The Congress Should Control Federal Credit Programs To Promote Economic Stabilization

PAD-82-22: Published: Oct 21, 1981. Publicly Released: Oct 21, 1981.

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The amount of federally assisted loans outstanding will exceed $500 billion in fiscal 1981, and the rate of new lending will exceed $70 billion annually. Explicit recognition should be given to the aggregate economic effects of Federal credit assistance programs and to the consistency of their annual volumes with fiscal and monetary policy. GAO raised the following questions: (1) whether Federal credit assistance programs in the aggregate are stabilizing or destabilizing; and (2) if they are, on balance, destabilizing, whether they can be controlled in a way that furthers the economic stabilization goals of the Government and, if so, how.

GAO found that, in the past 20 years, Federal credit assistance programs have been destabilizing and inconsistent with fiscal and monetary policy. In general, credit assistance flows, to be stabilizing, should oppose movements in the level of economic activity. That is, during rapid economic expansion, credit assistance should flow at a relatively low rate. During economic downturns or periods of relatively slow growth, credit assistance should flow at a relatively high rate. Current and proposed efforts to control Federal credit programs are not intended to promote economic stabilization. Instead they propose a credit budget to establish annual limitations on the amount of guaranteed and direct loan flows that may occur in the forthcoming budget years, and they propose more stringent standards for program choice, design, and administration. A control mechanism that promotes economic stability should cause new annual commitments for loans and loan guarantees to fluctuate counter to the business cycle. Loan activity could be controlled in any given year by placing ceilings on program activity.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: This issue is still being debated by Congress.

    Matter: Congress should consider surveying Federal agencies to obtain needed information on the relationship between program levels and the amount of subsidy.

  2. Status: Closed - Not Implemented

    Comments: The budget committees are debating methods for controlling Federal credit assistance loan flows. The report suggests that varying the amount of subsidy can be an effective tool for controlling the level of loan flows and contributing to economic stabilization goals.

    Matter: Congress should consider adding to its present efforts to control Federal credit assistance flows a mechanism for controlling Federal loan programs what will support Federal economic stabilization goals.

  3. Status: Closed - Not Implemented

    Comments: The budget committees are debating methods for controlling Federal credit assistance loan flows. The report suggests that varying the amount of subsidy can be an effective tool for controlling the level of loan flows and contributing to economic stabilization goals.

    Matter: Congress should consider using as the point of control the amount of the subsidy, not the ceiling on levels of loan activity. Target on various credit program loans flows and aggregate loan flows should be established but only for the purpose of monitoring results.

  4. Status: Closed - Not Implemented

    Comments: The budget committees are debating methods for controlling Federal credit assistance loan flows. The report suggests that varying the amount of subsidy can be an effective tool for controlling the level of loan flows and contributing to economic stabilization goals.

    Matter: Congress should consider monitoring the results of implementing the subsidy control mechanism and requiring that reports be prepared periodically by the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, and the Office of Management and Budget on the success of the operation of the control mechanism, taking into account current economic activity, conditions in financial markets, and fiscal and monetary policy.

 

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