By Martin Hutchinson, Global Markets Analyst
By 1934, global markets had been decimated by the Great Depression. Even creditworthy countries were finding it difficult, if not impossible, to finance exports.
So the U.S. government stepped in to fill the gap. It created the Export-Import Bank of the United States (Ex-Im bank) to provide the international capital markets with liquidity.
Thomas Mun would’ve approved. His 1664 masterpiece, “England’s Treasure by Forraign Trade,” advocated subsidizing exports and deterring imports so the country could amass a huge store of “treasure,” which would finance wars against the French, the Dutch, or whoever else was Enemy of the Week.
However, once the credit markets recovered following World War II, it didn’t take long for the Ex-Im bank to become obsolete.
In fact, the bank ceased to have a valid purpose around 1950. By that time, any country that had a decent chance of repaying a credit for export had access to international financing markets in New York or London.
Yet the Ex-Im bank remained open for business, providing financing for longer maturities and on cheaper terms than were available elsewhere. Essentially, the relatively impoverished U.S. taxpayers were subsidizing wealthy Third World dictators who were looking to borrow money.
Fast forward to today’s era of ultra-liquid banking markets, and we see the Ex-Im bank operating as an instrument of crony capitalism that subsidizes large corporations.
Just four months ago, Congress could’ve killed the bank by simply doing nothing. In fact, closing the Ex-Im bank was a major target of the Republican Congress elected last November.
But Democrats opposed the closure largely on principle. That is, if you can close down bits of government that have far outlived their usefulness, where will it end? Thus, Ex-Im lives on, revived by a “discharge petition” in Congress that has forced a vote the bank will probably win.
The entire process is an excellent example of why the public disapproves of Congress by a margin of no less than 67% (16% approve, while 83% disapprove).
Long Live the Leviathan
Currently, Congress is worried about the federal budget deficit – not just the actual deficit ($439 billion as of September 2015) and the extent to which it’s likely to soar in the next downturn, but especially the off-balance sheet obligations that are likely to become critical in the event of economic uncertainty.
The largest of these are the costs incurred under the Medicare, Medicaid, Social Security, and disability programs, which are likely to soar in the coming decades given the country’s shifting demographics.
And while the Ex-Im bank is hardly the most dangerous program, it was one of the easiest to do away with. Indeed, its abolition was automatic if not extended.
Thus, with the deficit having soared since 2007 and waste appearing everywhere in government activities (don’t get me started on the subject of ethanol subsidies!), the Ex-Im bank ought to have been an easy target for a Congress elected on fiscal responsibility.
Now, the “discharge petition” doesn’t automatically revive Ex-Im bank; Congress still has to vote on it. No doubt “reforms” will be imposed as a fig-leaf for perpetuating this waste of resources and distortion of the economy.
Maybe Ex-Im bank will participate in the witless theatre whereby Congress proposes a funding bill the President doesn’t like and the President, backed by a friendly media, threatens to close down the government or cause the country to default if his priorities aren’t followed.
In the final analysis, Congress will have achieved nothing by November 2016 in its efforts to rein in the Federal government Leviathan. Its ratings will drop a point of two further, and Congressmen will run for re-election, wondering why people don’t like them.
Good investing,
Martin Hutchinson
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By Martin Hutchinson
