By Walter “Burno” Korschek
One of the promises from the Republican party leadership after their big election wins this past Tuesday was the pledge to reduce the size and budget of the Federal government and to finally start cleaning up the wasteful spending of taxpayer dollars. They may want to consider the following recently reported samples of government waste as a starting point:
– An Associated Press article on October 28, 2010 investigated the widespread misuse of taxpayer dollars in the many “dysfunctional” housing authorities across the country. The result of their investigation uncovered the following:
* The head of the Philadelphia housing authority, the fourth largest in the country, maintained a secret slush fund of $900,000 to pay off a sexual harassment problem without the oversight board of the housing authority knowing about it.
* And Philadelphia was not even designated a problem housing authority by the department of Housing And Urban Development (HUD). The Department currently maintains a list of 146 housing authorities across the country that were in a troubled condition, a list that does not include Philadelphia.
* Some housing authority contracts are signed and approved without bidding.
* The New Haven housing authority in Connecticut had no written contracts at all. The Associated Press found that Federal housing money designated for one purpose is often used for a totally different purpose.
* Some housing authority of directors do not meet on a regular basis and many times when they do meet, meeting minutes are not kept.
* Many housing authority executives have little or no financial management or accounting experience, often resulting in deep financial problems before anyone notices, including the Federal government.
* Two employees of the Alamosa, Colorado housing authority were able to embezzle almost $1.7 million of housing authority funds before they got caught, often by simply writing housing checks out to their relatives. It was an easy way to embezzle since often board members regularly signed blank checks and relied on these employees to spend the money wisely, using the signed blank checks.
* In 2003, the Winter Haven, Florida housing authority was cited for not preparing monthly budgets, not adequately training its staff, and being cited for its board not having adequate monitoring and accountability procedures.
In 2010, seven years later, they are still on HUD’s troubled list.
* The findings show that current audits of housing authority operations cannot be done because audits from several years ago have not yet been completed.
* The inability of many housing authorities to manage their operations usually results in needy families not quickly finding the housing they need or never finding the housing they need.
* In Dallas, even if as needy family found housing, two out of three times the Dallas housing authority miscalculated the monthly rental rate to be paid.
This incompetence and criminal activity is funded by a $26 billion Federal budget and many more billions from state and local governments.
– On November 3, 2010, the Associated Press reported that government owned mortgage buyer, Freddie Mac, posted a $4.1 billion loss in the third quarter of the year and has asked for another $100 million of taxpayer money to help its short term financial condition. It asked for $1.8 billion in the second quarter.
The article estimates that the combined bailouts for both Freddie Mac and Fannie Mae will eventually top out at about $260 billion. This works out to about $2,300 for every American household. Most of the problem is due to the soured mortgages and mortgage securities that both agencies got involved prior to and during the “Great Recession.” Given the fragile state of the economy and the worst state of the housing market, the article quotes a housing expert who concludes that the financial condition of both is unlikely to improve dramatically any time soon. Thus, taxpayer subsidizing of these poorly performing government entities is likely to continue.
– A short article in the November 4, 2010 edition of the St. Petersburg (Florida) Times reported that the U.S. government will spend $511 million to expand, not build, its embassy in Afghanistan. The American ambassador there “described the work as a demonstration of America’s commitment to Afghanistan.” I do not know what it cost to build the existing embassy but if it costs more than a half a billion dollars to expand it, the original build cost out most have also been obscenely expensive. And given our government’s tendency to never hit a budget, there is a good chance that the $511 million is a low ball estimate. Do we really think that building a fancy building in the middle of the capital of Afghanistan is going to reassure the local population and government that we are not going to abandon them? I doubt it.
– A National Review Online article by Robert Bryce that was included in the November 5, 2010 issue of The Week magazine, talked about the state of the ethanol energy industry in this country:
* The Federal government pays an annual $7 billion subsidy to American corn farmers to produce a “second rate fuel” to be added to gasoline.
* The ethanol/gasoline mixture approach has failed to reduce America’s appetite for imported oil, creates more pollution than straight gasoline, and reduces gas mileage.
* According to Mr. Bryce, environmentalists have concluded that ethanol is net negative from the environmental perspective since studies indicate that corn ethanol increases air pollutants by 7% over gasoline.
* Ethanol is corrosive to fuel lines of older cars, boats, law mowers, and other engines.
So why do we continue to use taxpayer money to fund an inferior fuel product while increasing the environment damage? Because our political class likes those corn farmer votes. In fact, they like those votes so much that the Obama administration recently approved increasing allowable amount of ethanol that can be combined with gasoline from 10% to 15% because those corn farmers have overbuilt their ethanol distillery capacity and need the extra volume to bail them out of their poor planning.
– A chart from the October 25, 2010 issue of Businessweek magazine, showed the TARP payback status of major financial institutions. Bank of America, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Hartford Financial, and PNC Financial Services have all repaid back their TARP loans already. We know from other news sources, most of them paid back their TARP bailout funds within months after receiving them, indicating that maybe they were that needy in the first place and were just looking for a free lunch at the expense of the American taxpayer. The Businessweek chart shows that Citigroup, GMAC Financial and Sun Trust banks have not paid back all of their TARP money with Citigroup having paid back about 75% and the other have not paid back any.
I am pretty sure that the financial system would not have collapsed if we had allowed these three institutions to go bankrupt due to the bad management of their leaders. The quick and total payback from the many other banks indicates they would have easily picked up the slack. Thus, the $32 billion still owed by Citigroup, GMAC, and Sun Trust is wasted taxpayer money.
– A short article in the November 5, 2010 issue of The Week magazine, reported that the Public-Private Investment Program run by the Treasury Department, which helped private money-management firms invest in devalued mortgage securities, had an investment return of 36% over the past year, far surpassing the 10% return by stocks and the 8% return by bonds.
What is to be learned by this situation? There was no need for any government bailout of any industry. The free market is self correcting, whenever assets devalue, some investor, somewhere will step in and buy the assets, betting that he or she can manage the asset better and make a profit. It happened here in the mortgage industry. Once the sour mortgage securities hit a balanced market price, money professionals came in, bought up the distressed assets and made a financial killing for themselves. It’s called capitalism.
Same thing would have happened with the banks, investment firms, and the car companies. Eventually, the assets of these distressed companies would have become attractive enough to have been bought by willing entrepreneurs, wasting taxpayer money on the bailouts made no financial sense. However, from the political class perspective, the bailouts made political sense to step in and protect the companies from themselves and possibly generate some campaign donations and votes from those affected.
If you add up all of the waste and tax payer bailout listed above and throw in the amount of taxpayer money spent bailout General Motors and Chrysler, you find almost $400 billion of taxpayer money that has been wasted in one form or another. A lot of this money is a one time waste (e.g. the car company bailouts and the Afghan embassy) but much of it is annual recurring waste (e.g. the billions of dollars wasted subsidizing poor performing corn ethanol and the never ending subsidy of Fannie and Freddie.) In both cases, one time and recurring, serious government savings and waste is available to be reaped.
How could this reaping be done? Consider the following approaches:
* An article in the October 25, 2020 issue of Businessweek explained how American farmers are currently in a boom period with exports making American farming quite lucrative. One quote from the article states: “It is a perfect situation for U.S. farmers, the best since the early 1970s. Thus, given it is actually a boom period for U.S. farmers, this might be the best time ever to cut the ethanol subsidy to nothing, saving wasted taxpayer dollars and reducing the incremental harm to the environment. While the farming industry might gripe about losing their government corporate bailout, they cannot cry poverty since overall, farming is in the best situation in four decades.
* Anyway, since much of the farming today is done by farming conglomerates and not family farms, they should not be getting any government subsides to begin with. If this total cutoff is too drastic politically, then limit the subsidies to family farms only.
* Delay the build out of the Afghan embassy for now and maybe forever. The Obama administration has publicly stated it wants to start getting our troops out of the country by next summer. That will have a far larger impact on demonstrating our resolve to see the fight to the end then putting up a prettier and bigger embassy building. Save the money for now, until we know what we are doing in an overall strategy.
* Make the hard and difficult analysis and decisions on how to get the Federal government out of the mortgage business. Freddie Mac and Fannie Mae executives, along with their oversight committees in Congress have proven time and again that they cannot manage their mortgage business, resulting in untold billions of wasted taxpayer dollars. Since the political class did not have the courage to address these two government atrocities in the financial reform bill legislation, rendering that legislation next to useless, the drain on taxpayer dollars by these two institutions needs to be readdressed. One alternative may be to write down and sell off their assets like the Treasury Department did with the Public-Private Investment Program. It may require the assets to be sold at a drastically reduced price but such a program would get the assets off of the government’s ledger, would shut down a taxpayer drain, and would finally turn the mortgage industry back over to the private sector who cannot help but do a better job. Even if they cannot do a better job, it is their risk and not the taxpayers’ risk.
* Implement a process that removes Congressional members from their committee posts if they do not adequately perform their oversight functions for their respective committees. For example, under this step, those members sitting on the financial committees overseeing Fannie Mae and Freddie Mac would have been removed from their committee posts for not foreseeing the financial disaster that is Fannie Mae and Freddie Mac. Any Congressional committee member sitting on a HUD oversight committee would also be removed for allowing the nation’s housing authorities receiving Federal money to be so corrupt and incompetent.
* Implement a step that would allow only individual citizens to financially contribute to election campaigns. I am pessimistic that the political class has enough courage to shut down the wasteful ethanol subsidy since that might effect how much money a politician can get from the industry for their re-election. If you can remove that option of corporate campaign donations via something like Step 6, the political class might actually do the best thing for the country since it does not hurt them politically.
There you go, political class. Almost $400 billion in government waste, exposed, detailed, and a plan attached on how to achieve the savings. The election is over, the rhetoric is over, time for action.
Walter “Bruno” Korschek is the author of the book, “Love My Country, Loathe My Government.”