AGENDA AND PAPERS FOR THE JANUARY 12 MEETING

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86M00886R002000010027-3
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• Document Creation Date: December 21, 2016
• Document Release Date: August 20, 2008
• Sequence Number: 27
• Publication Date: January 11, 1984
• Content Type: MEMO

CABINET AFFAIRS STAFFING MEMORANDUM LIZ
Date: 1/11/84 Number: 168882CA Due By:
THE WHITE HOUSE
WASHINGTON
Subject: Cabinet council on Economic Affairs with the President
Thursday. January 12, 1984 2.00 nm - Cabinet Room
Action
ALL CABINET MEMBERS ^
Action FYI
CEA ^
CEQ ^ ^
OSTP ^ ^
^ ^
^ ^
^ ^
Vice President
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
GSA
EPA
OPM
VA
SBA
Jenkins
^
Mc Farlane
Svahn
0
^
0
CCCT/Gunn
CCEAJPorter
I2
CCFA/
^
CCHR/Simmons
^
CCLP/Uhlmann
^
CCMA/Bledsoe
^
CCNRE/
^
The President will chair a meeting of the CCEA on Thursday,
January 12, 1984 at 2:00 p.m. in the Cabinet Room.
The agenda and background papers are attached.
RETURN TO: ^ Craig L. Fuller ^ Katherine Anderson ^ Don Clarey
Assistant to the President UkTom Gibson ^ Larry Herbolsheimer
for Cabinet Affairs Associate Director J
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 MEMORANDUM FOR THE CABINET COUNCIL ON ECONOMIC AFFAIRS
FROM: ROGER B. PORTER 0/0
SUBJECT: Agenda and Papers for the January 12 Meeting
The agenda and papers for the January 12 meeting of the
Cabinet Council on Economic Affairs are attached. The meet-
ing is scheduled for 2:00 p.m. in the Cabinet Room. Atten-
dance is limited to principals only.
The Council will review two issues:
1. Controlling Federal Credit Activities
2. Monetary Policy and Financial Market Developments
Memorandums on these issues reflecting recent Council
discussions are attached.
 January 12, 1984
2:00 p.m.
Cabinet Room
1. Controlling Federal Credit Activities
(CM # 113)
2. Monetary Policy and Financial Market Developments
(CM # 111)
 MEMORANDUM FOR THE PRESIDENT
FROM: THE CABINET COUNCIL ON ECONOMIC AFFAIRS
SUBJECT: Controlling Federal Credit Activities
The Cabinet Council on Economic Affairs has recently under-
taken a series of Economic Policy Studies reviewing major areas
of economic policy. Economic Policy Study Number 6 focused on
federal credit policy. A summary of the study is attached at
Tab A with the full report and a set of tables at Tabs B and C,
respectively. This memorandum presents the conclusions and
recommendations of the Cabinet Council arising from this study.
The Growth and Allocation of Federal Credit
Controlling the size of the Federal Government requires not
only restraining the growth of on-budget Federal spending, but
also the growth of off-budget Federal outlays (primarily direct
Federal loans) and off-budget Federal guaranteed loan activity.
From 1976 to 1982, while on-budget Federal spending grew 100 per-
cent, off-budget Federal outlays grew 137 percent and Federal
loan guarantee commitments grew even faster.
Direct loans and loan guarantees grew rapidly, in part,
because they are not subject to the same Congressional scrutiny
as on-budget spending. Loan guarantees, for example, show up in
the budget only when there is a default and the government must
honor its guarantee. This may occur long after the government
offered its guarantee. Neither direct loan obligations nor
guaranteed loan commitments are covered by binding budget reso-
lution measures. The Administration includes a budget for direct
loan and guaranteed loan commitments in Special Analysis F of
the Budget, but that credit budget is not treated the same by
Congress as the official budget.
Direct loans at subsidized interest rates and guaranteed
loans provide a subsidy similar in its impact to many other
Federal subsidies. There is little difference between the
economic effects of some forms of grants or price subsidies and
subsidized loans. The economy bears a cost from these subsidized
loans because they allocate credit to certain sectors of the
economy and away from other sectors. Thus, there is a loss of
investment that would have occurred in these other sectors.
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T
In general, Federal credit activity has allocated credit away
from the business and industrial sectors and toward the agricul-
tural and housing sectors. Almost half of the direct loans made
by the Federal Government are in farm programs. These programs
support farm purchases and farm operations, as well as crop prices.
Some of the farm programs also support home purchases in rural
areas. Three-fourths of the guaranteed loan commitments made
by the Federal government are for housing.
The subsidies embodied in Federal credit activity are highly
variable across lending programs. At least one direct loan pro-
gram, for example, lends at interest rates as low as 2 percent.
This and similar low-interest rate programs were begun in the
1930's when a 2 percent interest rate was slightly above or
equal to the prime borrowing rate. Today those loans are still
made at 2 percent, though now, obviously, they include an enor-
mous subsidy. Further, guaranteed loan commitments are made
to a wide cross section of borrowers who differ markedly in
their risk characteristics. A guaranteed loan to a relatively
risky borrower provides a large subsidy, while a guaranteed loan
to a more credit worthy borrower involves a smaller subsidy.
Proposals
The Cabinet Council on Economic Affairs has four general
Federal credit policy recommendations:
1. Support Congressional efforts to move off-budget lending
onto the unified budget. This change would require that the
direct loan programs of the Rural Electrification Adminis-
tration and the Farmer's Home Administration, among others,
be treated in the same manner for budgetary purposes as
other programs. The 1985 budget will not reflect such a
change. If, in the future, legislation were enacted to
make this change, the published on-budget deficit would
appear larger by about $5 billion to $10 billion. Such
a change, of course, would not affect total Federal borrow-
ing requirements.
2. Include Federal direct loan obligations and guaranteed loan
commitments in the Congressional budget resolution process.
The Administration already develops a credit budget that is
included in the budget submission. Congress, however, does
not subject the credit budget to the same scrutiny and
binding resolutions it does the Federal budget. While
including credit programs in the resolution process will
not lead automatically to greater restraint, it is a useful
step in the process of evaluating government credit activity.
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3. Provide an explicit statement of Administration credit policy.
Coherent Federal credit policy requires an up-dated statement.
OMB should re-issue its credit policy directive (OMB Circular
No. A-70.) The revised circular would:
(i) Require credit legislative proposals to contain an
explicit statement of any subsidies in direct loan
or guaranteed loan programs;
(ii) Require that interest rates on any direct loans be
related to market interest rates so that those
interest rates will vary as market interest rates do,
rather than staying at fixed levels that may become
outmoded when market realities change;
(iii) Require those receiving Federal loan guarantees to pay
for part or all of the expected Federal default
liability on the guaranteed loans;
(iv) Encourage risk sharing with the private sector by
offering less than 100 percent Federal guarantees
rather than the full guarantee frequently used now; and
(v) Oppose providing Federal guarantees for Federally
tax-exempt obligations.
4. Provide government-wide management guidelines for credit
programs. These guidelines would include criteria for
forecasting credit write offs, criteria for designating
loans as being in default, and procedures for dealing with
defaulted loans.
Recommendation: The Cabinet Council on Economic Affairs recom-
mends that you approve the four Federal credit
policy proposals outlined above.
Donald T. Regan
Chairman Pro Tempore
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CABINET COUNCIL ON ECONOMIC AFFAIRS
ECONOMIC POLICY STUDY NO. 6
FEDERAL CREDIT POLICY
219:102,84
November 16, 1983
Growth of Federal Credit
o The role of Federal credit activity in the U.S. economy has been growing both absolutely and
relatively, with limited Presidential or Congressional oversight and control. In the past decade.
Federal credit activity has rapidly expanded through on- and off-budget direct loans, guaranteed
loans, and Government-sponsored enterprise loans. Since 1970, annual Federal and federally assisted
net lending (disbursements less repayments) has increased four-fold to approximately $88 billion. The
participation ratio of Federal and federally assisted lending relative to all funds advanced by
non-financial sectors has increased by about half -- from 14% to 22%.
o Federally subsidized lending is directed much more to some sectors of the economy, such as housing or
agriculture, than to other sectors, such as general business. Since it is subsidized, it alters
resource allocation relative to the free market and therefore results in loss of economic efficiency.
To the extent feasible, the costs of subsidized credit and the resulting loss of efficiency in the
private sector must be weighed against any public benefits of subsidized credit.
o The other side of the ledger from Federal and federally assisted lending is Federal and federally
assisted borrowing. Federal borrowing is to finance the budget deficit, including on- and off-budget
direct loans. Federally assisted borrowing is used for uncontrolled guaranteed lending, and
Government-sponsored lending. Borrowing to finance these credit activities increases Federal and
federally assisted demands for borrowing, which causes other borrowers to be crowded out of the
nation's financial markets.
o In 1982, Federal and federally assisted borrowing totalled $200 billion, up from an average of $32
billion a year during the first half of the 1970's. The ratio of Federal and federally assisted
borrowing to all funds raised by nonfinancial sectors in U.S. credit markets was 49% in 1982. This is
the highest participation ratio since World War II and is a large increase since the early 1970's,
when the ratio was 21%.
 Problems in Controlling Federal Credit Activity --The problems of controlling Federal credit activity are
enormous an system c for severs reasons.
o Budgetary control is inadequate over both the volume and subsidies of Federal credit activity.
-- With respect to volume, in 1982 only $9.1 billion of net outlays from loan programs were reflected
in the unified budget. An additional $14.3 billion in net loan outlays of off-budget entities
were not reflected in the unified budget. Moreover, the unified budget does not reflect loan
guarantee transactions at all, except in the case of defaults. The development of the Federal
credit budget, which is the aggregate of new direct loan obligations and guaranteed loan
commitments, is not adequate. Its aggregates are not binding on the Congress and thus do not
force trade-offs in the allocation of credit among credit programs.
-- There is no practicable and accurate measure of the subsidy from Federal credit programs because
of the great difficulty in weighing all aspects by which the Government improves the credit terms
for the borrower being favored. This allows interest groups, program pmanagers, and Congress to
argue that some forms of credit are "free goods," virtually costless to the Government and the
economy. This argument is particularly pernicious when used by the supporters of lending programs
that, by virtue of hidden subsidies, routinely make nominal profits. The existence of such
nominal profits is used as evidence that these programs should not have their lending volume
constrained.
Certain limited measures of subsidies for direct loans are presented in Special Analysis F of the
U.S. budget. Subsidies for direct loans and guaranteed loans, however, are not measured formally
in the budget.' There are, therefore, no estimates in the budget data base to force trade-offs
between various credit programs and normal budget expenditures. Such trade-offs as exist between
lending programs and other spending programs are limited to a few on-budget direct lending
programs and focus more on outlay constraints.
o There is no current statement of Federal credit policy that would provide guidance to credit program l FederalsCredit Pini olicy)iw shissuedoinm1965.ThP roast
rams have been warped policy
fit the desires of No.
special
interest groups, and there is no counterweight in the budgetary process to limit the subsidies
provided. The lack of a clear statement of Federal credit policy has also encouraged legislation that
is poorly conceived, inconsistent, or contrary to the Administration's credit policy goals.
Reform Measures
The best overall means to control Federal credit activity is through a two-pronged approach:
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 1. a strengthened budgetary process that makes the credit budget totals more binding; and
2. Improved credit program administration through a clear statement of Federal credit policy.
o A strengthened budgetary process: The unified budget, with its strict cash basis, is an inadequate
tool for controlling Federal credit activity. Financial commitments, either direct loan obligations
or guaranteed loan commitments, cannot be effectively managed by a fiscal tool that places its sole
of Federal credit ivity emphasis on the cash drawer. Nonetheless, the unified budget can and should be made more reflective
through the FederalaFinancingb Bankc(FB) the
The Administrationais on ecordeinisupportrofsthenbasic
intent of legislation (S. 1679) that would accomplish this goal.
o To some extent, any budget reflects the agency-by-agency, function-by-function decisions of Congress
and the Executive Branch. However, in the past three years, considerable progress has been made in
controlling the unified budget totals through aggregate ceilings on broad, across-the-board
categories. This has led to better restraint in the totals.
o There has been less success with the credit budget, even though it is the best extant tool for
potential control of overall Federal credit activity.
-- A major improvement in the credit budget would be for the Congress to establish more binding
aggregate limits on new direct loan obligations and guaranteed loan commitments and require an
allocation of credit totals by committee. Congressional action on credit should be subject to the
same scorekeeping procedures and controls as outlays. This would go beyond the process of
limitations on direct loan obligations and guaranteed loan commitments now set in some
appropriation bills.
-- A second improvement would be to establish formal measurements of the subsidies in Federal and
federally assisted lending. This would be one way to compare credit programs to one another and
to other expenditures.
These reform measures would be the best across-the-board mechanisms for limiting the growth of Federal
credit activity.
o improved credit program administration: The best way to improve the effectiveness of Federal credit
activity is to provide Government-wide guidance on administering individual credit programs. This
requires a clear statement of Federal credit policy. 0MB Circular No. A-70, Federal Credit Policy, is
the vehicle of choice for such a statement. Many of the Reform 88 initiatives on credit management
 could be used to buttress the policies enunciated in Circular No. A-10. However, improved credit
program administration will also require sustained attention to the legislative foundations of various
Federal credit programs. Unless these legislative aspects are dealt with in a consistent manner, the
jungle of conflicting credit program mandates will continue to grow.
Recommendations on Short Term Credit Issues
The following proposals for improving control over Federal credit are recommended for CCEA consideration and
approval:
1. The reissuance of 0MB Circular No. A-70 Federal Credit Policy. outdated because of changes in cre it programs and financial markets. CTheureissued A-701shouldeprovide policy
guidance on the administration of credit programs. It should also set the policy for shaping legislation for
new credit programs and amending defective legislation in existing programs. The draft A-70 would be reviewed
by the CCEA in February 1984, when it and a background report are completed.
(a) Interest rates on new direct loan obli ations. There is no updated policy on the minimum interest rates
that s 15511 c e11 or direct loans. interest rates range from 2% in a few cases to rates marginally
above the yield to maturity on Treasury Instruments. Lending at low fixed interest rates may reflect the
intended goal of the program, which is to subsidize borrowers. In a significant number of programs, however,
where the interest rate does not vary with financial market rates, the subsidies are greater than intended
when the legislation was enacted. The following recommendation would determine the basis for a minimum
interest rate on direct loans.
Recommended Principle: Direct loans should be offered at interest rates comparable to those charged a
particular r
borower by private financial intermediaries. This rate would be considered a benchmark
interest rate.-'
ate. it would vary from agency to agency, and loan category to loan category. It would raise
the average interest rate charged by Federal credit agencies. The yield to maturity on Treasury
interestnrate of(ia arbenchmark arable because direct
is aorisk would not be considered
therefore normally bear an interest rate above-the yields on Treasury instruments. comparable market
loan obligations should
in cases where the Administration wished to offer an interest rate subsidy. the subsidy would be defined
as a discount below the benchmark rate. This would mean greater control over the level of subsidies
offered new borrowers, as the subsidy discount would stay the same, even with movements in financial
market rates.
(b) Guarantee There is no current policy on the level of fees to be charged for guarantees. In some
cases, these fees are set in law and bear no relationship to either the administrative and servicing costs to
 the lity costsgthat result inpadditionnalrsubsidies. in the event of a default. This guarantee program administrators would need G to eess timateethe
expected Government liability of their guaranteed loan portfolios.
Recommended Princi le: Guarantee fees should cover the servicing and administrative costs and the full
expecte Government liability in the event of default for a guaranteed loan portfolio.
In cases where the Administration wished to provide subsidies, guarantees fees would not cover the full
expected liability of the Government in the case of default. The Intended subsidy would be defined
through reference to the expected liability of the-Government. The guarantee fee would be expected to
cover a portion (e.g. 80%) of the Government's liability in the event of default in a loan guarantee
portfolio. The guarantee fee would still cover the full administrative and servicing costs.
(c) Interest rates on guaranteed loans. There is no current policy on the interest rate that should be
charged by private lenders for guaranteed loans. In some cases, legislation requires that borrowers be
protected against "excessive costs."
Recommended Principle: The recommended principle in A-70 would state that the Government should offer
guarantees for loans by private lenders in a manner-that enhances competition among lenders with respect
to the
be requiredcto bidntforeresthet the
assure the boarrowerpotential f the lowest lenders
costs.
(d) Co-Insurance. Agencies frequently offer guarantees to private lenders for 100% of the principal and
interest for loans. With respect to credit risk, the guaranteed loan is virtually the equivalent of a
Treasury security. This may encourage private lenders to be less diligent in offering and servicing loans
protected by the guarantee. (We are not here considering guaranteed loans of a type normally financed in the
investment securities market.)
Recommended Principle: The recommended A-70 principle would state that (1) private sector lenders should
bear a "significant" portion of the risk of default when they benefit from Government guarantees and (11)
in the event of default, the Government's claim on assets should not be subordinated to that of private
lenders. The definition of "significant" portion could be defined as 20% of the risk of default. Thus,
loan guarantee coverage would be limited to 80% of outstanding principal and interest.
(e) Guarantees of tax exempt securities. Federal direct or indirect guarantees of tax exempt securities
offer investors e
in thos guaranteed securities double benefits: they pay no Federal tax and bear no risk.
This type of security is therefore a more attractive investment than U.S. Treasury Instruments. The
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Administration has consistently opposed the direct or indirect guarantee of tax exempt securities.
Recommended Principle: A-70 would confirm the principle that Federal agencies should not offer direct or
indirect guarantees for securities that benefit from tax exempt status, except when required to do so by
law.
2. Active su ort for le islation that would set resolution tar ets on new direct loan obll ations and
uaranteed loan commitments. Bills in both the House H.R. 2076 the "F
AL I
c an the ena e
_rr
d
138
.
e
2,
eral Lending Oversight and control
contribute to improved control over credit. The bills would require that th
the budget include a
ro
i
pp
pr
e first concurrent resolution on
ate levels of authority for new direct loans and guaranteed loans and would require
an allocation of credit totals by committee. Congressional action on credit would be subject to the same
storekeeping procedures and controls as outlays.
Recommendation: The Administration should support the basic intent of both bills, which 1s to 1
Congre focus on credit aggregates. The Administration would define its position on individual
provisions of the bills at a later point, in testimony before Congress. Improve
Recommendations on Loner Term Credit Issues
In addition to the above recommendations, a variety of other credit issues need to be resolved. These include effort
ely
ses on withexpandtheired
c ouplace
comme rcisalto
asatwel loasemonitoring theirnactivitytmore carefulalymore
and equal getting
agencies to follow past CCEA recommendations on Federal credit activity; ( ) getting
a. Government-s onsored enter rises. Efforts to place privately-owned, Government-sponsored enterprises
-- part cularly the -Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC) -- on a more equal footing with their commercial counterparts have had only
limited success. Although the Administration has generally been able to restrain the Congress from
adding new authorities or expanding existing authorities to GSEs and has been able to provide some and re
t thelimiGSEsted theirstiesito the FedgulraaltorGoy
difficulties encountered in beginning the amPetitors,
tooassisttthemiincobtaining credit. The
establishment of more binding limits for the pfundssraised rbyaGSEsnas well asdon the newgdir ct loan
obligations and guaranteed loan commitments of the Federal Government.
b. Implementation of the 1981 CCEA recommendations. In 1981, the CCEA made a variety of programwatic
recommendations on Federal credit to businesses, individuals, housing, and agriculture. The CCEA
studies noted several instances in which Federal credit activity could be reduced while sustaining the
 objectives of the programs. Unfortunately, many of the recommendations of the major CCEA effort were
never fully implemented, even when there was general agreement on the principles that determined the
recommendation. The Working Group on Federal Credit Policy should continue to develop policies to
implement in 1984 the principles of past CCEA recommendations with respect to credit for housing,
business, agriculture, and invididuals. These policies and recommendations would be presented to the
CCEA on a case-by-case basis.
A ends
The recommended agenda for implementing these recommendations is:
To draft OMB Circular No. A-70 by February 1984. The guidelines approved by the CCEA on
administration of credit programs should be strongly and clearly included in the FY 1985 budget.
-- To support hearings in 1984 on both 5. 1582 and M.R. 2076, urging enactment of their major provisions.
Establishment of more binding credit limitations should be a major goal
activity. for proposed FY 1985 credit
-- To continue to develop policies that implement in 1984 the principles that underlay previous
programmatic CCEA recommendations with respect to credit for housing, business, agriculture, and
individuals.
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 30:84
November 17, 1983
I. Volume and Allocation of Federal Credit Activit
A. Flow-of-Funds Accountin
One useful context in which to analyze aggregate Federal credit activity is the
flow-of-funds accounts produced by the Federal Reserve Board (FRB). The
flow-of-funds accounts measure total borrowing by non-financial sectors in U.S.
credit markets. Total lending, of course, is identical to total borrowing.
(Financial sectors are excluded to avoid double-counting of transactions.) It
is against this denominator of total borrowing that we can measure Federal and
federally assisted borrowing in the case of total funds raised and Federal and
federally assisted lending in the case of total funds advanced.
Direct Federal borrowing to finance the deficit, federally guaranteed and
direct borrowing for loan programs, and federally assisted borrowing by
Government-sponsored enterprises from the U.S. capital market clearly redirect
financial resources from all sectors of the economy to favored sectors. The
ratios of direct Federal borrowing plus federally assisted borrowing to total
funds raised in U.S. credit markets have recently grown to much higher levels
than in the past, as shown in Table 1:
Table 1.--RATIO OF FEDERAL AND FEDERALLY ASSISTED
BORROWING TO TOTAL FUNDS RAISED
(in percent)
1966-69
Federal borrowing attributable
to non-credit activity....... 2%
Federal and federally assisted
borrowing attributable to
credit activity .............. 13%
Total ...................... 15%
The above table separ
a
t
es Federal
1970-74
1975-79
1980
1981
1982
7%
16%
13%
12%
27X
14%
14%
21%
21%
-
22%
21%
30%
34%
33%
49%
and federally assisted borrowing into two
parts. The first part is Federal borrowing necessary to finance the non-credit
activity of the Government. This is the Federal on- and off-budget deficit,
less the amount of on- and off-budget net loan outlays. part is
consthatists amount of for Federal b which the Government acThe second
told as a financial intermediary. If
orrowing to finance direct loans (on- and off_budget),
guaranteed borrowing (which is identical to guaranteed lending), and
 Government-sponsored borrowing. This amount increased from 14% of total funds
raised in the 1975-79 period to 22% in 1982.
8. Volume of Credit Activity
The point of potential control In Federal credit activity is when the
Government becomes obligated to extend a direct loan or a loan guarantee. It
is for this reason that the Federal credit budget shows the gross aggregate of
direct loan obligations and guaranteed loan commitments. Direct loan
obligations grew at an annually compounded rate of 17% between 1970 and 1981;
guaranteed loan commitments grew at a rate of 10% over the same period.
Table 2 presents the volume of new direct loan obligations and guaranteed loan
commitments:
Table 2.--NEW DIRECT LOAN OBLIGATIONS
AND GUARANTEED LOAN COMMITMENTS
(in billions of dollars)
Avers a Estimates
1980 1981 1982 _
Direct loan
obligations ....... 13.0 38.4 51.0 57.2 47.6 49.2 40.3
Guaranteed loan
commitments....... 31.5 49.9 81.4 76.5 53.7 107.0 90.4
Total ............ 44.5 88.3 132.4 133.7 101.3 156.2 130.7
The growth rates in new direct loan obligations and guaranteed loan commitments
have been highly volatile over the last several years as shown in Table 3.
This is largely due to cyclical movements in the demand for housing guarantees
and insurance. Demand was low in 1982, due to the recession and high interest
rates, while a large increase in demand is estimated in 1983. Most of the
growth in the credit budget aggregates in 1983 is estimated to result from the
growth in guaranteed loan commitments, mainly for the housing sector.
Table 3.--ANNUAL CHANGE RATES
(in percent)
1172- .. Averages
Estimates
1980 1981 1982
obligations ....... 17% 8% 26% 12% -17% 3%
-18X
Guaranteed loan
commitments....... 2% 30% -5% -6% -30% 99% -16%
Total ............ 6% 20% 5% 1% -24% 54% -16%
 The major direct loan programs responsible for the growth since 1970 are shown
in the following table:
Table 4.--GROWTH RATES FOR LARGEST DIRECT LOAN PROGRAMS -- 1970-1982
(dollars in millions)
1970
1982
Average
Compounded Annual
CCC price supports...
3,093
11
500
Growth Rate
Farmers Home Admini-
,
11.3%
stration ............
Export-Import Bank
451
2
209
8,221
1/
-
26.7
...
Rural Electrification
,
3,516
3.9
Administration......
470
4,752
1/
20.8
1/ Includes direct loans made by the agency and sold with an agency guarantee
to the FFB.
Despite the sharp growth in some large direct loan programs, new direct loan
obligations are estimated to decline 18% from 1983 to 1984. This is due mainly
to:
-- less lending by the Commodity Credit Corporation because of the new
Payment-in-kind (PIK) Program, in which farmers are offered surplus
commodities in return for reducing their production of crops; and
-- less lending by the Rural Electrification Administration (REA) because
of anticipated decreases in the growth of electric power demand in
areas served by rural electric systems.
As noted above, estimated increases in guaranteed loan commitments are
responsible for most of the recent growth in the credit budget aggregates. The
major factor in the changes in guaranteed loan commitments is the mortgage
insurance and guarantee programs in the housing sector. Table 5 shows both the
absolute levels of the largest loan guarantee programs, and their average
compounded annual growth rates since 1970:
 Table 5.--GROwTH RATES FOR LARGEST LOAN GUARANTEE PROGRAMS -- 1970-1982
(dollars in millions)
New Guaranteed
Loan Commitments
Average
Compounded Annual
G
Low
Fed
-rent public housing.... 1,517
eral Housing Administra-
13,284
rowth Rate
19.4%
ti
VA
on ...................... 16.324
housin
18,576
Rur
g ................. 3,720
al Electrification
'983
5,983
4.0
Ad
Edu
ministration............
cation ...
5,112
---
Gov
....
ernment National 959
~~~ ~~
6,895
17.5
Mo
Mor
Sec
rtgage Association
tgage-Backed
urities ................ 3,710-2/
36,382
22.5
j/
C.
D ata are for
Sector Allocations of Credit
Federal and federally assisted lending reallocates capital to favored of the economy. One means of gauging the reallocation is to define the sectors
approximately along the lines of the sectors in
flow Of funds accounts. the Federal Reserve Board's households In 1982, three malor sectors
agriculture, and business -- accounted for 98% of direct loan
obligations and 99% of guaranteed loan commitments Appendix Tables 4 and 5
present the conceptual division of loan and loan guarantee programs by sector.
1. Households.--The household sector of the economy, which incluw
examp e1 housing guarantees, guaranteed student loans, and health es ms,
benefitted from the greatest volume of Federal credit activity. $5.3 billion (11%) of the Fv 1982 direct loan obligations and $45 0 xbillion
(79%) of the quaranteed loan commitments were extended to this sector.
2. A riculture.--The agriculture sector of the economy also benefitted from
massive amounts of Federal credit. Credit programs include the Commodity
Credit Corporation, and the Farmers Home Administration. In 1982,
approximately $20.5 billion (43%) of the direct loan obligations and $1.8
billion (3%) of the guaranteed loan commitments were extended to this sector.
3. Business.--The business sector of the economy benefitted from the largest
number o ederal credit programs. Credit programs include the Small Business
Administration, the Export-Import Bank, the Maritime Administration and several
others. In 1982, approximately $20.8 billion (44%) of the direct loan
obligations and $9.9 billion (17%) of the quaranteed loan commitments were made
to this sector.
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
Table 6 presents Federal and federally assisted net lending (including
Government-sponsored enterprises) for each of these sectors as a percent of
funds advanced to that sector. The participation ratios are only approximate,
however, as it is difficult to classify Federal credit activity in accordance
with the FRB's sector definitions. In this analysis, credit activity that
benefits a given sector is attributed to that sector. In some cases, the FRB
does not attribute the loan to the same sector. For example, Eximbank loans
benefit the U.S. capital goods industry, a part of the business sector.
However, Eximbank loans are made to foreign borrowers, not to the domestic
business sector, and so would be counted as a flow of funds to a foreign
borrower by the FRB. In these cases, the FRB flows have been adjusted to
reflect these changes.
Participation ratios by themselves do not reveal the full effect of Federal
credit activity on the economy. They do not reveal the subsidy effects, for
example. Nonetheless, the table shows, in circumstantial fashion, the
extremely high degree of participation by Federal and federally assisted cer
The ratioseofithe lehoundingsehotold andtain
ectrelatively in high
which participation
Federal and
federally assisted loans redirected capital from the business sector to both
the household and farm sectors.
It should furthermore be noted that the fluctuations in the participation rates
of given sectors are affected by normal economic cycles, as well as changes in
Federal credit programs.
Table 6.--NET FEDERAL AND FEDERALLY ASSISTED LOANS BY SECTOR
AS PERCENT OF TOTAL FUNDS ADVANCED TO THAT SECTOR
1976
1977
1978
1979
1980
1981
1982
Households ..............
Business .......
16
14
15
26
26
42
44
80
.........
Farm ..
7
8
8
15
12
..................
66
70
84
70
67
64
8
97
The household sector's participation ratio has grown monotonically since 1979
to a high of 80% in 1982. This high participation ratio reflects a sharp
decline in net funds advanced to the household sector from all other sources
and a slight increase in Federal and federally assisted lending. Approximately
half of the total Federal and federally assisted lending can be attributed to
Government-sponsored enterprises, exceot in 1982, when this proportion rose to
over 60 percent.
The farm sector shows relatively stable participation ratios; the funds
advanced to the farm sector have moved in the same direction as net Federal and
federally assisted lending to that sector over this period. There was a sharp
 drop in funds advanced to the farm business sector in 1982, which resulted in a
relative increase in the calculated participation ratio to 97 percent.
The business sector participation ratios fluctuate between 7% and 15% because
the net funds advanced to the business sector over several of the years moved
in a different direction than Federal and federally assisted lending to the
sector.
Appendix Tables 4-7 present both Federal and federally assisted lending and the
FRB's flow of funds by sector in more detail.
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
II. Economic Costs and Subsidies
The measures of the volume of Federal credit activity given above do not
present a complete picture of the effects of Federal credit activity on capital
allocation throughout the economy. Federal credit activity' has a greater
effect on capital allocation the greater is the subsidy implicit in the
activity. That is, Federal loans to a sector that are made at interest rates
near the rate at which that sector could borrow in the private market have much
less effect on allocating capital to that sector than highly subsidized loans
would have. The figures given above do not capture the depths of the subsidy
in the different programs and sectors.
A. Direct Loan Subsidies
The subsidy to borrowers of direct loans depends on the difference between the
rate of return they pay lenders with Government assistance and the alternative
rate of return they would have had to pay to borrow the same amount of money
without Government assistance. However, in a practical setting it is
f
requently not possible to know and to measure what this alternative interest
rite to
finan ed,tdifferdargreatwould
dealVe Sbeen. ome borrowers are such poor credit risks being that
they could not find a lender even at interest rates above 100%. Some
transactions would not be viable unless financed at a subsidized rate, and so
would not take place in a free market. Therefore, most subsidy calculations
use as an estimate of the alternative rate market rates for specified classes
of loans that may not be entirely comparable.
In addition to providing interest rates that are lower than private lending
interest rates, Government direct loan programs frequently carry other
conditions that enhance the partially measured subsidies. For instance, direct
loans sometime carry longer maturities than comparable private sector loans.
When combined with below-market interest rates, these subsidies persist for
protracted oeriods. Or, the original loan amount may be higher in relation to
the value of the underlying enterprise than would be offered by a private
lender.
Even if the ostensible direct loan value and maturity are not generous,
repayment subsidies may exist. Deferral of interest, grace periods, and low
fees increase the value of the loan to the borrower, and cost the Government
money. Default clauses may offer the borrower greater protection from
foreclosure actions by the Government than clauses typically available from
private sector lenders.
Finally, direct loan programs may make credit available to borrowers to whom
the private sector would not lend -- at virtually any interest rate, under
virtually any repayment terms. An example may be loans for the start-up and
construction of subsidized public housing.
Two sets of calculations of direct loan subsides were made in Special Analysis
F. "Federal Credit Programs," in the last two years. One, based on private
borrowing interest rates, is characterized as the value of the subsidy to the
borrower. It is, nevertheless, incomplete, because it compares the Government
lending rate with the private interest rate for a high quality loan at standard
 terms. It therefore does not include the additional subsidy from an unusually
risky borrower, an unusually risky venture, or unusually risky terms.
The second measure of subsidy is still more incomplete or partial. It compares
the Government lending rate with the Treasury borrowing rate and therefore does
not allow for any risk of default. As such, it does not 'measure the cost of
the subsidy to the economy, but the cost of the subsidy to the Government. For
long-term direct loans made at very low nominal interest rates, this subsidy
may he quite large. In a few cases, such as a short-term direct loan at
Treasury bill rates plus a premium percentage, it may even be negative.
B. Loan Guarantee Subsidies
A Government guarantee of a private sector loan frees the lender of the risk of
default. This has two important effects. First, it encourages private sector
lenders to provide credit to borrowers who otherwise would be considered too
risky. Second, the guarantee eliminates the full risk premium that lenders
otherwise would charge.
Both lenders and borrowers share the benefit of the eliminated risk premium. A
100% guarantee of principal and interest, in credit risk terms, is the
equivalent of a direct loan from the Government. Private lenders, however,
will normally charge a rate for this loan above the Treasury's cost of capital.
In part, this will reflect some of the loan characteristics; the loan will also
be less liquid than a Treasury instrument, and servicing and administrative
costs are incurred. Nonetheless, the interest rate differential -- the
difference between the Treasury's cost of capital and the comparable interest
rate on a loan from the private sector -- will probably be shared by both
borrower and lender, instead of flowing entirely to the borrower as in the case
of a direct loan.
The two effects of the guarantee alter the allocation of credit in the market
place. Furthermore, the Government's assumption of risk leads to outlays when
borrowers default; this represents the program's direct costs to the
Government. Just as with direct loans, the distinction between credit market
effects and cost to the Government is important. Even when the Government does
not bear the cost itself, the credit market effect may impose private costs by
channeling credit and real resources from one sector to another.
C. Estimates of Interest Subsidies
The concept behind the calculation of the value of a direct loan subsidy to a
borrower is clear; as noted above, the practical measure of that subsidy is
not. Nonetheless, the methods used in Special Analysis F do Provide estimates
of the relative depth of subsidies in individual direct loan Programs and the
relative distribution of the subsidies among the direct loan programs. At the
least, they provide an ordinal rankinq of the subsidies. Subsidy estimates are
not available for loan guarantee programs in Special Analysis F, however,
except to the extent that the Government pays part of the interest in the
student loan insurance Program.
Since interest subsidies occur throughout the life of a loan, the measurement
of the subsidies requires that annual future Payments be discounted into a
 single present value. By making this calculation, it is possible to estimate
what the cost of the subsidy is to the Government and the economy.
The Special Analysis F estimates of the present value of interest subsidies on
direct loans based on comparable private market rates, in 1982, are as follows
for the three major sectors that receive almost all of the direct and
guaranteed loans:
Households....... $1.3 billion
Agriculture...... $3.9 billion
Business......... $2.0 billion
These estimates almost certainly understate the actual subsidies to the sectors
for many of the reasons noted above. The subsidy calculations do not consider
the lower fees, longer grace periods, or longer loan maturities available from
the Government. Nor do they consider the case where the Government would make
a loan, but the private sector would not.
 III. Major Reasons for Poor Control Over Credit Programs
There are four principal interrelated reasons for the growth in Federal credit
program levels since 1970. First, previous Administrations and Congress
treated credit as virtually a free good, or at best, an inexpensive substitute
for a grant or direct purchase. Second, the budgetary controls over both the
amount and subsidy of Federal credit activity were and are inadequate. Third, fre higherasubsidies designed to
providestgreater amounts of credit or
goals. Many of the goals
are poorly defined and thus encourage an excessively broad use of Federal
credit resources. Fourth, poor program management may mean that program levels
are higher than necessary. The full costs of Federal credit activity are not
charged borrowers, thus encouraging greater use of Federal credit.
A. Credit as Free Good
The most pervasive myth surrounding Federal credit activity is that it is a
free good. The myth arises in several particular sets of circumstances.
Perhaps the most important set of circumstances is when the Government nrovides
a loan guarantee. The loan guarantee is a contingent liability of the ecome an doesrnotnbt that ecome ayactualyliability, which cisatol say ithere is in
no hdefault that
on tthe
part of the borrower, it may appear that the loan guarantee is a free good in
spite of the fact that it reallocates credit and hence real resources from one
sector of the economy to another.
Another set of circumstances in which Federal credity activity appears to be a
free good is one in which the Government lends money at the Treasury borrowing
rate, thus incurring no explicit cost. Another set of circumstances is one in
which Federal agencies earn nominal profits. Supporters of the Ex-Im Bank, the
Tennessee Valley Authority, and other Federal agencies have routinely made this
last claim.
As noted in the section on subsidies above, there is a significant opportunity
cost to the private sector in Federal credit activity even if the Government
makes loans at the Treasury borrowing rate. When the Government finances a
direct loan by taxation, the taxpayer bears a burden and gives up real
resources. When a direct loan is financed by borrowing, less credit is
available to other private borrowers and, thus, they must forgo real resources,
Just as in the tax finance case. Therefore, however the loan is financed,
someone must be forgoing the real resources that are transferred to the favored
borrower. A loan guarantee has this same effect of making less credit and real
resources available to other private borrowers, even though the funds do not
transfer through the Government at all.
A second fallacy involves those agencies with significant equity held by the
Government. One reason that some lending agencies make nominal profits is that
they value Government equity at zero opportunity cost. Eximbank, for example,
is required to take its average cost of capital into account when setting its
lending rate. The billion dollars of U.S. Treasury equity, as well as retained
 earnings of $1.9 billion, are usually valued at zero cost. Thus, although
Eximbank's latest marginal borrowing cost is above 10.5%, it lends to some
borrowers at 10.0X.1/ It can afford this low rate at least in part because the
cost of equity is assumed to be zero. The cost to the Government, however, of
$2.9 billion on which it receives no rate of return is roughly $300 million
annually at today's interest rates.
B. Inadequate Buda etary Controls
The treatment of credit as a free good is reflected in the inadequate budgetary
controls over both the volume of lending and the subsidy amounts.
1. Problems in the Unified Budget
The unified budget, with its necessarily strict adherence to cash flows, is
inadequate as the sole management control tool for credit programs. It does
not measure economic subsidies. It cannot provide control over loan guarantee
programs as these do not involve outlays except in the case of default. It
c
does now. A an, however, be made to reflect Federal direct loans more accurately than it
the unified
and budget
transactions ofmtheroff budget FEB iin into the
to attribute the outlays
to the agencies that use the FFB and are therefore responsible for the FFB's
direct loans to the public.
Size and Growth 'of FFB Spending
The problem of control posed by the present budgetary treatment of programs
.financed by the FFB applies to a large volume of Federal activity. As shown in
the following table, FFB outlays more than doubled from $6.4 billion in 1975,
the first full year of operation, to $14.1 billion in 1982. By 1983, they
decline to $10.4 billion.
b/'-The average Eximbank lending rate for the last year is above 10.5%; it lends
only to least developed countries at a rate of 10.0%. However until this
Administration, Eximbank's marginal lending rate had been significantly below
its marginal borrowing rate.
 Table 7.--OFF-BUDGET OUTLAYS
(dollars in billions)
Fiscal
FFB as a
Period
FF8
Other
Percent of Total
1974.....
S 0.1
S 1.3
7%
1975.....
6.4
1.7
79
1976.....
5.9
1.4
80
TO.......
2.6
-0.8
144
1977.....
8.2
0.5
94
1978.....
10.6
-0.3
102
1979..:..
13.2
-0.7
106
1980.....
14.5
-0.3
102
1981.....
21.0
-*
100
1982.....
14.1
3.2
82
1983.....
10.4
2.0
84
1984 est.
11.3
2.7
80
1985 est.
10.4
0.8
93
1986 est.
9.0
1.1
89
As Table 7 shows, FFB outlays have comprised at least 80% of the Federal
Government's off-budget outlays since 1976. The problem of off-budget outlays
is thus primarily a problem of the budgetary treatment of proqrams financed by
the FFB. Under the July 1983 budget estimates, OMB projects FF8 outlays to
decline from $11.3 billion in 1984 to about $9.0 billion in 1986, primarily due
to proposed reduced program levels by the Farmers Home Administration.
Achieving these reductions in off-budget outlays will be difficult. One major
reason is that the off-budget FFB outlays are not subject to the same budgetary
review and control they would be if they were counted in the budget totals and
charged to the agencies that are responsihle for them.
The magnitude of off-budget FFB activity can be seen in terms of its asset
holdings as well as its outlays. The assets held by the FFB at the end of
June 1983 are summarized below:
 Table 8.--FFB ASSET HOLDINGS
(in billions of dollars)
Agency debt
On-budget agencies ................ $27.4
Off-budget entities ............... 1.3
Subtotal ....................... 28.7
Loan assets purchased from agencies. 58.6
Loans directly made to the public... 44.7
Subtotal ....................... 103.3
Total .................. :..... 132.0
As of the end of June 1983, the FF6 had financed agency operations amounting to
a net total of $132.0 billion. These are the cumulative results, from 1974 to
the present, of FFB purchasing agency debt securities, buying agency loan
assets, and making agency-guaranteed direct loans to the public. The FFB's
purchases of agency debt are properly accounted for now. An agency incurs
.outlays when it spends the proceeds of its borrowing, not when it borrows.
However, the $103 billion of loan asset purchases and direct loans made to the
public constitute Federal outlays that were not recorded in the budget because
the FFB is itself off-budget.
This $103 billion of off-budget outlays had to be financed by Treasury
borrowing, just as did the budget deficit. It therefore added $103 billion to
the debt borrowed from the public and to the amount of debt outstanding that is
subject to the statutory limit. Since agency debt is generally not subject to
the statutory limit, the replacement of agency debt in the market by Treasury
debt also added to the total amount of debt subject to limit. Thus, because of
the FFB, these agency issues and guarantees are now properly reflected in the
total public debt, and the Administration has publicly supported taking the
next step and including these activities in the budget as well.
The FFB's financing is largely concentrated in a few agencies. As shown helow,
in 1982 the Farmers Home Administration and the Rural Electrification
Administration accounted for more than two-thirds of FFB outlays, and the
foreign military sales credit program accounted for nearly half of the
remainder.
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
Table 9.--MAJOR USERS OF THE FFB
(in billions of dollars)
1982
Farmers Home Administration. ............ $4.9
Rural Electrification Administration....
Foreign military sales credit........... 24.5
.3
Student Loan Marketing Association......
Low-rent public housing 0.7
Other .................................. 0.7
1.0
Total .................................
14.1
The use of the FFB is the greatest evasion of the cash flow concept of the
unified budget. The key improvement that we could make in our present budget
process is, therefore, to attribute the cash outlays of the FFB to the
appropriate agencies and programs in the unified budget. The overall budget
totals would then measure more accurately the true size of Government outlays
and the Government deficit. Attribution of
the responsible agency would improve control over the FFallocation ysoftocredit
resources among different uses, agency-by-agency and function-by-function.
Alternative programs cannot be compared with each other unless their activities
are consistently and fully measured. Failure to correct the current treatment
of FEB activity will continue the distortions, abuses, and lack of control over
Federal lending that have plagued proponents of sound budget management Poi-
years.
For all of the above reasons, the Administration supports the basic intent of
S. 1679, "The Honest Budgeting Act of 1983." Despite its importance, this bill
would not by itself provide an adequate mechanism for controlling the credit of
the agencies that use the FEB. Such a mechanism requires subsidy estimates and
credit budget control, as discussed below.
2. Problems with the Federal Credit Bud et
Control over Federal credit activity is most effective at the point when the
Government is obligated to provide a direct loan or a guarantee. This
fundamental concept is the underpinning of the credit budget and has been the
focus of Administration planning. The Administration has consistently proposed
gross limitations in its internal Planning ceilings on the volume of new direct
loan obligations and guaranteed loan commitments.
Controlling the volume of new credit activity, however, is only a half step in
controlling its effects on the economy. The other half is controlling the
amount of subsidy provided by the credit. The bar graphs in Chart 1 provide
comparisons for some key direct loan Programs between the level of new direct
loan obligations and the estimated present value subsidies of those direct loan
obligations. As the graphs illustrate, a low level of direct loan obligations
does not necessarily mean a relatively low level of subsidy, although subsidies
and obligations tend to move together.
 Approved For Release 2008/08/20 : CIA-RDP86M00886ROO2000010027-3
Credit Program Levels & Subsidies
Credit Program Levels Subsidies
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
An improved credit budget, therefore, should have two Poi of First, the aggregate ceilings for new direct loan obligations, at tat a au minimum,
ed
loan commitments should be binding. Ceilings that bind are and necessary to curb the growth of Federal credit activity by forcing some degree
of trade-off between the varinus types of Federal credit activity.
Second, a common metric of subsidy is necessary. Without this measure,
proponents of guarantee programs, for example, will argue that they should be
chargethigherginter stt r tesn than rect
other loan
direct a loan Direct loan programs that
they in turn should be subject to higher loan lima ationsmsthanlltheseeother
programs. Both the lack of a binding ceiling and the absence of a formal
measure of subsidy contribute to the poor control over Federal credit activity.
C. Defective legislation
A third reason for inadequate control over Federal credit activity is rogrammat
slati pnadeq ateior de ectiveirelative ito Admion for credit cy. Among frequently
major flaws are: poliY? Among the frequent
nt
-- Program beneficiaries that are ill-defined. This allows loan program
administrators a moveable feast. For example, the Rural Development
Loan Fund of the Department of Health and Human Services, authorized
under the Economic Opportunity Act, was initially developed to
increase income and employment opportunities for low income rural
residents. In fact, many of the actual recipients of the program live
in urban areas.
-- Interest rates and fees that are set in legislation and bear no
relationship to market forces. The Rural Electrification
Administration Act, for example, had its interest rate set at 2% at
the time of its enactment in the 1930's, which was above the then
prevailing prime rate. It hardly reflects recent prime rates,
however. MarAd's ship construction guarantee fee, as another example,
is set by law between 1/2% and 1% per annum.
The last example also indicates the need for a measure of the subsidies in
direct loans and loan guarantees as a point of control. By specifying the
interest rate rather than the degree of subsidy, Congress has no idea what the
subsidy will be in the future. As interest rates rise, so do subsidies,
without any Congressional review or decision.
0. Poor management
The final overlapping reason for the poor control over Federal credit Programs
is poor administration. Rudimentary risk analysis, faulty credit standards,
and defective credit approval processes result in higher defaults and
unnecessary program costs. Although it is not possible to place a dollar value
on the amounts of delinquent or defaulted loans due to poor management
practices, it is no doubt significant. In September 1983, the principal on
delinquent loans owed the U.S. Government was over $11 billion.'
 IV. The Administration's Objectives and Polic Issues
In March 1981, the Administration laid out an ambitious program to redress some
of the flaws in Federal credit programs. The Administration's broad objectives
were:
-- to reduce the impact of Federal credit activity on the nation's
financial markets;
-- to improve control over the allocation of credit and reduce its costs
to the Government; and
-- to improve program management.
In the aggregate, the Administration has had only limited success In reducing
the impact of Federal lending activity in the nation's financial markets. e
participation ratio of net Federal and federally assisted lend The
(disbursements less receipts) to total funds advanced by nonfinancial sectors
has increased from 20.2% in 1981 to an estimated 25.0% in 1983.
The major credit Policy issues given these objectives are:
-- how to improve budgetary controls over Federal credit activity; and
-- how to improve credit program administration.
A. Improved Budoet Legislation
Controlling credit activity will continue to be a sizeable
problem
Administration unless credit is formally integrated into the congressional
budget process. Attributing the outlays of agencies that use the off-budget
FFB back to those agencies through legislation such as is required in S. 1679,
is an important step. But, as long as lending aggregates are not binding,
there is a strong incentive to continue the practice of replacing on-budget
outlays with off-budget lending programs.
Recently, legislation was proposed in the Senate to amend the Congressional
Budget Act of 1974 in order to provide a statutory basis for including Federal
credit totals in the budget resolution. S. 1582 "The Federal Credit Control
Act" would "establish procedures for setting targets and ceilings in the
congressional budget Process for direct loan authority and loan guarantee
authority ... " This Act would incorporate credit activity into the
Congressional budget process by establishing guidelines for credit budoet
aggregates and functional totals similar to those for budget authority, outlays
and receipts.
Major provisions of the bill would:
-- require that the first concurrent resolution on the hudget include
appropriate levels of new direct and guaranteed loan authority and
attribute the authority level for each function;
-- require that the conference report on the budget resolution include an
allocation of new direct and guaranteed loan authority by Senate and
House Committee;
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
-- require that any legislation specifying new levels of direct and loan
guarantee authority shall not be considered unti budget
resolution is passed; l the first
-- Provide for a Point-Of-order against bills that exceed the totals in
the second budget resolution;
-- extend rescission and deferral procedures to direct and loan guarantee
authority; and
-- specify that the President's budget. Proposal include new direct and
guaranteed loan authority and that the Administration submit current
services estimates for credit.
Legislation has also been Proposed in the House (H.R. 2076 "The Federal
Lending Oversight and Control Act") that would include binding credit
aggregates in the credit process. There are four major differences between the
Senate and House version.
-- The Senate introduces new credit concepts -- direct loan authority and
loan n guarantee authority. This change recognizes that authority to
itments and guarantee
cake
can be made. Authority, be provided before obligations and
therefore, control. Direct loanauthorityhoand loanhe point of authority are made analogous to budget authority and are necessary to
extend the procedures of the Impoundment Control Act to credit
activities.
-- The Senate version of the bill would extend the procedures of the
Impoundment Control Act to both direct and loan guarantee authority
whereas the House version would provide impoundment control only for
loan guarantee authority.
-- S 1582 specifies that limitations must be included in appropriations
bills or else be subject to a Point of order. This provision enables
Congress to review direct loan programs and establish appropriate
activity levels each year similar to the process for discretionary
spending Programs.
-- The Senate bill requires that the President's budget include estimates
ofogthe outIlayadds will result from defaults in loan guarantee n in such a way that it, excludes the authority to purchase guaranteed
y the Federal Government.
In addition, the House Rules Committee Task Force on revising the Congressional
Budget Process is also considering proposals to integrate credit into the
Congressional Budget Process and to put the FFB on budget.
In Principle, the Administration should support the general provisions of both
bills to amend the Congressional Budget Act, although the Administration would
want to propose technical amendments to both bills. Integrating credit in the
congressional budget process is an important step toward controlling Federal
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
19
credit Congressional activity.
Budget A Act key to stumbling changes block has been the fear of opening up the
because of other controversial issues that
would arise. These issues include general enforcement procedures and the roles
of the budget committees, as well as proposals for a two year budget cycle and
a capital budget.
Enactment of the basic provisions of S.1582 and H.R.2076 would not be a credit
panacea, however. In fact, non-binding credit totals by function have been
included in the budget resolution for several years--albeit at relatively high
levels. In addition, the FY 1983 budget resolution contained some of the other
credit enforcement mechanisms that would be required under the proposed reforms
of the Budget Act. Credit programs were allocated by committee and subject to
the same point of order provision as outlays. With some exceptions, the
resolution also called for points of order against legislation that provided
lending authority not subject to appropriations. Despite the point of order
provision, the Congress breached the supposedly binding credit total--just as
it breached the "binding" outlay and budget authority totals for 1983.
B. Administration Initiatives
One of the major gaps in controlling Federal credit activity is a clear and
agreed-upon set of guidelines for practical use in management and legislation.
The only existing statement is 0MB Circular No. A-70, which was issued in 1965,
although a revised draft of A-70 was prepared in 1974, but never issued. The
present Circular provides out-of-date guidance on the administration of credit
programs and the Executive branch's policy on legislation. It is in need of
revision due to the changes in financial markets and credit programs since
1965.
A revised Circular should be designed as a clear, agreed upon set of
Government-wide guidelines on the administration of credit programs. Th
i
guidance would also shape the Executive branch's reaction to both proposeds
legislation authorizing new credit programs and amendatory legislation for
existing credit programs. Furthermore, it would provide the basis for
Executive branch initiatives regarding new programs and amendments to existing
programs.
Reissuing 0MB Circular No. A-70 is a major policy initiative. In order to make
the Circular more effective, it should be endorsed by the CCEA. A full draft
of Circular A-70 is now under Preparation by 0M8 staff with an expected
completion date of February 1984. When the draft A-70 is completed, it will be
reviewed by the CCEA.
In the interim, the following principles, which have been proposed for
inclusion in A-70, are recommended for CCEA consideration and approval.
1. Interest Rates on New Direct Loan Obligations. There is no updated policy
on the interes*. rates that shou e C arae for direct loan obligations.
toIntmaturerest
Treasury instruments. Loweinteresteratesgmayifrequentlyhreflect
the intended program goal of Providing interest rate subsidies. In many cases,
however, where the interest rate is specified, the subsidies are greater than
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
20 when
the ratherethan the subsidy,ltheosubsidy is tallowedyto specifying fluctuaa the
with interest
movements rate in
market interest rates, without control or oversight.
One means of regaining control over interest rate subsidies is to create
benchmark interest rates that could be used by lending agencies. In line with ion on onetheointerestsrate chargediaiparticularpborrower forbenchmark a given atransaction depend
private financial intermediaries.
The recommended A-70 principle, therefore, is that lending agencies should
calculate these benchmark rates, loan category by loan category, through
comparison
example, the th the interest rate the Private Electrication Administration arcould use cthe ge. As an ies of
yields to
utilit bonds as one benchmark rates. The yield to maturity ubl on'Treasury instruments would sn
appropriate benchmark rate, as it is a risk-free rate.
ot be an
Subsidies could be provided borrowers through lending at a specified discount
below the market benchmark rate. In our above example, if the appropriate
benchmark
14%, then ante
appropriateisubsidy8mightbbecprovided bonds, and that % of the
benchmark rate. This would allow significantly greateby ending at
r ccontrol overOinterest
rate subsidies than the previous practice of specifying a lending rate that
does not move with market rates.
2. Guarantee Fees. There is no 'updated Policy on the level of fees charged
for guarani teees; In some cases, these fees are set in law and bear no e therelat
exionship pected tli ability tin the event rative and
default. vicThisc means to the aency bears costs that frequently lead to unintended subsidies.
The recommended A-70 principle is that guarantee fees should cover the expected
Government liability in the event of default as well as administrative and
servicing costs. This will require loan quarantee program administrators to
estimate the expected Government liability of their loan
The Government would still he providing one form of subsidy uinathat itrwouldobe
bearing risks that the private sector was unwilling or unable to bear.
In cases where it was deemed appropriate to Provide further
subsidy could be defined through reference to the expectedliabilityeof the
Government. The quarantee fee would be expected to cover a portion (e.g., 80%)
of the Government's liability in the event of default in a loan guarantee
portfolio. The guarantee fee would still cover the full administrative and
servicing costs.
Agencies would also have to charge fees in a manner that would allow the
adiustment of the fees in light of cnnditions that increased the risk of
default. As an example, fees could be charged on an annual basis over the life
of the guarantee rather than collected "up-front" when the guaranteed loan
commitment is made.
3. Interest Rates on Guaranteed Loans. There is no updated Policy on the
interest, rate that should be charge y private lenders for guaranteed loans.
 21
In some cases, legislation or agency policy requires that borrowers be
protected against "excessive costs." As an example, there is a ceiling on the
interest rates that commercial banks who use an SBA guarantee may charge
borrowers. The concern is that lenders covered by the guarantee may possibly
benefit from monopolistic lending situations.
The recommended A-70 principle is that the Government should offer guarantees
for loans by private lenders in a manner that enhances competition among
lenders with respect to the effective interest rate charged the borrower. For
example, potential lenders could be required to bid for the guaranteed loan
transaction in order to assure the borrower of the lowest possible cost.
4. Co-Insurance. Agencies frequently offer guarantees to private lenders of
100% of the principal and interest. With respect to credit risk, the
guaranteed loan is virtually the equivalent of a Treasury security. This may
encourage private lenders to be less diligent in offering and servicing loans
protected by the guarantee. (We are not here considering obligations of a type normally financed in the investment securities market.)ed
In order to encourage greater private sector participation in guaranteed
transactions, Federal guarantee coverage should be limited, to significantly
less than 100%. Moreover, the guarantee should be structured in such a way as
to preclude the Government from bearing more risk than the nominal guarantee
cover would suggest. One example of greater real guarantee cover occurs when
the Government's security in the event of default is subordinated to that of
the private lender. Another example is when the unquaranteed portion of the
loan is repaid ahead of the guaranteed portion. Thus, in the later years of
the loan, the Government bears 100%-of the risk that outstanding principal and
interest will not be paid.
The A-70 principle would state that (i) private sector lenders should bear a
"significant" portion of the risk of default, and (ii) in the event of default,
the Government's claim or assets should not be subordinated to that of private
lending. A "significant" portion could be defined as at least 20% of the risk
of default.
5. Guarantees of tax exempt securities. Federal direct or indirect guarantees
of tax exempt securities otter investors in those guarantees double benefits:
they pay no Federal tax and they bear no risk. This type of security is
therefore a more attractive investment than U.S. Treasury instruments.
A-70 would confirm the principle that Federal agencies should not offer direct
or indirect guarantees for securities that benefit from tax exempt status,
except when required to do so by law.
Credit Management Initiatives
The general principles in A-70 should be buttressed by the credit management
initiatives of Reform 88. These initiatives, which are under the policy
direction of OMB, include:
-- A Federal debt write-off policy and procedures protect, directed by the
Treasury Department, which is to develop uniform standards for
assessing the status of delinquent loans. The deadline for this report
is March 30, 1984.
 A risk analysis project, directed by the Treasury Department, which is
to develop a model to evaluate the risks associated with lending
programs. The deadline for a report on this pro.fect is December 31,
1983.
Other protects include credit approval Projects led by the Veterans
Administration (loans to individuals) and the Commerce Department (loans to
businesses).
One example of how the principles of A-70 and the credit management initiative
complement one another is the connection between the A-70 principle on the
level of guarantee fees and the credit management protects on risk analysis and
debt write-off policies and procedures.
The A-70 principle with respect to guarantee fees is that these fees should
cover the risks that contingent liabilities may become actual liabilities. In
order to implement this principle, a consistent and uniform method of risk
evaluation is needed. The objective of the risk analysis task force is to
develop such a model. Equally necessary is a method for assessing the quality
of the loan assets acquired through defaulted guaranteed loans. The objective
of the debt write-off project is to develop a Federal policy for writing-off
debt owed the Federal Government and to establish uniform write-off criteria
and procedures for Government-wide application.
In addition to the above recommended improvements to Federal credit policy,
several other control mechanisms need to be examined.
C. Other Initiatives
1. Expand privatization efforts. The Administration has initiated efforts to
Privatize severs +overnment-sponsored enterprises (GSE's), most notably FNMA,
FHLMC, and SLMA. Although these efforts have had only limited success to date,
they need to be continued. The most significant
encountered so far has been the difficulty in severingtGovernmentoties to a GSE
with negative net worth (FNMA). GSEs have a natural reluctance to sever their
ties, hut this tendency is particularly strong when severance of ties would
result in bankruptcy. Although FNMA may be a special case, a Principle that
needs to be followed in all cases is to share the costs of privatization
between the private stockholders and the taxpayers. Until strategies that will
fairly split these costs between shareholders and taxpayers can be developed,
the limits on the authorized activities of GSEs should be contracted where
Possible.
2. A Unified Perspective on Bankinq_T pe Activities. One major difficulty
with cry it contro is that there is no exp ici*. trade-off between the unified
budget and the credit budget. The United States Government engages in a wide
range of borrowing and lending operations akin to banking services. When the
Joint efforts of the Treasury, the FFB, and the on- and off-budget lending
?. _?1L scanaaras pro.iect, directed by the Treasury Department, the
task of which is to develop a series of uniform standards for
credit. The deadline for the report on thtc npn4 extending
 23
agencies are taken as a whole, a picture emerges of the Federal Government as a
net borrower from or lender to the public in any given year.
This perspective might be useful in fashioning credit control policies in a
number of ways. One'
ne version is recommended in the Committee for Economic
Development report, Strengthening the Federal Budget Process. The report notes
that the real point o comparison between norms expen itures and lending
programs is not the dollar outlay but the subsidy component in the lending
program. The report recommends that the Administration place greater emphasis
on measuring the interest subsidy elements in Federal loans and loan
g
propos
uarantees. The report also recommends "careful further exploration of the l lendinglfundpthatiwou Federal
credit and
allowed to guarantee activities
orttake*risks
on its own account but would receive reimbursements from Government agencies
equivalent to the cost of providing subsidized loans or guarantees on behalf of
these agencies."
This approach, of course, presents conceptual and methodological problems. The
difficulty of measuring subsidies is apparent. Nonetheless, the CED proposal
merits examination as a long run alternative to the requirement of having
separately a unified budget dependent on cash flow measurements and a credit
budget dependent on the gross level of direct loan obligations and guaranteed
loan commitments.
3. Implement 1981 CCEA Recommendations
evaluate lending . In addition to the systemic
mprovements recommen e n part. o this report, a reform initiative to
programs on a sector by sector basis is necessary. During the
fall of 1981, OMB staff prepared five briefings on Federal credit for the CCEA
Working Group on Federal Credit Policy. The briefings made specific
recommendations for major credit Programs in four sectors: agriculture,
business, housing, and individuals. Many of the recommendations, however, have
not been carried out. The CCEA should consider the best means of implementing
these recommendations, the principles of several of which are summarized below:
Credit Assistance to Business
Principle. .The private market is the best means of allocating credit to
usi6 inesses.
Credit Assistance to A
Principle. The agricultural sector will be served best by a sustained effort
to develop independent, unsubsidized sources of funds. The long-term
dependence of the agricultural sector on Federal credit assistance has removed
a large proportion of the industry from the discipline of the marketplace.
T
inefficient
his has contributed to a range of problems, including (1) maintenance of that non-subsidizedrsources oflfundsFforragricultural;uses;l(3)lover-investmentvine,
capital assets; and (4) rapid increases in land prices, which increase start-up
costs for new farmers.
 Credit Assistance to Housing
Principle. The Federal housing objectives of the 1930's and 1940's may not be
relevant for present and projected housing credit market conditions. One
objective should be to strengthen the ability of the private sector to provide
adequate credit for homeownership. Deregulation of thrift institutions and the
development of innovative mortgage financing vehicles have assisted that
process. Changes in Federal involvement in the mortgage markets to revise
artificially restrained or augmented housing capital supply are needed.
Credit Assistance to Individuals
Principle. Existing credit assistance to individuals should be revised and
Tund~iilevddub;lsseoperAteveral
programs that assist
credit that
may not several
be the most efficient
mechanism for providing subsidies. Second, eligibility criteria are not
specific enough to exclude recipients who have borrowing options other than the
Government. Third, the private sector could provide some functions as well or
better than the .overnment.
 V. Summary
The CCEA is asked to endorse a two-pronged approach to controlling Federal
credit activity. The first approach is to support, in an active manner, both
Senate and House legislation that will subject Feder
rigors al credit activity to the
of the budget process by setting binding limits on new direct loan
obligations and guaranteed loan commitments.
The second aporoach is to improve credit program management. 0MB Circular No.
A-70, Federal Credit Policy, would be drafted by February 1984, consistent with
.the general principles noted in this paper and subject to further review by the
CCEA. The credit management initiatives of Reform 88 are expected to buttress
the policies outlined in A-70.
 b. Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
v
Appendix Table 4.
Appendix Table 5.
Appendix Table 6.
Net Federal Credit Activity and Total Funds
Advanced and Raised .............................. 1
Net Federal Credit Activity and Total Funds Raised 2
Direct Loan Obligations and Guaranteed Loan
Commitments -- 1970-1982 ......................... 3
Net Direct Loan Activity by Sector 1975-1982...... 5
Net. Guaranteed Loan Activity by Sector 1975-1982.. 6
Net Government-Sponsored Enterprise Activity by
Sector -- 1975-1982 .............................. 7
Net Federal Credit Activity by Sector -- 1975-1982 8
Credit Program Subs.idies............................. 9
133:
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Octoher_4_-1983,
 Appendix Table 1.--NET FEDERAL CREDIT ACTIVITY AND TOTAL FUNDS ADVANCED AND RAISED
(dollars In billions)
Estimates
Direct loans: 2/ 1970 1971 1912 1973 1914 1975 19761 1977 1978 1979 1980 1981 1982 1983 981
On-budget.............. 3.0 2.0 3.0 0.9 3.3 5.8 5.3 2.6 8.6 6.0 9.5 5.2 9.1 5.2 (0.3)
Off-budget .....
....... --- --- --- 0.1 0.8 7.0 9.3 9.0 I1.2 13.6 Si 20.9 11.3 9.1 10.1
Total direct loans. 3.0 2.0 3.0 1.0 4.1 12.8 14.6 11.6 19.0 19.6 24.2 26.1 23.4 19.6 10.1
Guaranteed loans ........ 8.0 16.1 18.9 16.6 10.3
Government-sponsored 8.6 11.0 13.5 13.1 25.2 31.6 28.0 20.9 55.8 48.9
enterprise'loans'(GSEs) 5.2 -1.7 0.1 8.5 11.2 5.6 3.0 11.7 25.2 28.1 21.1 32.1 13.1 55.5 56.2
Advanced under federal
auspices ............... 17.2 16.5 22.0 26.1 25.5 27.0 28.6 36.8 58.4 72.9 79.9 86.5 87.7 130.9 115.2
Total funds advanced In
U.S. credit marketi 3/. 93.6 125.7 151.9 198.2 187.5 177.9 307.9 308.3 383.4 426.4 366.4 427.2 408.7 N/A N/A
Participation ratio
(1) .................. 16.1 13.1 11.5 13.2 . 13.6 15.2 9.3 11.9 I5.2 17.1 21.8 20.2 21.5 N/A N/A
Federal borrowing from
the public............. 5.4 19.4 19.4 19.3 3.0 50.9 100.9 53.5 59.1 33.6 70.5 79.3 135.0 216.0 194.0
Guaranteed borrowing.... 6.0 16.1 18.9 16.6 10.3 8.6 11.0 13.5 13.4 25.2 31.6 28.0 20.9 55.8 48.9
Goverment-sponsored
enterprise borrowing... 1.5 -2.1 0.7 10.6 10.9 5.3 5.5 12.0 21.4 21.9 21.4 34.8 43.0 53.5 55.0
Federal and federally
assisted borrowing..... 17.9 33.5 39.1 46.5 24.2 64.8 117.4 79.0 93.9 80./ 123.5 142.1 199.7 325.3 297.9
Total funds raised In
U.S. credit markets 21. 93.6 125.7 151.9 198.2 187.5 117.9 307.9 308.3 383.4 426.4 366.4 427.2 408.7 N/A N/A
Participation ratio
(1) .................. 19.1 26.6 25.7 23.5 12.9 36.4 38.1 25.6 24.5 18.9 33.7 33.3 48.9 N/A N/A
iT nFludes TFiiiItT-quarter
2/ Data are from the FY 1984 Budget, released In January 1983. Loans are measured on a net basis (disbursements less repayments).
7/ Actuals from federal Reserve Board Flow of funds Accounts. Nonfinancial sectors, excluding equities.
90:64
November 10, 1983
 Appendls Table 2.--MET FEDERAL CREDIT ACTIVITY AND
TOTAL FUNDS RAISED LINDER FEDERAL AUSPICES
(dollars In billions)
Federal borrowing for
direct loans,
On-budget..........
Oft-budget---------
Total direct
loans..........
Guaranteed borrowing.
Goverment-sponsored
enterprise borrowing
total, Federal and
federally assisted
borrowing attrl
butable to credit
activity 7/......
Total federal and
federally assisted
borrowing 2/.......
Participation
ratio (Y.) 3/........
- ------- - - - - - -
Estimates
1910
1971
1972
1973
1974
1915
1916 1
1971
1918
1979
1980
1981
1982
1983
RU
3.0
2.0
3.0
0.9
3.3
5.8
5.3
2.6
8.6
6.0
9.5
5.2
9.1
5.2
(0.3)
---
---
---
0.1
0.8
7.0
9.3
9.0
11.2
11.6
14.7
20.9
14.3
14.4
10.4
3.0
2.0
3.0
1.0
4.1
12.8
14.6
11.6
19.8
19.6
24.2
26.1
23.4
19.6
10.1
8.0
16.1
18.9
16.6
10.3
8.6
11.0
13.5
13.4
25.2
31.6
28.0
20.9
55.8
48.9
1.5
-2.1
0.1
10.6
10.9
15.5
16.0
2Z.6
28.2
25.3
26.1
31.1
31.1
54.6
66.1
77.2
88.9
88.1
128.9
114.0
17.9
33.5
39.1
46.5
24.2
64.8
117.4
79.0
93.9
00.7
123.5
142.1
199.7
325.3
297.9
86.6
41.8
57.8
60.6
104.5
41.2
26.5
47.0
50.1
82.7
62.5
62.6
44.1
39.6
38.3
1/ Includes Transition Quarter.
2/ federal and federally assisted borrowing (Federal borrowing from the public, borrowing for guaranteed loans, and
Goverment-sponsored enterprise borrowing).
3/ Net direct loan outlays are treated as If they were financed by direct Federal borrowing from the public.-
16104
1hw?.niw?e 19111
 Appendix Table 3.--DIRECT LOAN OBLIGATIONS AND GUARANTEED LOAN COMMITMENTS 1970-1982
(in millions of dollars)
1971
1972'
1973
1974
Direct Loan Obligations:
On-budget ..............................................
10,444
10,451
8,498
8,749
13,351
Off-budget;
FFB.................................................
---
---
128
Other..., ... .......... !.!? ...................
2,967
4,546
5,826
Total gross direct loan obligations...........
11,465
13,295
19,305
Less loan assets held by the FFB .......................
---
---
2
Less repurchases of loan assets from the FEB...........
N/A
N/A
N/A
N/A
N/A
10,444
10,451
11,465
13,295
19,303
Guaranteed Loan Commitments
Gross guaranteed loan commitments ........................
27,920
N/A
44,808
36,411
35,276
Less secondary guaranteed loans ........................
438
N/A
3,518
3,607
4,375
Less guaranteed loans held as direct loans by:
FFB .................................................
---
---
---
---
128 1/
GNMA ................................................
---
N/A
7,144
4,778
1,528
Total primary guaranteed loans.. .... ...
27,482
38,547
34,146
28,026
29,245
Memo: Callable capital ... ..
N/A
N/A
N/A
N/A
N/A
211:84
October 3, 1983
 Appe Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3 ITMENTS 1970-1982 (continued)
(in millions of dollars)
Direct Loan Obligations:
On-budget ...........23,044 20,654 25,312 35,233 33,924 39,608 40,857 40,057
Off-budget:
FIB................ 6,958 13,130 19,042 21,716 16,045 22,188 30,269 26,232
Other...,,....., 4,907 1,555 1,467 1,382 1,434 1,395 1,276 1,284
Total gross.. 34,909 35,339 45,821 58,331 51,403 63,191 72,402 67,573
Less loan assets...... 5,055 2/ 2,036 3/ 7,116 3/ 8,716 3/ 10,911 3/ 12,110 15,208 12,630
Less repurchases...... N/A N/A N/A N/A N/A N/A N/A 7,387 4/
Total net.... 29,854 33,303 38,705 49,615 40,492 51,081 57,194 47,556
Guaranteed Loan Commitments
Gross Guarantees........ 50,172 51,578 90,172 96,536 146,453 5/ 170,164 5/ 152,729 118,325
Less secondaries...... 5,905 9,188 17,255 17,636 42,360 64,393 44,113 36,382
Less GL held as DL:
FFB ................ 6,958 13,130 19,042 21,716 16,045 22,188 30,269 26,232
GNMA ............... 6,842 3,113 2,092 2,197 2,053 2,195 1,832 1,985
Total primary... 30,467 6/ 26,147 6/ 51,783 6/ 54,987
Memo: Callable capital.. N/A N/A 737 882 883 5/ 830 5/ 1,133
Source: Special Analysis on Federal Credit Programs, 1970-1983.
53,726
2,340
1/ This number reflects the commitments for FFB to disburse loans, consistent with current accounting practices. It is
not FFB disbursements, which were $102 million.
2/ Estimated from Table E-5, FY 1977.
3/ Loan assets were published in FFB table but not deducted from direct loans prior to 1980.
4?/ Repurchases deducted only since 1982.
5/ Published total adjusted for callable capital, which in other years is shown as a memorandum entry.
6/ Published totals for primary guaranteed loans included FFB guaranteed loans held as direct loans in 1977 and GNMA
tandem and FFB in 1976 and prior years. These data are adjusted for those deductions.
Note: This table does not adjust for programs (Ex-lm Bank, Housing for Elderly or Handicapped, etc.) whose on- or
off-budget status changed over the period. If used to present detailed levels of on- and off-budget activity, rather
than the totals, those adjustments must be made to the table.
214
October 3, 1983
 Appsedie Table 4. Net Outlays for On & Off-9udget Direct Loans by Sector 1973 -1982
(in millions of dollars)
Low-rent public housing .................
SNNA lindes .............................
7A housing ..............................
Other housing program ..................
Subtotal, ifousinq .....................
Education ...............................
4eaith ..................................
tai households ..........................
International:
International assistance ................
International development assistance....
Espcrt report Bank ......................
iubtotal, Int'I But ...................
General:
-
Ecdnosic development administration.....
Interior ................................ .
8aiirdad progrin .......................
2tber transportation ....................
:A insurance ............................
Federal Dep. incur. Corp ................
Federal Haw L.7an Bank 3oird............
SBA.. us. loan incur. fund...............
33A.'disaster lain........................
OS ~u!+ay ASSOC ........................
lot. Ocean. 4 Ataos. Adaln ..............
sat.. Con. Credit 3ane ...................
'lat. 3red:t 1n:an Admic ................
eia rt ................................
.'rid......
iuot?7tai. Ten. Bus ...................
..... :: ee:.
_ier; ...................................
.,A .....................................
Eura;,. cec. ; 1ei. sevdlv. Fund.........
?arai Tel. 'oink .........................
ccb tctai. R:i:f: es ..................
1975
1976
1977
1978
1979
1980
1981
1982
(41)
:8
(26)
2,327
(260)
(1,138)
(22)
(170)
1,021
4
(239)
17
(138)
(183)
26
2334
(5)
124
231
273
648
(191)
270
393
949
2,006
631
2,576
238
(1,638)
268
478
1.965
2,224
602
439
523
314
306
930
463
406
641
SS
87
49
40
49
18
32
(9)
3,070
870
(1,:93)
814
1,017
2,448
2,662
1,234
401
1,:.?
1.660
2,379
..196
:.ale
?,327
2,765
407
413
128
!0
63
112
166
100
1,504
1,207
446
12
:09
1,906
:,037
763
:,312
2,849
2,234
2,421
2,168
4,3:6
4,530
3,828
4
3
11
204
58
87
72
(104)
. 11
2S
3S'
.42
28
U
21_
1
39
159
1:2
67
86
170
143
53
1
1
I
(73)
U01)
29
35
31
41
:0
9
46.
48
119
02
(23)
100
-
-
-
306
(43)
274
1,266
203
582
127
(86)
187
1
!13
209
210
34
114'
393
18
-
34
2.030
Got
777
1,100
471)
34
372
943
304
7,8
638.
(_,O)
142).
-
-
-
li
B
38
--
-
--
1'
31
.-
-
--
.
6:
1
I
44
i
;4
apl
Ib7'
SO!
:II01
i40:
-
-
-
-
0
-_
-_
-
-
!,533
514
(231)
3,a G.
!.ih
.!'S
1.306
:
.6c
.-
-
4'
-
--
-
---
J.
68
99
69
hsi ~
'::~
!.2:1-.
..Tai
..317
;56
4,647
4 07.
,?.?
o
12.
i:b:
77
138:
CS
191
14;
10'
'
"'av
335
!.;?8
_.`v
.
3,0,3
;,015
1129!
4,77:
1983
1984
(640)
(68)
(390)
239
(101)
(382)
(1,137)
(341)
470
294
,
.3
2.
(644)
(93)
3, 99'
4,697
66.
64
911
1,216
4,280
1,977
? (40)
(203)
-
56
38
25
36
(14).
(14)
(31)
(411)
(48)
(173)
132
(231)
i=&).
(274)
(64)
(21)
-
42
34
!51
li
._
-
1"D
ii.110)
39
121
57
S.
S.i9B
5.11155.
1 3
!,'I
Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
Tits; viiiness ............................. 4.630 4,
 Flri 3usiness:
Firsen Hose Adsinistration .............
31,395)
1.778
5,081
7.969
9,:90
6.976
3.912
4.164
:,595
646
~L
480
P
L
44461
615
2,626
.729
.
594
(72)
1920)
6,
4,382
(Z.02 i
.
.
.
.......................
515
793
;87
540
010
651.
544
590
531
548
Total Fare Business .......................
11,326)
6.496
3,294
11.238
10.484
6,964
8.536
11.079
3,508
(831)
Toth )Nt -actor Direct Loans .............
6,374
11,719
10,900
20,216
18,721
20,966
22,435
21,075
18.298
4,320
Cther-Direct Loans.. 31 ...................
6,426
2,385
633
(4201
894
3.237
3,638
2.311
1.304
151
TOTAL DIRECT LDANS ......................
12,800
14,604
11,533
19,796
19,615
24,203
25,073
23,452
19.597
10,071
1/ Source: Special Analysis F, 1976-1983.
Z/ Other refers to both other sectors and unattributed FFB activity. Figures for 1976-1984
attribute both loan asset sales and loan guarantee originations back to the responsible
agency for the Foreign Military Sales credit program, REA and FmHA. Data could not be
disaggregated for 1975. Data for guaranteed loans, presented. in Appendix Table 5, has
been adjusted accordingly.
 Appendix Table 5. Net Loans Guaranteed Loans by Sector
(in sillions of dollars)
1975-1982
Les-rent public housing ..............:..
712
574
477
365
483
1,440
1.032
3.:47
2,219
1,378
:4A .....................................
111
2,240
4,864
4.377
ll,?22
14,401
10,194
6,207
29.169
26,325
VA housing ..............................
5,088
6.7 9 .
7,161
9.871
8,364
10,271
o,434
5,171
17,075
18,314
Other housing ...........................
56
(1,266)
(1,035)
(515)
!315)
(169)
23
-
-
-
ubtotal, housing ....................
5,967
8,327
11,467
13.098
20,454
3,7.4:
18,488
15.:27
48.463
46,517
Education ...............................
608
118
* 639
613
1,986
4,395
8,721
5.a85
2.900
2.300
Nealth .......................... r.......
355
244
246
22
a
lbbi
43
1/0
!34
126
internat:onai:
International security assistance.......
753
745
(134)
i103)
186)
(52)
93
(20)
(201
(20)
international development assistance....
66
(46i
105
62
49
42
71
163
272
293
Export Isport Bank ......................
1,021
933
391
(4)
1,179
1,556
766
(914)
490
710
Suittotai, Intl Bus ..................
1,842
1,634
362
(375)
1,142
1,546
930
(771)
722
783
General:
Ecanaszc developsent administration.....
-
(23)
74
636
(86)
113
(70)
(82)
(80)
Mat. Ocean. k Atsos. Adamn ..............
-
--
'.3
21
58
65
21
(18)
35'
(I1)
efense .................................
t3)
.-
-
-
-
_.
-
2
4-
interior ................................
-
34
92.
4
(3)
14
2)
24
2
13
Federal snip financing ..................
700
1.223
1.i::
451
:1
494
a;5
609
125
125
Transportation ...........................
335
321
63
a2
266
516
1.)U6
169
(Bl)
(941
gASA ....................................
-
--
IT
180
la-6
101
ill
120
)75
(140)
Nat. Credit Union Mao .................
4-1
SO
(14)
36A.9us. lain k invest. fund............
93
301
684
1.:16.
786
396
1.:69
301
:49)
(390)
SBA/disaster ............................
-
-
--
(1)
:)
U
--
3
(3)
0
23Aipollltion ............................
.-
-
-
16.
40
49
100
50
150
150.
Fed. San ngs.k Loan ins.. Corp...........
1,464
--
Subtotal. general bus ................
:.589
:.:Sl
:.009
:.043.
1.99:
:.:51
;.;11.
845
49
1429)
......................................
!!
a.)6
ua
103
99'
564
.".erg-i .................................
.--
"-
t
33
1.-79
732
.40
:7:
,:+
---
:37
76.
193
121
Lsotatai..ia;lttes ..................
:53.
?06.
2peciai:
C5rvsier ................................
Far!' 9usi nets:
F;rners -oee? :esinistratior ..............
5:102
1.ii4i
)1.439)
ii.4;:)
5:
;66.
3051
(479)
!1631
(::i)
 CCC :.:.................................
-
-
-
-
136
o52
1,:98
645
1,389
(412)
Total Fare Business .......................
5,108
(1,104)
.(1,439)
(1.492)
138
1,0)8
993
173
-6
(635)
Total Net Sector Guaranteed loans.........
16,724
12,506
1:,292
15,411
2b,782
33,988
,304
22469
56,526
49,6;9
other Guaranteed loans. 21 ................
(3,1211
11,506)
160
(5:1)
11,530)
(4,388)
(5,332)
(1,713)
(747)
(819)
TOTAL BUAAANTe LOANS ..................
8,600
11,000
13,452
13,580
23.2,
31,600
:7,972
20,356
35,779
49,800
1/ Source: Special Analysis F, 1976-1983
7/ Guaranteed loans that have not been attributed to above sectors and unattributed FF3
activity. See footnote #2 in Appendix Table 4.
 4opendis table b. Net Government-Sponsared Enterprise Activity by Sector 1975-1982 1/
(in millions of dollars)
1975
1976
1977
1978
1979
1980
1981
1982
H o u s e h o l d s, P ers. T
rusts, and Nonprofit,
--
`'IM ....................................
FTa11C
3,264
2,825
1.001
6,974
7,993
6,458
4,050
17,259
...................................
FHL3B
2,156
633
2,070
4,412
3,036
3,127
t9
16,983
...................................
CLMA
1,137
(398)
(341)
12,037
9,853
6,434
20,516
2,411
-
.....................................
Federal land b
k
31
176
117
192
529
1,039
2,052
1,689
an
s ......................
3,037
3,171
2,941
3,047
5.057
3,338
7.230
6,033
Adjustment to households../ .............
(3,368)
(7311
2,903
(171)
(4,387)
(5,464)
(4,497)
(346)
Total households ..........................
Fare Business:
Fars Credit Adsinistration:
6,327
5,676
8,491
26,511
24,071
19,972
29,690
43,847
Banks for Cooperatives ...............
Federal int
edi
638
1,095
768
Be,
1,101
823
777
(337)
ers
ate credit banks....
1.340
1,561
1,703
311
2,370
3,37-i
1,977
(114)
Adjustsert to Fars business../..........
-
-
i4)
(46)
Total Faro-Business .......................
2,178
2,636
2,471
1,393
3,111
4,163
2,130
(497)
Total ret SSE Loans .......................
3,305
3.72
10,962
27,904
27.542
24.137
32,440
43,330
TGTAL SGVEBNNENT-SP,NSBP.,C7a EMTE5PRISES..
3,303
8,334
11.333
27,904
27,342
24,137
3^,440
43.x30
1/ Source! Special Analysis F,, 1976-1983
1963 1984
28,591
24,919
18,840
18,336
12,943)
(402)
1,928
1,078
6,043
6,778
(630)
31,809
52,276
1,394
1,192
2,303
2,772
3,699
3,964
53.508
56,240
55,508
36,240
_
s are prmariy deduction
f
s
o
r ac
v
ti
i
ty by GSE
'
s that are also attributable to
guaranteed loan programs. A small proportion of the adjustment is also intra-GSE
financing.
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
Appeadis Table 7. Net Federal Credit Activity by Sector 1973-1982
iin millions of dollars)
1975 1976 1977 1978 1979 1980 1981 1982 1993 1984
Net Direct and Guaranteed Loos
Households. Trusts and Nonprofits...... 10.000 9,359 11,057 14,547 23, ST 2.620 24,220 22,322 30.833 48.848
Business ............................... 9,316 9,274 6,280 9,834 11,308 16,447 17.490 10.068 12,227 11,617
tare Business .......................... 3.782 5,392" 6,353 9.746 10,672 7,i87 9.529 11,234 11.734 (1,466)
7ther .................................. (1,698) 1,379 793 :951) (636) (1,131) (2,194) 664 562 (128)
Total Federal Credit Activity by Sector
Households, Trusts and Nonprofits...... 16,327 13,233 19,348 41,038 47,394 32.392 38,910 66.169 102,662 101,124
Business ............................... 9,316 9,274 6.280 9,834 11,308 16,441 17,490 10,068 12.227 11,611
Farm-Business .......................... .19960 8,048 9,326 11,139 14,143 12,052 12,279 10,737 13,433 2,498
Floe of Funds by Sector 1/
Households. Trusts and Nonprofits...... 43,658 96,428 126,443 159,989 181,893 1=.404 133;360 82,587 M NA
Business... .................. 58,401 66,112 87;:80 117,764 134,306 108,595 149,152 129,868 NA NA.
Fan 9usiness.. ~ ..................... 9.653 12.258 13,376 13,235 20,279' 18,05+ 19,i., 11,126. NA NA
Other .... .................... 71,217 144,216 88,363 47,843 88,891 114, :6 116,211 117,612 NA NA,
TOTAL ................................ 181,929 319,014 315,364 338.831 4:5,861. 366,374 418,056 401,193 NA NA
_as-,sasaaaz:aaaasaaaaaaazsamram
zaaaaazasaasasaaaaaaassaaaaaaaaaz--aaaaaa~----~^^'~~-
'!at Direct and :uarinteed Loans ?
aduseho1a. Trusts and Nonprofits...... :: 10. 9 ? 1: 26. :: :7
Sussass ............................... 16 14 7 a: 3. !5 12 3
Fars easiness .......................... 44 44 51 74 33 44 49' l61
44 c0
cusenc!ds. Trusts and: Nonprofits....... A 16 15' :o, to 4:
9usiness ............................... to 14. 7 3. 3 i5 1:. 3
F:n~Buuntss .......................... o9 66 70 a4 70 o; 64 97
s szszr_zaxxxsaxxazzxzzazz zzzazasz zsasszaaszsxaazs_-azzaaazazaaasazz-azsszr_a_-zzzaaa--azss :azaxzszr_azx~r_am~
1/ Source: Federal Reserve Flow of Funds Accounts.
2/ Adjusted.to..include Export-Import Bank and foreign military sales credit.
7/ Adjusted to include P.L. 480 and CCC.
 Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
Appendix Table 8.--CREDIT PROGRAM SUBSIDIES
(in millions of dollars)
Economic support fund ..........................
Functional develooment assistance...........
CCC price supports ....
Agriculture credit insurance fund ..............
Rural housing insurance fund ...................
Rural development insurance fund .....
...:......
PL 480 ............................... ....
Rural electric and telephone revolving fund....
GNMA tandem plan ...............................
Housing for elderly or handicapped .............
Export-Import Bank .............................
Student loan insurance .........................
1982
Program Present Value o
Level Subsidy
366 241
398 252
11,500 292
4,199 744
3,454 2,203
568 208
777 453
1,099 1/ 649
1,985 - 739
819 285
3,516 641
6,195 1,932
Source: Table F-14a of Special Analysis F, January 1983.
1/ Excludes sales of loan assets by REA to the FFB.
18:84
October 4? 1983
Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
 MEMORANDUM FOR THE PRESIDENT
FROM: THE CABINET COUNCIL ON ECONOMIC AFFAIRS
SUBJECT: Monetary Policy
Since mid-summer the rate of growth in the money supply, as
measured by Ml, has slowed dramatically; from July through
December, Ml grew at an annual compound rate of less than 3
percent. Because the rate of money growth is closely related to
economic growth in the short-term, continuing the low rate of
money growth of the past five months would raise the threat of a
recession sometime in 1984.
The Cabinet Council on Economic Affairs has closely
monitored and reviewed the recent developments in monetary
policy. This memorandum summarizes our discussions.
The Rate of Money Supply Growth
All members of the Cabinet Council agree that a sustained
period of near zero growth in the money supply poses the strong
threat of a recession sometime in 1984 and is clearly
undesirable. However, the ambiguity of Federal Reserve policy
intentions and the accuracy of the policy indicators create some
uncertainty regarding the actual course of monetary policy.
There are two basic interpretations of the slow rate of
money supply growth over the past five months:
o The monthly money supply growth rates may be understated
because of faulty seasonal adjustment factors and
therefore should be treated with some degree of caution.
Relying on alternative measures of money growth such as
the monetary base suggests that the Federal Reserve's
policy is not as restrictive as the money supply figures
indicate; and
o The extraordinary decline in the rate of growth in the
money supply is not a statistical aberration but a result
of the Federal Reserve's attempt to use monetary policy
to maintain the.current level of interest rates. The
highly volatile rate of money supply growth over the
past three years, resulting from the Federal Reserve's
targeting interest rates and economic activity, itself
contributes to volatile economic growth.
 A. Seasonal Adjustment Factors and the Monetary Base
The following table offers a comparison of the 1983 money
supply growth rates as measured by (i) the official seasonal
adjustment factors for 1983, (ii) the official seasonal
adjustment factors for 1982, and (iii) an alternative set of 1983
seasonal adjustment factors that the Fed is experimenting with.
It is impossible to say which factors are more correct. What
they illustrate is the significance of seasonal adjustment
factors. Using either the 1982 factors or the experimental
factors suggests that the money supply slowdown is not as
dramatic as the 1983 factors suggest.
M1 With
Current M1 With Experimental
Seasonals 1982 Seasonals Seasonals
Jan. 10.2 14.6 6.3
Feb. 24.9 19.7 24.2
Mar. 17.1 17.5 19.6
Apr. -2.6 6.1 0.0
May 29.8 15.8 21.4
June 10.7 5.6 7.6
July 9.3 5.7 3.3
Aug. 2.9 3.0 7.0
Sept. 0.9 2.2 -0.5
Oct. 1.9 8-.1 - 4.7
Nov. 0.5 5.6 6.5
Apparently, the official seasonal adjustment factors do not
adjust only for variations that occur each year, such as the
increased demand for currency at Christmas. Because of the
statistical methods employed, the factors are also affected by
financial deregulation and other nonseasonal events. For
example, the factors may be affected by financial market changes,
such as the introduction of Super NOW accounts, which some
believe caused a special one-time increase in the growth of M1 by
increasing checking deposits.
Because of the uncertainty created by the seasonal
adjustment problems, alternative measures of monetary growth are
occasionally considered. The monetary base, an alternative
monetary indicator consisting of currency in circulation and
bank reserves, has grown at a 7% rate over the same July to
 r Approved For Release 2008/08/20 : CIA-RDP86M00886R002000010027-3
December period when money growth has been slow. The divergence
of growth rates of Ml and the monetary base has occurred because
nearly all of the growth in the base has been in currency, rather
than bank reserves; each dollar of bank reserves. supports many
dollars of the money supply, so currency growth is a much less
"potent" form of monetary expansion.
All members of the Council reject relying on M2 as an
alternative indicator of money supply growth. There was no
important deceleration of M2 preceding the 1981-82 recession. In
addition, M2 was, not a reliable predictor of either the
acceleration of inflation in 1978-1981 or its deceleration
thereafter.
The second interpretation of the low rate of growth in Ml
over August-December 1983 is more pessimistic. Although seasonal
adjustments and other factors create uncertainty in the money
supply estimates, there is sufficient historical evidence that
the previous official estimates of Ml correspond closely with
economic activity. For example, over the period of August 1982
to July 1983, M1 grew at a 14 percent rate. Some economists
discounted the estimates of Ml for this period because of the
introductions of Super NOW accounts and MMDA's. Yet economic
forecasts that relied on the money supply estimates are now
proving to be the most accurate.
As chart 1 indicates changes in the money supply growth rate
correspond closely with changes in industrial production.
Likewise, as chart 2 indicates, sharp contractions in the money
supply growth rate such as the drop from 14 percent growth rate
of August 1982 - July 1983 to the'3 percent rate of August 1983
through December 1983 typically result in economic contractions.
In the last three weeks Ml has shown more significant
positive growth, an encouraging sign that the period of flat
money growth may be ending. But weekly data on the money supply
are notoriously erratic, so inferences cannot be confidently
drawn from a few weeks of statistics.
Conclusion
The purpose of this memorandum is to alert you to recent
trends in monetary policy. The Cabinet Council will continue to
monitor financial market developments and monetary policy and
provide you with additional information and options as
Donald T. Regan
Chairman Pro Tempore
 30
25
.
~.2 0
.L.
t-15
4--
T1
T5
Industrial Production: dotted line, right scale.
Money Growth: solid line, left scale.
-2
1981
Latest date plotted: November 1983.
Money is a six mmth rate of. change.
Industrial Production is a three nth rate of change.
-5
-10
-15
.i.
t-20
.J..
=25
.4--
T-30
-35
i
Prepared by the Office of Monetary Policy Analysis. Telephone [phone].
 O 10 0
.ti .~
CU