The Carter administration's offer to rescue troubled Chrysler Corp. with federal loan guarantees spotlights one of the little noticed but most important of all the federal government's activities: its dominant role in borrowing and lending in America.
The government is now responsible for a fourth of the borrowing and a sixth of the lending in this country.
The most common form of involvement is loan guarantees, which is the way the government helped Lockheed Corp. and New York City. But these are just the best known examples of federally backed loans.
The government has co-signed $1 of every $12 in supposedly private loans made in the United States. All told, the government's guarantees added up to $254 billion at the end of last year, about twice what the government had loaned directly.
Use of these loan guarantees is growing. The value of the guarantees last year was double what they were in 1970 and six times what they were in 1950. And much of the growth, according to one study, has been unplanned and uncontrolled.
Government officials regard the guaranteed loans as a free good, involving only negligible intervention in the economy and costing taxpayers little or nothing -- just Uncle Sam's signature on a loan application promising to make the payments if the private borrower defaults.
But the guarantees, in fact, are not free, and their increasing popularity has prompted serious concern for their economic impact.
By co-signing tens of millions of dollars worth of special interest loans each year, federal agencies distort relationships among potential borrowers. They help borrowers who are less credit worthy move to the front of the lending line, while more credit worthy ones, particularly small businesses and unaided home buyers, get forced to the rear.
Also the types of loans the government is guaranteeing have changed dramatically. What started in the 1930's as a limited and financially sound program of attaching federal guarantees to some home mortgages has since exploded into a grand hodgepodge of federal loan guarantees to cities, failing companies, even whole industries, such as shipbuilding. Placed in that context, the proposed guarantees of up to $750 million to Chrysler would be a small addition to an already huge pot.
In effect, these guarantees amount to subsidies. But they are concealed subsidies. Little or no money is expended for them, so they do not show up on agency budgets and are not subject to regular congressional scrutiny as some think they should be.
This has raised more serious question about how the guarantees should be used and how they can be controlled as part of the federal budget process.
Through the use of guarantees Washington has managed to spread a financial safety net under a broad variety of business activities. Some have received more favors than others.
Home buyers and farmers account for the largest share of guarantees (roughly two thirds of the total), and the government's lending hand deals heaviest in home mortgages and farm credit.
One out of every five home mortgages in the United States has been co-signed by someone in either the Department of Housing and Urban Development of the Veterans Administration. One out of every four farm loans is covered by the Department of Agriculture.
Other more narrow interests have also gotten the government to back up a loan. Nearly all the money borrowed by the shipbuilding industry last year carried a U.S. Maritime Administration guarantee. The total came to $900 million in fiscal 1978, and by the end of last year federal guarantees for shipbuilding loans had piled up to $5.2 billion.
This was about the same amount of loan money the government had backed for rural electrification projects. Another $63 billion in student loans were covered, and the same amount in small business loans also carried federal guarantees.
Next to these huge sums, it is easy to overlook some of the smaller though quite substantial ones: $22 million for construction in the Virgin Islands, $36 million for the Guam Power Authority, $910 million for railroads, $997 million for Washington Metro construction, and $1.6 billion authorized for New York City.
Taken together, many of these guarantees suggest what some regard as a serious trend.
"Anything goes in this area, whatever gleam is in a politician's eye," said David Gillogly, a credit expert in the Office of Management and Budget.
"In the beginning," explained Nancy Teeters, a governor of the Federal Reserve Board who has testified on the subject, "the guarantees were for Veterans Administration and Federal Housing Administration mortgages. It was a program then in which everyone paid a fee and the government could cover what few defaults there were. Some of the loans guaranteed now, however, are very large and involve considerably more risk."
Just how big a risk the government has taken on as a result of all its guarantees is difficult to tell. Efforts by federal officials and outside consultants to figure the full extent of liability have faltered due to a lack of consistent and accurate data among federal agencies.
Several instances of costly defaults on federally guaranteed loans have surfaced, the most notorious being the student loan program, which reported a default rate of 18 percent.
A study last year by an accounting firm, Peat Marwick Mitchell & Co., for the Congressional Budget Office found that the government's liabilities, as a result of its guarantees, "have grown so much that serious difficulties may result if provisions for possible losses are insufficient and the government actually has to pay insurance and guarantee claims."
Overall the study concluded: "The rapid increase in government intervention in the nation's credit markets has generally been unplanned, and it has been relatively uncontrolled."
The study detailed difficulties some agencies have had in administering guarantee programs. In general it noted that credit activities receive far less congressional oversight than other federal programs do.
Seeking to call attention to loan guarantee practices, the White House plans to establish a credit section in the federal budget next year. It is hoped this will intensify public scrutiny of federal credit activities and, in particular, encourage Congress to fix limits for new guarantees.
Against such a backdrop of concern, the Chrysler case is likely all the more to draw heated debate on Capitol Hill. For though federal loan guarantees are a common and long standing government practice, the Chrysler case would reinforce what many regard as a dangerous precedent set by the $250 million in loan guarantees won by Lockheed in 1971, and would further expand an already uncontrolled operation.
"You're really raising the possibility of making guarantees to every corporation in trouble." said Eleanor Bachrach, a Senate Banking Committee staffer who will handle Chrysler's petition. "you may be opening up a whole new category." Source: Federal Reserve Board Flow of Actual Funds Accounts.