There is a lot of talk about the Export-Import Bank (the EXIM) shutting down for the first time in 80 years. Although it has received bipartisan support for a long time, it has recently become quite the topic of heated debate on Capitol Hill. Not only have I noticed the ruckus it has been creating, but I have also noticed that not many people know what it is, what it does or whether it works or not. So, I will attempt to clear it all up.
The EXIM bank was brought to life with an executive order signed by Franklin D. Roosevelt, back in the 1934 as the country was trying to recover from the Great Depression. The purpose of the bank was to finance purchases of American goods for international buyers. The bank would incentivize foreign buyers of American products by providing loans, guarantees, and insurance for them. Thus, benefitting U.S. businesses by helping them get the sale. So foreign buyers win because they can purchase our awesome products with loans that the EXIM bank facilitates and U.S. workers and businesses win because they are making stuff that people can buy.
How Does It Work Though?
Say a foreign Airline Company, let’s call it Air XYZ, wants to purchase a plane from an American Plane Maker, APM. Since planes aren’t exactly the cheapest products to buy, Air XYZ goes to a bank to take out a loan, but the bank says, “Whoa, whoa, whoa! That’s a whole lot of money. What if you don’t pay me back? Is there some sort of collateral that can match up to the $270 million loan you’re asking for?”
Enter EXIM. The EXIM bank tells the bank, “Hey, we got you. If Air XYZ defaults on his loan, we’ll guarantee you for up to 85% of the loan. Go ahead and hook it up.” Boom! The bank lends out the money to Air XYZ and the ridiculously expensive American plane from APM is bought.
Most of the United States’ exports consist of really expensive stuff, so this EXIM bank really comes in handy. According to the Observatory of Economic Complexity over at MIT, the top 5 exports for the U.S. are: Cars (4.4%), Refined Petroleum (4.2%), Planes, Helicopters, and/or Spacecraft (3.2%), Packaged Medicaments (3.1%), and Gas Turbines (2.4%). I sure can’t afford any of these products and neither can most of the world. But, they’re super cool, necessary, and thanks to the EXIM bank(s), affordable.
The EXIM bank prides itself on how it helps small businesses in the U.S. and secures domestic jobs. Not to mention, it has been brushing its shoulders off due to the huge increase in exports since the Great Recession of 2009, thus increasing the amount of jobs in the U.S. The EXIM claims to have supported 164,000 jobs in 2014 alone. It boasts on how low the default rate is and it claims to have 17 times its default rate in reserves. It has apparently generated $7 billion more than the costs to run the joint, over the past 20 years, to bring down the federal deficits.
This EXIM bank is the bees knees, right? Maybe for some people. You can watch Senior Research Fellow at the Mercatus Center of George Mason University, Matthew Mitchell’s Youtube video for a more in depth look at how the bank works.
The critics of the EXIM have three main arguments.
- There seems to be some level of crony capitalism, which hurts small businesses and helps the businesses that are in cahoots with politicians. These “hook-ups” that range from lower interest rates to straight up cash injections to soften pricing, screw up the prices of the goods, by artificially raising the prices. Raise your hand if you like higher prices on stuff you want to buy. No worries, I know you didn’t raise your hand.
- Although the bank claims to be earning profits every year, the accounting is shady and loan guarantees are actually at a loss for taxpayers. (Keep in mind, the money EXIM uses to guarantee the loans the private banks lend to the foreign buyer are tax dollars.)
- Environmentalists claim that the EXIM is negatively affecting climate change by subsidizing and financing oil purchases. A “fossil-fuel binge,” they call it.
According to Veronique de Rugy, senior researcher at Mercatus Center and one of the leading opponents of the EXIM bank, the EXIM increases exports alright–mainly for 10 particular companies, especially Boeing. There are 14 other aircraft makers in the U.S. How come they aren’t getting that EXIM hook-up? She explains in one of her articles that export jobs won’t disappear if the EXIM is dissolved–What will disappear is this blatant favoritism toward particular companies.
When it comes to seeing a healthy economy, it’s almost always good to be rocking exports. For years, the EXIM has received ovations from presidents on both sides of the aisle as it really does help American businesses sell their expensive products to the world. It allows for foreign buyers to invest in our economy and come out winning with state of the art U.S. tech. To illustrate, imagine the EXIM bank is a small trampoline in front of the basketball hoop (the price of the sale) that you can use to get an awesome dunk (the financed sale).
However, critics have noticed that in front of the trampoline there is a “bouncer” (pun intended) that is picking and choosing who gets to use the trampoline to dunk. If you aren’t the “bouncer’s dawg,” to seem fair, he might pull the trampoline farther up to the 3-point line, making it really hard to dunk. That illustration was a longshot, but to put simply, some businesses and countries are getting better deals than others and that is distorting the prices of the goods and hurting potential buyers and sellers.
For a bank, having EXIM as your backer when loaning out money is pretty sweet. The bank will always come out winning. The problem is, the EXIM bank’s backer is tax dollars–and these purchases are huge! Seeing as the bank will always win, they can make the interest rates lower for the buyers and be incentivized to lend money to buyers that may not be so creditworthy. If you know you’ll get most of the money back no matter what, wouldn’t you be a little more reckless?
The EXIM bank is set to expire on June 30th and for the first time, even proponents of the bank, are bracing themselves for its demise. Now that you know a little about what it is, how it works, and the pros and cons, let us know if we should let the U.S. EXIM bank live or let it die.
Also Posted at GenFKD