The bipartisan highway bill currently moving through the Senate would break new ground in creative financing by establishing federal transportation construction bonds that would not fall under traditional definitions of federal debt. These new bonds would be called “Build America Bonds”.

Senate sponsors Jim Talent (R-Mo.) and Ron Wyden (D-Ore.) all but proclaim the next free lunch. For every $1 billion invested in federal highway and transit infrastructure, an estimated 47,500 jobs are created. For every $1 billion invested in federal transportation infrastructure, an estimated $5.7 billion in economic activity is generated. “The Build America Bonds proposal looks beyond the bleak budget headlines and taps the big potential of bonds to create more than a million jobs and improve our country’s transportation system at the same time,” said Wyden. “By investing in Build America Bonds, Americans can put their money to work building and improving critical infrastructure like roads, bridges, transit, rails and ports, while helping to create jobs, spur the economy and ultimately save lives.”

The Build America Bonds legislation would create a federally chartered non-profit corporation that would issue $39 billion in bonds, of which $30 billion would be used to fund transportation projects.

Does anyone seriously think it would stop there if this monstrosity passes? Do we really need another quasi-government corporation messing things up? Don’t we have a big enough mess with Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae? Apologies to lovers of the childhood game with a similar name but I think its time to put a complete stop to another “Mother Mae I?” before it gets started.

Supposedly, Build America Bonds would usher in a mini-New Deal for the age of globalization using seed money to help new jobs and economic activity.
It’s an evolution in transportation funding,” said Ed Mortimer, spokesman for the U.S. Chamber of Commerce, another of the bonds’ advocates on Capitol Hill. “With limited dollars in Washington, we’re going to see the trends go more toward getting Wall Street and investors involved in funding these types of projects.”

It seems to me that getting Wall Street involved in more creative off book financing schemes is the last thing we should be doing.

Hear is the essence of the deal: To pay off the $30 billion principal, the government would invest $9 billion more in a “sinking fund, using reliable choices such as Ginnie Maes and Freddie Macs”. Senate estimates predict it would take 30 years for the initial cost to be recouped, but the bonds would stay off the deficit’s bottom line due because their issuer would be a nonprofit corporation established by the government, not the government itself.

According to the bill’s sponsors, the proposed legislation will reduce congestion, correct deteriorating road conditions, save 12,000 lives each year caused by inadequate road conditions, enhance long term economic growth, and create millions of job opportunities. Is this the ultimate free lunch or is there an even better creative financing scheme around the corner?

As long as we are being creative, why stop with roads? Why not Build Iraq Bonds to fund the war and keep that debt off the books. Oh wait, aren’t we already keeping Iraq funding off the books somehow? Let’s go for something big. Why not fund Social Security or Medicaid this way? Since we get nearly a six times payback on this free lunch investment, why not just sink $5 trillion into it and solve all of our problems at once? Imagine how nice it would be to completely remove huge budget items off the books. After all, that’s one way Bush can meet his goal of cutting the budget deficit in half. As the Church lady says “How Convenient”!

How much more creative finance, buy now pay later schemes can we stand before we have a debt implosion accompanied by an enormous credit crunch?

Once you start down the slippery slope of creative financing where does it stop? Consider Enron. How many investors were totally wiped out when that company imploded? More recently consider the shenanigans at Fannie Mae. Fannie Mae has to restate earnings because they were hiding billions of dollars of losses off the books. Here is a report from the SEC on the poor accounting practices at Fannie Mae. Greenspan and congress are now up in arms warning about financial risk, denying that Fannie Mae is too big to fail, and in general publicly trashing Fannie Mae’s accounting practices that let them keep $9 billion dollars in derivative losses off their balance sheet. In fact, their books are so screwed up they still are months delayed in filing up to date quarterly reports. It might be as long as a year before the mess at Fannie Mae is straightened out. Congress now wants to rein in lending at Fannie Mae before it implodes.

The point of this is not to bash Fannie Mae (even though they truly deserve it), but to point out the stupidity of creating another yet non-government agency for the explicit purpose of keeping debt off the US governments books. If anyone’s books are more screwed up that Fannie Mae, it’s the US governments.

Meanwhile the president’s Office of Management and Budget said the said the bond mechanism “disguises the true costs to taxpayers,” threatening a veto if the bill included the provision. If Bush vetoes this bill it would be his first veto ever. The fact that Bush is actually threatening a veto over something like this tells you how extreme this Republican Congress has gotten in their spendthrift ways and their foolish creativity in attempting to hide it.

Enough is enough.
It seems to me that we already have had way too much creative financing. Instead of more free lunch proposals, what we really need is some semblance of fiscal sanity in conjunction with GAAP reporting of Federal finances. Don’t hold your breath.

Mike Shedlock / Mish/