NCPA - National Center for Policy Analysis

The Fannie Mae Model Applied to Public Works

September 1, 2011

Here's a novel idea: Have Congress create a "bank" that could borrow huge sums with only a small federal outlay and would be independent of any political interference.  If you believe in this miracle, you probably thought Fannie Mae was a private company that wouldn't cost taxpayers a dime, says the Wall Street Journal.

  • The Journal is referring to Washington's latest marketing tool to sell spending to a skeptical public, a new federal "infrastructure bank."
  • For the low, low price of $30 billion or so, President Obama says Congress can conjure hundreds of billions in new "grants and loans" to rebuild "roads, bridges, and ports and broadband lines and smart grids."

This is the Fannie Mae model applied to public works.

  • The new bank would be a government-sponsored enterprise, or GSE, whether or not anyone admits it.
  • The bank would have an implicit subsidy for its debt because it is backed by the government.
  • And the debt it issued would be "off-budget," which means it wouldn't show up in annual outlays.

Such an outfit will inevitably be politicized, as similar examples have been all over the world.

  • Japan's postal bank has been used for decades to finance public works.
  • Japan's roads and bridges are grand but its economy has grown little in 20 years.
  • Agribanks, regional development banks, Brazil's BNDES national bank have all become vehicles for the political allocation of credit.

No one disputes that American public works need improving, and government has been spending huge sums to do so.  Indeed, between 2001 and 2011 federal "public physical capital investment outlays" more than doubled to $330 billion from $142 billion.

Instead of a Washington-centric bank that picks winners and losers, Congress would be wise to move in the opposite direction: devolving most public-works decisions to the state and local levels so users decide whether they want to finance a new school, bridge or water system, says the Journal.

Source: "Bank of Political Works," Wall Street Journal, August 31, 2011.

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