1
 Few people are aware 
5002
attribution

2
that the federal government lends almost as much money 
5002
Comparison

3
as it borrows.
5002
Comparison

4
 From 1980 to 1988, 
5003
span

5
while federal budget deficits totaled $1.41 trillion,
4
circumstance

6
 the government issued $394 billion of new direct loans and an additional $756 billion of new primary loan guarantees.
5004
Same-Unit

7
 These figures omit secondary guarantees, deposit insurance, and the activities of Government-Sponsored Enterprises 
5005
span

8
(a huge concern in its own right, 
5006
span

9
as detailed on this page May 3). 
8
attribution

10
 Federal credit programs date back to the New Deal,
5008
List

11
 and were meant to break even financially.
5008
List

12
 Since the 1950s, federal lending has experienced extraordinary growth in credit volume, subsidy rates, and policy applications, 
5010
span

13
spurred on by the growth of government in general and budget gimmicks and deceptive management in particular.
12
elaboration-additional-e

14
 As we will see, 
15
attribution

15
many of these obligations don't show up as part of the federal deficit.
5011
span

16
 But recent events indicate 
17
attribution

17
that federal credit is out of control.
5013
span

18
 Student loan defaults remain high at about 12%, 
5015
List

19
and the program has been rocked by allegations of fraud and mismanagement.
5015
List

20
 Farmers Home Administration 
5016
span

21
(FmHA)
20
restatement-e

22
 loans have turned into de facto giveaway programs; 
5017
Same-Unit

23
losses over the next three years are expected to exceed $20 billion. 
5018
List

24
Defaults on Veterans Affairs loan guarantees have quadrupled in the past eight years.
5019
List

25
 Last month, the General Accounting Office reported 
5022
attribution

26
that defaults in Federal Housing Administration guarantees were five times as high 
5021
Comparison

27
as previously estimated, 
5021
Comparison

28
and that FHA's equity fell to minus $2.9 billion.
5022
List

29
 GAO's findings are particularly troubling 
5027
cause

30
because the FHA has about $300 billion in obligations outstanding 
5023
List

31
and had previously been considered one of the most financially secure credit programs.
5023
List

32
 Scores of other credit programs, 
5025
span

33
subsidizing agriculture, small business, exporters, defense, energy, transportation and others, 
32
elaboration-object-attribute-e

34
are less visible but in no better shape. 
5026
Same-Unit

35
If the programs continue their present path, 
36
contingency

36
the potential government losses are staggering: 
5030
span

37
The federal government holds $222 billion in direct loans outstanding 
5031
List

38
and backs an additional $550 billion in primary guarantees.
5031
List

39
 (Secondary guarantees of pools of FHA- and VA-backed loans by the agency 
5032
span

40
known as Ginnie Mae 
39
elaboration-object-attribute-e

41
currently exceed $330 billion.) 
5033
Same-Unit

42
 Although external events have contributed to the morass, 
43
antithesis

43
the principal causes of the current crisis are internal and generic to all programs.
5036
span

44
 To reduce the risks 
5038
concession

45
while still retaining the legitimate benefits 
5038
span

46
these programs can provide, 
45
elaboration-object-attribute-e

47
credit policy must: 
5040
span

48
 1. Use credit 
5041
span

49
to improve the operation of capital markets,
5042
List

50
 not to provide subsidies.
5042
List

51
 There is a fundamental conflict 
5043
span

52
between providing a subsidy 
5044
List

53
and maintaining the integrity of a credit program.
5044
List

54
 If the program is meant to provide a subsidy,
55
contingency

55
 collecting the debt defeats the original goal.
5045
span

56
 Thus, subsidized loans tend to turn into giveaway programs, with increasing subsidy and default rates over time.
5046
span

57
 To avoid this problem, 
58
purpose

58
government should issue credit 
5047
span

59
only if it intends to use every legal method 
5049
span

60
to collect.
59
elaboration-object-attribute-e

61
 In contrast, credit programs can be appropriate tools 
5051
span

62
to improve the operation of capital markets.
61
elaboration-object-attribute-e

63
 For example, legal restrictions on interstate banking once inhibited the supply of credit to the agricultural sector.
5059
Problem-Solution

64
 Farm lending was enacted 
5057
span

65
to correct this problem 
5058
span

66
by providing a reliable flow of lendable funds.
65
means

67
 However, this in no way justifies the huge government subsidies and losses on such loans.
5063
span

68
 Credit policy should separate these two competing objectives 
5061
List

69
and eliminate aspects 
5062
span

70
that provide the subsidy.
69
elaboration-object-attribute-e

71
 For example, student loans currently attempt to subsidize college attendance and mitigate problems 
5064
span

72
created by the fact 
5065
span

73
that students' future earnings are not accepted as collateral. 
72
elaboration-object-attribute-e

74
The program provides highly subsidized loans to any student 
5066
span

75
whose family earns less than a particular amount.
74
elaboration-general-specific-e

76
 High default rates, a low interest rate, and government coverage of all interest costs 
5067
span

77
while the student is in school 
76
circumstance

78
make program costs extremely high.
5068
Same-Unit

79
 Families 
5070
span

80
that do not need the loan
79
elaboration-object-attribute-e

81
 can make money 
5071
Same-Unit

82
simply by putting the loan in the bank
5073
List

83
 and paying it back 
5074
span

84
when the student graduates. 
83
circumstance

85
 In contrast, a student loan program 
5076
span

86
that was meant solely to correct capital-market imperfections
85
elaboration-object-attribute-e

87
 would allow loans for any student, 
5078
span

88
regardless of family income,
87
concession

89
 at market or near-market rates.
5079
Same-Unit

90
 While the student was in school, 
5081
circumstance

91
interest costs would either be paid by the student
5081
Otherwise

92
 or added to the loan balance.
5081
Otherwise

93
 This program, 
5083
span

94
combined with cash grants to needy students, 
93
circumstance

95
would reduce program costs 
5085
List

96
and much more effectively target the intended beneficiaries. 
5085
List

97
 2. Provide better incentives.
5102
span

98
 Given the structure of most credit programs, 
99
circumstance

99
it is surprising that default rates are not even higher.
5093
span

100
 Guarantee rates are typically 100%,
5095
circumstance

101
 giving lenders little reason
5095
span

102
 to screen customers carefully.
101
elaboration-object-attribute-e

103
 Reducing those rates moderately 
5096
span

104
(say, to 75%)
103
definition-e

105
 would still provide substantial assistance to borrowers.
5097
Same-Unit

106
 But it would also encourage lenders to choose more creditworthy customers, 
5099
List

107
and go a long way toward reducing defaults.
5099
List

108
 For example, the Small Business Administration has had reasonable success 
5104
span

109
in reducing both guarantee rates and default rates in its Preferred Lenders' Program.
108
elaboration-object-attribute-e

110
 Borrowers' incentives are equally skewed.
5113
span

111
 Since the government has a dismal record
5106
span

112
 of collecting bad debts,
111
elaboration-object-attribute-e

113
 the costs to the borrower of defaulting are usually low.
5107
span

114
 In addition, it is often possible to obtain a new government loan 
5109
span

115
even if existing debts are not paid off. 
114
concession

116
Simple policy prescriptions in this case would be to improve debt collection 
5111
span

117
(taking the gloves off contracted collection agencies) 
116
cause

118
and to deny new credit to defaulters.
5112
List

119
 These provisions would be difficult to enforce for a program 
5115
span

120
intended to provide a subsidy,
119
elaboration-object-attribute-e

121
 but would be reasonable and effective devices for programs 
5117
span

122
that attempt to offset market imperfections. 
121
elaboration-object-attribute-e

123
 3. Record the true costs of credit programs in the federal budget.
5127
span

124
 Since the budget measures cash flow,
5119
circumstance

125
 a new $1 direct loan is treated as a $1 expenditure, 
5119
span

126
even though at least part of the loan will be paid back. 
125
concession

127
Loan guarantees don't appear at all 
5121
span

128
until the borrower defaults, 
127
circumstance

129
so new guarantees do not raise the deficit, 
5123
span

130
even though they create future liabilities for the government.
129
concession

131
 By converting an expenditure or loan to a guarantee,
5125
means

132
 the government can ensure the same flow of resources
5125
List

133
 and reduce the current deficit. 
5125
List

134
Predictably, guarantees outstanding have risen by $130 billion since 1985, 
5128
List

135
while direct loans outstanding have fallen by $30 billion.
5128
List

136
 The true budgetary cost of a credit subsidy is the discounted value of the net costs to government.
5136
span

137
 This figure could be estimated 
5131
span

138
using techniques 
5130
span

139
employed by private lenders 
5132
span

140
to forecast losses, 
139
purpose

141
or determined 
5134
span

142
by selling loans to private owners 
5135
span

143
(without federal guarantees). 
142
elaboration-additional

144
Neither technique is perfect, 
145
concession

145
but both are better than the current system, 
5138
span

146
which misstates the costs of new credit programs by amounts 
5140
span

147
that vary substantially 
5141
List

148
and average about $20 billion annually,
5141
List

149
 according to the Congressional Budget Office.
5140
attribution

150
 A budget 
5144
span

151
that reflected the real costs of lending 
150
elaboration-object-attribute-e

152
would eliminate incentives 
5146
span

153
to convert spending or lending programs to guarantees
152
elaboration-object-attribute-e

154
 and would let taxpayers know 
155
attribution

155
what Congress is committing them to.
5148
span

156
 4. Impose standard accounting and administrative practices.
5160
span

157
 Creative accounting is a hallmark of federal credit.
5150
span

158
 Many agencies roll over their debt, 
5151
span

159
paying off delinquent loans 
5152
span

160
by issuing new loans, 
159
means

161
or converting defaulted loan guarantees into direct loans.
5153
Otherwise

162
 In any case, they avoid having to write off the loans.
5151
summary-s

163
 Some agencies simply keep bad loans on the books;
5156
span

164
 as late as 1987, the Export-Import Bank held in its portfolio at face value loans 
5157
span

165
made to Cuba in the 1950s.
164
elaboration-object-attribute-e

166
 More seriously, FmHA has carried several billion dollars of defaulted loans at face value. 
5159
span

167
Until GAO's recent audit, FHA books had not been subject to a complete external audit in 15 years.
166
circumstance

168
 The administration of federal credit should closely parallel private lending practices,
5162
span

169
 including the development of a loan loss reserve and regular outside audits.
168
elaboration-part-whole-e

170
 Establishing these practices would permit earlier identification of emerging financial crises, 
5163
List

171
provide better information for loan sales and budgeting decisions,
5163
List

172
 and reduce fraud.
5163
List

173
 Government lending was not intended to be a way 
5166
span

174
to obfuscate spending figures, 
5167
List

175
hide fraudulent activity,
5167
List

176
 or provide large subsidies.
5167
List

177
 The reforms
5169
span

178
 described above 
177
elaboration-object-attribute-e

179
would provide a more limited, but clearer, safer and ultimately more useful role for government as a lender.
5170
Same-Unit

180
 Without such reforms,
181
circumstance

181
 credit programs will continue to be a large-scale, high-risk proposition for taxpayers.
5172
span

182
 Mr. Gale is an assistant professor of economics at UCLA.
5173
TextualOrganization

5001
span
5055
span

5002
multinuc
5001
span

5003
span
5004
Same-Unit

5004
multinuc
5007
span

5005
span
5004
elaboration-general-specific

5006
span
7
elaboration-additional-e

5007
span
5009
List

5008
multinuc
5009
List

5009
multinuc
5001
background

5010
span
5014
span

5011
span
5013
concession

5012
span
5056
span

5013
span
5012
span

5014
span
5009
List

5015
multinuc
5019
List

5016
span
5017
Same-Unit

5017
multinuc
5018
List

5018
multinuc
5019
List

5019
multinuc
5012
example

5020
span
5028
span

5021
multinuc
5022
List

5022
multinuc
5020
span

5023
multinuc
5027
Contrast

5024
span
5029
span

5025
span
5026
Same-Unit

5026
multinuc
5027
Contrast

5027
multinuc
5024
span

5028
span
5019
List

5029
span
5020
evaluation-s

5030
span
5035
span

5031
multinuc
5034
span

5032
span
5033
Same-Unit

5033
multinuc
5031
elaboration-additional

5034
span
5037
span

5035
span
5024
elaboration-additional

5036
span
5034
interpretation-s

5037
span
5030
explanation-argumentative

5038
span
5039
span

5039
span
47
purpose

5040
span
5089
Problem-Solution

5041
span
5054
span

5042
multinuc
5053
span

5043
span
5042
interpretation-s

5044
multinuc
51
elaboration-object-attribute-e

5045
span
56
circumstance

5046
span
5050
Problem-Solution

5047
span
5048
span

5048
span
5050
Problem-Solution

5049
span
5047
contingency

5050
multinuc
5052
Contrast

5051
span
5052
Contrast

5052
multinuc
5091
span

5053
span
48
purpose

5054
span
5092
List

5055
span
5090
Problem-Solution

5056
span
5010
elaboration-additional

5057
span
5059
Problem-Solution

5058
span
64
purpose

5059
multinuc
5063
evaluation-n

5060
span
5052
example

5061
multinuc
5088
span

5062
span
5061
List

5063
span
5060
span

5064
span
5075
span

5065
span
71
elaboration-object-attribute-e

5066
span
5069
List

5067
span
5068
Same-Unit

5068
multinuc
5069
List

5069
multinuc
5064
elaboration-additional

5070
span
5071
Same-Unit

5071
multinuc
5072
span

5072
span
5069
List

5073
multinuc
5071
means

5074
span
5073
List

5075
span
5087
Contrast

5076
span
5077
Same-Unit

5077
multinuc
5086
span

5078
span
5079
Same-Unit

5079
multinuc
5077
Same-Unit

5080
span
5082
List

5081
multinuc
5080
span

5082
multinuc
5077
elaboration-additional

5083
span
5084
Same-Unit

5084
multinuc
5082
List

5085
multinuc
5084
Same-Unit

5086
span
5087
Contrast

5087
multinuc
5061
example

5088
span
67
explanation-argumentative

5089
multinuc
5090
Problem-Solution

5090
multinuc
5173
TextualOrganization

5091
span
5041
explanation-argumentative

5092
multinuc
5089
Problem-Solution

5093
span
5101
span

5094
span
5100
Problem-Solution

5095
span
5094
span

5096
span
5097
Same-Unit

5097
multinuc
5098
Contrast

5098
multinuc
5100
Problem-Solution

5099
multinuc
5103
span

5100
multinuc
5093
example

5101
span
97
explanation-argumentative

5102
span
5105
span

5103
span
5098
Contrast

5104
span
5099
example

5105
span
5092
List

5106
span
113
explanation-argumentative

5107
span
5108
List

5108
multinuc
5110
Problem-Solution

5109
span
5108
List

5110
multinuc
110
evidence

5111
span
5112
List

5112
multinuc
5114
span

5113
span
5102
evaluation-s

5114
span
5110
Problem-Solution

5115
span
5116
Contrast

5116
multinuc
5112
elaboration-additional

5117
span
5116
Contrast

5118
span
5120
List

5119
span
5118
span

5120
multinuc
5126
Problem-Solution

5121
span
5122
Cause-Result

5122
multinuc
5120
List

5123
span
5122
Cause-Result

5124
span
5126
Problem-Solution

5125
multinuc
5124
span

5126
multinuc
123
explanation-argumentative

5127
span
5129
span

5128
multinuc
5149
span

5129
span
5092
List

5130
span
137
means

5131
span
5133
Otherwise

5132
span
138
elaboration-object-attribute-e

5133
multinuc
5137
span

5134
span
5133
Otherwise

5135
span
141
means

5136
span
5143
List

5137
span
136
elaboration-additional

5138
span
5139
span

5139
span
5133
evaluation-s

5140
span
5142
span

5141
multinuc
146
elaboration-additional-e

5142
span
5138
elaboration-additional-e

5143
multinuc
5128
elaboration-additional

5144
span
5145
Same-Unit

5145
multinuc
5143
List

5146
span
5147
List

5147
multinuc
5145
Same-Unit

5148
span
5147
List

5149
span
5127
background

5150
span
156
explanation-argumentative

5151
span
5154
span

5152
span
5153
Otherwise

5153
multinuc
158
means

5154
span
5155
List

5155
multinuc
157
explanation-argumentative

5156
span
5155
List

5157
span
5158
List

5158
multinuc
163
example

5159
span
5158
List

5160
span
5161
span

5161
span
5165
span

5162
span
5163
enablement

5163
multinuc
5175
span

5164
span



5165
span
5092
List

5166
span
5168
List

5167
multinuc
173
elaboration-object-attribute-e

5168
multinuc
5161
comment

5169
span
5170
Same-Unit

5170
multinuc
5171
span

5171
span
5168
List

5172
span
5170
evaluation-s

5173
multinuc



5174
span



5175
span
5160
evaluation-s

