How We Get Into So Much Economic Trouble

Programs and Policies, for every program and policy has a winner and a loser...

Say we are an Indian Airline and we want to buy a 777 Freighter, not the most expensive, but a sincere purchase, useful in “national development.”   They run $300 million, wholesale.

http://www.boeing.com/boeing/commercial/prices/

4 Jan 2008 a company we’ll call Bombay Air buys a jet...

$300 million

US$ 1= INR 39.80

INR 11,790,000,000

Sounds more expensive in INR!

Now, you can finance a purchase on one of these over a term of twelve years.  Don’t qualify?  Never mind, ExImBank is there to work it out...

Government chartered private banks come up with the $300 million, and ExIm Bank guarantees that those private banks will be paid back with interest, with the full faith and credit of the USA (taxpayers.)

 In pursuit of its mission of supporting U.S. exports, Ex-Im Bank offers four financial products: direct loans, loan guarantees, working capital guarantees and export credit insurance. All Ex-Im Bank obligations carry the full faith and credit of the U.S. government.

So Bombay Air buys the jet, Boeing gets its $300 million cash, and the USTaxpayer guarantees the banks will be paid back.  Do you like this arrangement?  Well, depends if you are the one getting the guarantee, or you are the one who has been volunteered to cover the guarantee.

Who gets to do these deals?  You must be very special in India to get this deal, well connected to get license to have an airline, etc.  You have to be very special in USA, a business like Boeing.  How do you get in on this?  You are an Indian who is the smartest of the smart and so you got to go to Harvard and learn economics along with a cohort of USA born smartest of the smart.  And being part of this cohort, you went to work for BombayAir and your classmate went to work for Boeing.  And the two of you, because you both went to Harvard and are so doggone smart, put together this deal.  “Profits to Boeing and India Air, losses to taxpayers.”  What more proof do we need that capitalism is the very best system when two Harvard graduates from two separate cultures and countries, can both get rich in selling airplanes, in which there is absolutely no risk at any point?  What more proof do you need that these two people are smart?  They get rich in 300 million dollar deals in which they take absolutely no risk, they cannot fail.  Therefore, they must be smart.  Get it?

So smart, economics has no effect on them.  Now let’s round this deal up, and take out the interest issue (even though the taxpayer is on the hook for that too) to make this simple...

INR 12 billion, twelve year lease, that is payment of INR one billion a year to Boeing...  except, problem.... no one, (except every Austrian Economist), saw the exchange rate fluctuation coming...

So in 2008, they plan on covering the 25 million dollars yearly with about a billion rupees, but in a mere five years, US$25 million costs 1.67 billion rupees.  With cost of equipment rising some 67%, there is no way that cost can be covered without Air Bombay raising prices (in an economic downturn, in the face of foreign carrier competition? No way...).  But not to worry... from the ExImBank notes to the 2012 financial statements:

Accounting for Guarantees in a Foreign CurrencyEx-Im Bank provides guarantees and insurance denominated in certain foreign currencies. The foreign currencies approved for Ex-Im Bank guarantees as of September 30, 2012, are: Australian dollar, Brazilian real, British pound, Canadian dollar, CFA franc, Colombian peso, Egyptian pound, euro, Indian rupee, Indonesian rupiah, Japanese yen, Korean won, Malaysian ringgit, Mexican peso, Moroccan dirham, New Zealand dollar, Norwegian krone, Pakistani rupee, Philippine peso, Polish zloty, Russian ruble, South African rand, Swedish krona, Swiss franc, Taiwanese dollar and Thai baht. At the time of authorization, Ex-Im Bank records the authorization amount as the U.S.-dollar equivalent of the foreign-currency obligation based on the exchange rate at that time. At the end of each fiscal year, Ex-Im Bank determines the dollar equivalent of the outstanding balance for each foreign-currency guarantee based on the exchange rate at the end of the year and adjusts the guarantee loan liability accordingly. 

Did you get that?  There is an adjustment on paper... but this does not tell what effects are occurring in the real world that are merely noted on the paper.  What it suggests is, India is paying in constant rupees, and if so, we taxpayers were once taking in $25 million a year of taxpayer backed income, now in 2013 we only take $14 million.  See E31,  F31.

Sounds like the banks will not get their $300 million back, except they will, plus interest, compliments of the USTaxpayer.  Not to worry, first, this loss will not be accounted for yet another seven years on the books.  All of the players will be long gone, and the new set of managers will blame it on the black guy, and say “mistakes were made, time to move on..” Second, the risk is simply transferred to the taxpayers.  And, reading the notes, nonperforming loans are paid by the taxpayers and listed as assets on the ExImBank balance sheet.  

Under this system, risk analysis and free market methods to manage risk Boeing and Air Bombay would otherwise employ they no longer need to do so. 

Note in the 16 pages of notes to the financial report, the word "estimate" is used 63 times.  Pass the cost of failure to do your job onto the taxpayers, keep the profits, with Enron grade accounting.    

But what if Boeing & Bombay Air could not assess risk adequately, and went out of business?  Then some young hungry company would get risk management right and replace Boeing.  ExIMBank crowds out competitors, so no ExIMBank would mean more competition.

But where would we send Harvard MBAs so they could succeed no matter what?!  Now that would be a problem.  Perhaps these people should prove their advanced intelligence by serving in the infantry.

This has been the game since this 1934 agency first failed, and multiply by countless others.  It is why we are in economic crisis.

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