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Trump Reconsidered
“Donald Trump” by Michael Vadon. Via Wikimedia Commons.
It’s time for those of us holding our noses at Trump to reconsider our approach. He’s not our cup of tea, but he may be a cup we have to drink from. Barring a minor miracle in Iowa, or a major one in New Hampshire, Trump is going to be our nominee. He may even be the president. It’s time we tried to make that unwanted cup as palatable as possible.
What is at stake here is not our pride or our good taste, but the future of the country we love. After the depredations of Obama’s rule, we conservatives do not have the luxury of holding our breath until our preferred candidate materializes; we owe it to America to try to make the best of a potential Trump presidency.
The attitudes expressed by George Will, Jay Nordlinger, Mona Charen, and others whom I admire are wrong: rather than be embarrassed by Trump or worry that he will tarnish the conservative movement, conservatives should be taking a page from the Left and try to bring The Donald into the fold. In short, we need less public fulmination and more private persuasion.
I have nothing against Trump as a person. His bluster and crassness are unappealing to me, but my real reservation about him is that he does not grasp the wily ways of the Left and thus will be duped into policies that will work against his intended purpose. Remember the governorships of Arnold Schwarzenegger and Jesse Ventura.
The testimony of Conrad Black and others has shown me a side of Donald Trump I did not think existed. They both attest to his kind support during their times of trouble. This speaks to magnanimity, something sorely lacking in our times. The norm of our days is that your conservative friends vanish when you are accused of anything, however unjustly. Trump stands by his friends. I am not arguing that Trump is Mitt Romney — a person of exemplary moral character — but that he could be somebody we could do business with.
Conservative thought leaders should approach Trump quietly and respectfully in an attempt to alert him to the dangers that litter the ideological landscape. This may already be going on behind the scenes, but if it is not, it should happen, pronto. That delegation should be led by Conrad Black and Larry Kudlow, resplendent in their finery. It should also include George Will, Charles Krauthammer, Jay Nordlinger and Mona Charen all dressed as penitents, unshod and wrapped in sackcloth.
Published in Politics
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What makes you think that I think Ex-Im is tremendously unpopular with voters?
Who do you think hates Ex-Im and will be excited by its demise, leading to other good things coming to pass? I’d thought you were making an electoral argument.
The Ex-Im Bank is simple crony capitalism. If a product cannot be competitive without subsidized finance it should not be sold. Other “civilized” countries mostly have socialized medicine, complete gun bans and severely constrained freedom of speech. Please save me from such civilization.
Politically Ex-Im could be made unpopular if there was a constituency to fund publicity against it. Sadly there is not so it will keep getting approved.
Ex-Im is not competitive because it has a financial subsidy. It puts money in the treasury. The whole industry of export credit agencies is not competitive in that there is no competition. They exist because it is easier for governments to deal with foreign governments than for businesses to do so. There are no private sector ECAs not because they don’t make money (most do), but because it’s essentially a form of law enforcement against the powerful in emerging markets, which private companies are bad at.
I’m not aware of the particulars about Ex-Im’s profitability, however I am always skeptical when I hear of government agencies making profits using the faith and credit of the US government. Fannie Mae comes to mind.
I doubt there is a lack of financing for exports. These are usually low-risk transactions where the risk is principally operational and private banks are the ones doing all the operational stuff. They love pawning off the underlying asset and risk on Uncle Sam so they can charge lots of fees. Banks and Boeing are big backers of this crony capitalist scheme because it lines their pockets.
Ex-Im no longer serves Boeing; there’s a cap of $10 million on its involvement with clients, which renders it essentially worthless to Boeing.
I don’t know how much risk you think was being pawned off, but Boeing’s category of business had a roughly 0.1% default rate. Ex-Im in general had a far lower risk than commercial banks do. Fannie Mae’s job was to take on risk. Ex-Im’s job was to reduce it, and it does its job reasonably well (there are lots of ECAs, and they’re all effective at that; they were effective during global recessions and effective in good times).
You’re right that financing isn’t so hard to find. Ex-Im generally didn’t find financing; banks would work with Ex-Im to find it.
It’s not crony capitalist when there’s no cronies involved, and the bank as it stands has no large customers. Even before, it wasn’t cronyist because it didn’t have much discretion about terms, but it could seem that way because very powerful businesses were involved. Now that it’s just SMEs, even that fig leaf of legitimacy is absent.
James of England, thanks for your most informative response.
As crony-capitalism, Ex-Im with the $10MM cap is a pretty minor offender as compared to the green energy scam that gave us Solyndra or agricultural supports etc. Absent Boeing the cronies are the banks.
In a properly ordered world Ex-Im would be closed. Assets perceived as low-risk get leveraged to the point where they become risky. At one time Fannie Mae mortgages were considered low risk until political interference and high leverage made them toxic.
I want the Federal government to run the military, the Federal judiciary, the FBI and Customs, everything else should be devolved to the states or privatized.
I admit I don’t know the economics of the Ex-Im – I just liked the idea that something the government was doing came to an end.
And the world did not collapse for want of it. Bringing it back just seems like surrender. Like Reagan said – a government program is closest thing to immortality there is.
We need some precedent to get people used to the idea that “the government shouldn’t be doing this and therefore it will stop.”
Great. Then we can eliminate Ex-Im and let the enforcement of contracts be handled by treaties and the judicial system.
There exist no treaties that work for this purpose, because treaties cannot micromanage enforcement assets in this way. It’s not just that there’s no treaty of this variety between the US and another country, but there are between no countries (the EU comes close, but only by essentially becoming a single federal state, a solution that I imagine you would not advocate for the US.)
I’m confused by what you mean by the judicial system handling them. The chief counterparties for Ex-Im supported contracts are foreign governments with sovereign immunity. In cases where they’re not, one frequently has to sue in the foreign country, which lawsuit can be either essentially impossible, or impractical for a variety of other means.
When Boeing loses 800 million dollar contracts for lack of the Ex-IM, why do you think that they don’t just hire some lawyers and keep the contract? Do you think that Boeing’s problems might be a little greater for small businesses?
Other than the general loss to American businesses as a whole, which affects banks that support the American economy, why do you believe that banks particularly benefit from the Ex-Im? Ex-Im turns high fee contracts into low fee contracts by reducing the risk. It’s not obvious to me that investment banks consistently prefer boring contracts.
Ex-Im’s loans are not derivatives. Ex-Im is not exposed to direct risk from complex financial assets. Ex-Im’s business model has remained relatively constant through its 80 year run and there appears to be no reason to believe that the current quarter of a percent default rate is set to shift to something historically unprecedented. Fannie Mae’s default rates were never even close to as low as Ex-Im’s, and Ex-Im’s behavior has not been dramatically affected by mandates (it would be hard to do so since, as I’ve noted a couple of times, there isn’t all that much discretion involved in their work).
Why isn’t the Federal Constitution, which gives the Federal government jurisdiction over currency, post roads, and a variety of other things, including commerce with foreign nations, good enough? What state would have the assets in, say, Malawi, with which to manage payment for a shipment of hospital supplies? Who would benefit from there being fifty agencies dealing with the Uzbek government rather than one?
If a country defaults on obligations to US exporters it’s time for the US Treasury to get involved. However don’t hope for too much as a holder of defaulted sovereign debt. The US prefers to get a foreign policy advantage rather than enforce debt contracts.
There is such a thing as private enforcement of debt instruments. I am a participant in the litigation against Argentina and I can tell you that Argentina has had a very bad time of it. Russia is similarly still being pursued by creditors as a consequence of their 1998 default.
No need for Exim.
Your argument is that because creditors are still pursuing Russia from 1998, there’s no need for a better system?
I agree that these bond defaults are major headaches for counties. Not paying suppliers is a much smaller deal. When you say that there’s not much to hope for, I agree that that sort of a system is incredibly tough.
Ex-Im issues were not like that. Again, you don’t get to a 0.25% default rate by dealing with the sort of risk where one gets to hear “don’t hope for too much” a lot.
Waiting until there’s a problem and then trying to fix it is bad for both sides. ECAs from many countries were involved with Argentina, but Kirchner did not stiff them as she stiffed bondholders, and there’s a reason for that. If they’d been private citizens, they’d have gotten the same rough treatment or worse.
Seriously, spend some time looking at the numbers for Ex-Im, at how it works, and you will discover that it bears not the slightest resemblance to the sort of high risk investment that your Argentine bonds represent, despite the dealings being with governments even shakier than Kirchner’s.
Russia did eventually settle its trade supplier credits on terms equivalent to obligations owed by the Vneheconombank, the international financing arm of the USSR.
Argentina may not have defaulted on Exim credits but they have defaulted on IMF debt in the past. Rogue regimes are not swayed by financial pressures.
If these Exim transactions are so low-risk why does Uncle Sam have to put his faith and credit behind it? There is an unbelievable appetite for return these days of still extremely low interest rates. The truth is that the banks love making the fees and laying the assets off on someone else. I say cut off the gravy train for the cronies.
Eventually is a non-trivial word in this sentence.
If you look at IMF default rates, you’ll find that they’re pretty low, too. The key difference is that they often have to wait a little longer.
I don’t know why you’re saying “if”. These are publicly available statistics, both for the US and for many foreign ECAs. This is very far from speculative, virgin, territory. And, again, the risk would not be low if there were not an ECA involved. This is like arguing against the need for parachutes because the number of sky diving fatalities is low.
The fees for Ex-Im backed SME exports are not high. That’s a big part of the point. The system makes exporting goods cheap and simple, which expands the market available to SMEs. No one is getting spectacularly rich off the Ex-Im. Instead, many people are enjoying somewhat nicer middle class lifestyles.
James of England, a few points in rebuttal:
1) In sovereign debt restructuring a one gets paid for having waited, usually handsomely.
2) Default rates being pretty low there is no need for Exim to be involved. I don’t buy that the existence of ECAs make defaults any less likely.
3) Whenever the guarantee of the US is used there is a risk of another Fannie Mae or Freddie Mac. Don’t forget that these entities were paragons of financial probity for up to half a century before the lethal mix of finance and politics blew them up.
I really want the Federal government to do very few things and do those exceedingly well. Subsidizing exports does not even come close to being something I would want it to do.
Sal
Why do you think that contracts with Boeing were cancelled?
We’re agreed that the subsidization of commerce with money is a bad idea. I take it we’re also agreed that the enforcement of contracts is not an improper subsidy to business when it happens domestically, although it does take the form of spending money on making life better for the businesses. Ex-Im performs a rule of law function while costing the government nothing.
You keep describing a consistently profit making entity as a subsidy.
I guess, ultimately, this comes down to your not believing the statistics. Because you don’t believe that ECAs work, you don’t believe that it can have made money over eighty years, so you think it must be a subsidy. I’m not sure if you think that it’s a conspiracy, and that there have actually been payouts from the treasury rather than payouts to the treasury, but I don’t see a way to overcome that problem.
You already told us that this “rule of law” function is not about enforcing laws in the court system but about government intervention with other governments. If you want to call that “rule of law” you are free to do so, just as I am free to call it “brownie muffins.”
Much of the rule of law is about executive functions rather than judicial functions. Quite a lot of what the police do, for instance, is preventative rather than investigative. Upholding contracts is a classic example of the proper role of the state. Even minarchists support it. ECAs don’t spend a lot of time negotiating with foreign governments, they just have sufficient resources that they could support their claims if need be, which means that the abuses don’t take place.
And a great source of corruption, too.
Sure, there’s eddies and whirls. Nonetheless American policemen, along with most of their colleagues around the world, create a net improvement in the rule of law. Indeed, to achieve modern levels of law abiding behavior, a police force is probably essential.
I was amused in reading the CBO’s budget projections for Ex-Im that the cost depends on whether or not you figure the time value of money. If you use a fair-value accounting basis, it does cost money. Not a lot, but it’s a little different than what the Chamber of Commerce would have you believe.
I also enjoyed this paragraph:
Emphasis mine.
So it turns out for non-risky loans, there ARE other sources of funds. Imagine that. If fees have to be paid to cover the risk of costing the government some money, all of a sudden it IS likely to cost the government some money.
For some, there are. For the Boeing contracts, it appears that there were not.
Many countries have legal or constitutional requirements that ECAs are involved in some kinds of contracts. For those contracts no private funding will ever suffice (it’s my guess that that was Boeing’s problem; generally if funding isn’t just expensive but unavailable for a project like that, it’s a legal barrier). Boeing should ultimately be able to get around that by finding a country that will support it and building its stuff there, or perhaps still building it in America, but substantially transforming it in the other country (I don’t know if semi knock down works with Satellites, but it seems plausible).
I completely fail to understand why the requirement that the bank continues to charge fees means that it is likely that the bank will cost the government money. It hasn’t cost the government money so far and it is not obvious why that should change. The CBO has, for a while, been irritated by the Ex-Im’s accounting for future risk; they feel that the CBO should act as if their future risk is like that of commercial banks, rather than like that of an ECA, because there are no American ECAs to compare it with.
It doesn’t depend on whether you use a time value for money; of course you should use a number. The cost depends on what that number is: whether you cost it at the actual cost (the Federal Credit Reform Act) or if you pretend that it is borrowing on inferior terms to the terms that it’s actually borrowing at (the “Fair-Value Approach”).
I fail to see why we need a bank to represent US creditors. A department of the US Treasury can execute that function.
Fannie Mae was spectacularly profitable for decades before it blew up. It’s easy to look like a financial genius with the faith and credit of the US to back you up. BTW Fannie Mae is still taking on sub-prime loans. Once these piggies get on the Fedetal trough it’s impossible to shoo the away.
Now you’re being silly. Of course it matters; that’s why the CBO calculates it both ways, with different results depending on the way it’s calculated.
Please tell me your spouse handles your credit card and other loans. You can be annoying at times, but still I’d hate to see you hurt yourself.
I don’t understand this comment. What do you think I’m saying doesn’t matter?
Perhaps my comment was unclear. There are multiple different ways of calculating the time value of money. The CBO does not use any calculations that do not “figure a time value for money”. I offered a simplified account of how the different rate calculations differ. I can go into more detail, but I’d really prefer it if you stopped insulting me and suggesting that this is a field in which I lack basic competence.
How much do you think it normally costs to fund an 800 million dollar deal with a client with a 0.1% default rate? In general, very large contracts one off contracts of that kind have more flexibility than you find in large volume low margin businesses. The cost of guaranteeing a very low risk loan should not be a problem.
The worst case picture for Ex-Im has a subsidy of $200 million a year, and this would be less than half of a percent of the risk. If all the assets were equally risky, the subsidy would be worth less than a million dollars. Since Boeing was less than half as risky as the average contract, the subsidy would be closer to 0.05% of the contract price. Does it seem plausible that that would be an obvious requirement for the deal?
Most ECAs don’t have bank in the name and are branches of their government’s treasuries. The Ex-Im is a straight up government agency, not like Fannie Mae. If your concern is that it is an independent agency rather than a Treasury agency, then I don’t understand the concern, but can assure you that they work closely with the Treasury.
Right, because Fannie Mae had moral hazard and was induced to innovate. Ex-Im is doing the same stuff it’s been doing for decades, without new kinds of deals. Fannie Mae made lots of money. Ex Im does boring, low risk, low creativity, straightforward deals. It’s a different animal.
Are folks still reading all these comment threads? I remember when Sal posted this back in Dec … it made sense then and it makes more sense now… anyway Z in MT I think your comment here is one of the most interesting and one of the most likely scenarios I have read in all the Trump Bruhaha…cheers.. DQ