IAEA report, and in the growing sense of urgency internationally with respect to Iran’s nuclear program.

I think we have an opportunity to work cooperatively and collaboratively with our international partners to bring additional pressure to bear on Iran. The amendment, however, would focus the most powerful sanction that we have, the termination of access to the United States on the largest financial institutions and the central banks and some of our closest partners.

Watch the video:

Cohen said the “threat of coercion that is contained in the amendment” could alienate even close and cooperative allies like Japan and European countries. The administration believes, Cohen added, that cooperation and coordination can be better achieved “if we approach this issue through an effort to coordinate action voluntarily.”

Under Secretary of State for Political Affairs Wendy Sherman, who also appeared at the hearing, said the administration’s analysis concludes that “there is absolutely a risk that in fact the price of oil would go up, which would mean that Iran would in fact have more money to fuel its nuclear ambitions, not less.”

Also today, as committee chair Sen. John Kerry (D-MA) acknowledged, Treasury Secretary Timothy Geithner wrote a letter to Armed Services chair Sen. Carl Levin (D-MI) stating the administration’s “strong opposition to this amendment because, it its current form, it threatens to undermine the effective, carefully phased, and sustainable approach we have undertaken to build strong international pressure against Iran.”

Climate Progress

Solar Industry: Extending the Treasury Grant Program Could Add 37,000 New Jobs by 2013

The Treasury Grant Program has been a huge success for the solar industry. By allowing developers and financial institutions to take a cash grant instead of a tax credit — an instrument still hard to monetize due to the economic malaise — solar has become one of the fastest growing industries in America, expanding 102% in 2010 during one of the worst economic times in our nation’s history.

But the Grant Program is set to expire at the end of this year. Although the grants have been a resounding success for the renewable energy sector, the program is politically tarnished because it was created under Obama’s stimulus program.

Allowing this program to get killed by election-year politics would be a major mistake, as it would severely limit the growth of a valuable industry that has boomed in spite of the lagging economy.

A new report out from the business-to-business market research firm EuPD Research shows the immense economic value that could be created with an extension of the program. According to the report, which was commissioned by the Solar Energy Industries Association, a simple one-year extension of the Treasury Grant Program could leverage an additional 37,000 jobs — a 12% increase over the baseline. That could also help bring an additional 2 GW of solar projects online from 2012 to 2016.

A five-year extension through 2016 could result in an additional 114,000 jobs — a 32% increase in employment.   That could result in an additional 7.3 GW of installations over the baseline scenario, as this figure shows:

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Security

Treasury Department Offers Few Details About Alleged ‘Secret Deal’ Between Iran And Al Qaeda

Yesterday, the Treasury Department, announcing sanctions on six suspected al Qaeda facilitators, alleged a pact between Iran and al Qaeda. According to a statement, Iran agreed to a “secret deal with al Qaeda allowing it to funnel funds and operatives through its territory.” Treasury offered few details about the deal, leaving its contours mostly a mystery.

“Our sense is this network is operating through Iranian territory with the knowledge and at least the acquiescence of Iranian authorities,” a Treasury official, named in some reports as Undersecretary for Terrorism and Financial Intelligence David Cohen, said in a phone briefing. The Departments of Treasury and State did not respond to requests for interviews.

None of the six people named for sanctions were Iranian, and only one is allegedly based on Iranian soil: Syrian national Ezedin Abdel Aziz Khalil. Of the other named operatives and facilitators, one is based in Iraq, one in Pakistan, one in Qatar and two in Kuwait. The Gulf monarchies of Kuwait and Qatar are close U.S. allies, leading Columbia professor and former Iran-based foreign service officer Gary Sick to comment that articles about the announcement could just as easily have been headlined: “Two U.S. Allies in the Gulf promote and support anti-U.S. terrorism.”

The announcement yesterday piqued the interests of some prominent Iran hawks, including the neoconservative editorial board of the Wall Street Journal, which has already more or less called for war with Iran. The Journal editorial concluded that news of the agreement served as “a reminder of why a regime that has no qualms serving as al Qaeda’s facilitator can on no account be permitted to build a nuclear bomb.”

Al Qaeda has long been known to have some affiliated personnel inside Iran. Several operatives fled there after the U.S.-led invasion of Afghanistan in late 2001. But tensions between the Sunni terror group and Iran’s Shia government have long been thought to temper co-operation. Iran detained many of the operatives on its soil, usually at least restricting their travel. Those conditions were reportedly eased when al Qaeda reportedly helped Iran get an agent released by Pakistani militants, according to “Western officials.” Last year, then head of U.S. forces of Afghanistan Gen. David Petraeus said Iran’s attitude toward the group was “unpredictable,” and the Financial Times noted today that “there have been persistent reports of co-operation between the two given that they share a mutual enemy: the U.S.”

Yglesias

New Treasury Subcabinet Officials Named

brainardl_portrait.jpg

Timothy Geithner gets some officemates:

President Barack Obama today announced his intent to nominate Neal S. Wolin to be Deputy Secretary of the Treasury and Lael Brainard to be Under Secretary of the Treasury for International Affairs. In addition, the President announced that Stuart A. Levey, the current Under Secretary for Terrorism and Financial Intelligence, will remain in that position. The appointments announced today fill three of the four most senior Senate-confirmed Treasury Department positions beneath Secretary Geithner.

I don’t know anything about Neal Wolin except that he works currently at The Hartford and held a variety of economic policy positions in the Clinton administration. Brainard is at Brookings so you can get a look at her thinking on some present-day issues. Here (PDF) she talks about the need for a less militarized foreign policy. She likes infrastructure and she favors the creation of a wage insurance program. All that’s good stuff.

Update

I’ve now heard that Wolin plays in a poker game with Eric Alterman, which is not that much information, but I guess it’s something.

Yglesias

Gene Sperling Returns

item897103066.jpg

Gene Sperling, who headed up the National Economic Council in the Clinton administration after Robert Rubin left the job, willl be joining Timothy Geithner at the Treasury Department where he will “will advise on fiscal policy, including issues related to the annual budget, taxes and the domestic entitlement programs – Medicare, Medicaid and Social Security – whose growth is driving projections of long-term deficits.” It seems like an excellent choice to me. Geithner’s area of expertise is specifically in finance, but obviously these swathes of economic policy are hugely important and recruiting Sperling means there’ll be a real heavy-hitter on the treasury team. Among other things, Sperling’s been a CAP guy ‘lo these past several years so here’s a taste of his writing:

He also wrote a book, The Pro-Growth Progressive, which has a slightly annoying title and lots of great policy ideas.

Yglesias

Reading About Timothy Geithner

Here’s some Tim Geithner clippings:

  • Here’s Bob Kuttner: “Geithner’s admirers span the spectrum from Republican financial mogul Pete Peterson to liberal Democrat Barney Frank. One can infer from his broad fan base three possible conclusions: Wall Street is so clubby and politically powerful that permissible policy differences just aren’t that great; or maybe Geithner is all things to all people; or perhaps, in a deep crisis, truly talented and effective people can earn broad respect. “
  • Here’s Noam Scheiber: “In recent weeks, another financial crisis has ushered Geithner and Summers onto center stage. Geithner has helped guide the government’s response from his perch at the New York Fed; many see him as the most pragmatic voice in a trio that includes Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, two men skeptical of market interventions. “The idea that the Fed did as much as it did–with new facilities, new ideas–the breadth of it is stunning,” says one former Fed official.”
  • James Fallows notes Geithner’s background in Asia issues.
  • A New York Times profile from back in 2007.

I think it’s interesting that he’s a career civil servant turned political appointee, rather than a guy with a business background conscripted into government service. The financial crisis presents a difficult dilemma insofar as you want policy to be made by people who understand the world of finance, but you don’t want it to be made by people whose personal history in the finance world creates too many conflicts of interest or deep personal investment in the future of various bank executives. Geithner’s biography seem to walk that line appropriately.

Media

Paulson on the Job

The Wonk Room notes Hank Paulson’s disturbing habit of proclaiming that everything is fine just before some new piece of terrible news hits. Just last week he said “the banking system has been stabilized.” Now Citigroup is on the verge of collapse.

And yet for some reason some keep feeling that Paulson is worthy of things like gushing Washington Post writeups. It’s frightening to consider the implications of the fact that the Secretary of Treasury doesn’t seem to know what he’s doing. But just because it’s frightening doesn’t mean we need to be in denial about it.

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