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Asymmetrical Information

by Robert Capozzi

Sometimes, we get some very thoughtful comments. Here's one by "a concerned citizen" (ACC).

ACC opined on my blog Exploding Myths. Rather offhandedly, I wondered out loud why the US has an EX-IM Bank. ACC shared the short version. This ACCism caught my eye:

Now, if you believe that all markets are perfectly efficient and that the private sector is infallible in its judgment ..., this would be a bad thing. However, in reality, markets are not perfectly efficient. Information is asymmetrical.

Obviously, markets are not perfectly efficient. Does anyone believe that? Of course information is asymmetrical.

This begs the question: Does ACC believe that the government is more efficient than the market? Does government have better, more reliable information than the market? Can the government assess that information better than the market?

Hmm, let's see. WMD in Iraq. Synfuels. Profoundly large and unpredicted unfunded liabilities for Medicare and Social Security. Again, one needs hours to cite the list of government failure in the information game.

And while it may be sorta OK that the Ex-Im Bank contributes to the Treasury on one level, has American prosperity increased because of Ex-Im Bank? Hard to say. In fact, arrogant to say. Perhaps mitigating political risk to export is a bad idea. Maybe the market -- that is, the people -- have signaled the market that those products should not be produced, or perhaps they should be sold domestically.

Square one is generally a good place to start in any inquiry.

-RC

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Comments

Since you're looking at the Ex-Im Bank from first principles, fyi, you may be interested in the recent scandal uncovered in Texas where they're giving major loans to drug cartel figures that were (surprise!) never repaid.

Why do you assume that the Texas story is based on fact? What other source(s) do you have, or do you accept everything in print?

And how can you question whether EximBank's helping the economy when you write:

"And while it may be sorta OK that the Ex-Im Bank contributes to the Treasury on one level, has American prosperity increased because of Ex-Im Bank?"

Let's see. They finance US exports that commercial banks can't finance to help US exporters compete and keep Americans working... their default rate is around 2%, AND they've returned $4 billion to the Treasury during the past decade or so. That's $4 billion MORE than the taxpayer paid to operate Eximbank.

Sounds like the taxpayer AND US workers are winning because of Exim...

# posted at by Tom Jeff

You are correct in asserting that the public sector is, generally speaking, bureaucratic and, consequently, less efficient than the private sector. They have to be, largely because a tremendous amount of reporting is generally required for any activity related to public monies; the GAO is filled with auditors who make their entire careers out of finding fault. But I digress –

The point is not whether the government has more, or better, information than the market – although Ex-Im Bank has a lot of people who specialize in evaluating country or political risk who may, in all reality, be better equipped than your average commercial bank in that competency, as they deal with larger transaction volumes and have lines of communication with the Department of State – and unlike your publicly elected officials, most people at the State Department are actually fairly good at what they do, in my experience, nevermind the policies they are sword to uphold (which are made by W, Condi, etc.). The point is broadly, that markets are not perfectly efficient (we can agree on that point), and, specifically, that they may fail to support some types of export transactions. Whether or not you believe that export transactions are “good” for America is debatable, although David Ricardo would probably have something to say about that if he were here today.

To illustrate with a basic example (which is fictitious, but very much based in reality): the market for commercial jetliners is very large by volume, but there are only two major players, Boeing and Airbus. Let’s say that a consortium of commercial banks gets together to finance an order of ten 747 jets to be sold to an airline in Latin America that is partly owned by the the state government. The transaction volume is about USD $2 billion. The consortium of banks wrangles with each other to hash out the structure of the syndicated credit vehicle that will be used to finance the transaction, but there is a problem, because two of the banks have developed a bad relationship with local politicians in the buyer country (who sit on the airline’s board of directors). The syndicate falls apart, because the remaining bank’s charters will not allow that much of their capital to be risked in one place. Boeing has already started production on the project and is left holding the bag, and is losing two million dollars every day because a plant has had to be idled. In the meantime, Euler Hermes (Germany’s export credit agency) has already issued a guaranty to a large Latin American development bank to provide financing for 10 Airbus A380s, and the Latin American country, which needs airliners, has entered negotiations with Airbus, which is awarded the contract instead. Similar scenarios are repeated, causing layoffs in the pacific northwest. Litigation ensues (pardon the pun). America’s current account deficit widens. The value of the dollar falls relative to that of other currencies, increasing inflationary pressures.

You may also note that virtually every other major economy has their own export credit agency. In the example above, Airbus won the contract due to the support of Euler Hermes. If Ex-Im Bank had been involved in the transaction, it might have turned out differently.

It seems that you have a knee-jerk anti-government position on a lot of issues. Indeed there are many things our government does to make us angry. But not every single branch of the government is culpable for the latest CNN Headline. Just because you don’t understand how your government works (because you jump to conclusions from square one) does not mean that it isn’t working more or less as it should. The Ex-Im Bank takes a lot of flak from people who don’t understand it, and it is not fair to compare it to pork barrel projects or a jingoistic foreign policy.

Also, for the record, American prosperity has indeed increased due to Ex-Im Bank. You can see examples of how this works here: http://www.exim.gov/news/highlights/highlights.cfm

# posted at by ACC

I am not going to deal with ExImBank, other than to note that it is largely self-funding. This is a good thing.

The Social Security, Medicare and Medicaid issues are interesting for several reasons, the first being that the unfunded liabilities - which I gather is the potential for these programs to be out of fund balance - are due to conservative assumptions on economic growth and pessimistic assumptions regarding the vitality of the people in our generation. Realistic assumptions may make these unfunded liabilities go away. The other option is, of course, to fund them by raising a payroll tax or transfer them by some form of personal account structure and a shifting of retiree health costs back to the employer in exchange for a lower or eliminated Medicare tax liability (this is after transfering the Medicare tax entirely to employers and reducing gross but not net wages accordingly).

Of course, if Sen. Clinton is elected, Medicare and Medicaid may be a moot point if they are absorbed in National Health Insurance.

As an anarcho-syndicalist, I would rather see more employee ownership of companies, who would provide health care to their retirees by company employed (and trained) medical staffs (or directly contracted care) without reference to an outside payer. It makes no sense to make another company rich to do this - which is what is happening under the current regime.

I accept that the Texas story is based on fact because the reporter is a respected, award winning investigative reporter whose work I've read for many years, and because he cites his sources.

Plus, it makes sense: What better money laundering cover than the Ex-Im Bank, if the story is true? The potential implications are both mindboggling, and not far-fetched if you assume an inside job. Plus the new "voluntary" best practices they came out with seem almost designed to allow the bad loans to continue. That seems, to me, suspicious in and of itself. Why not REQUIRE checking loan recipients with the anti-drug deconfliction centers? What harm would it do?

Now, having given my reasons for finding the story credible, what reasons do you have to disbelieve it?

The way around the drug money laundering is not better enforcement or abolishing the ExImBank, but abolishing the drug laws in their current form. Some drug regulation is, of course, necessary for safety and effectiveness - although this activity should be self funding. There would have to be an entirely different system for the distribution and regulation of recreational drugs and it must be unrestricted enough to end the current black market but no so free that tainted drugs are sold.