The Solyndra Scandal And The Dangers of Government Lending

More information is coming to light about Solyndra, the much-hyped solar-energy company that got a loan of half a billion dollars from the federal government before declaring bankruptcy. The feds, hot off a raid of Gibson Guitar Company, have raided Solyndra’s offices. Megan McArdle highlights a few facts that suggest the possibility of scandal. At worst, the Obama administration loaned bad money at a suspiciously low rate to a politically-connected company so it could tout the creation of “green jobs” without any evidence that the company was at all sustainable. At best, the U.S. Department of Treasury’s Federal Financing Bank got unlucky on an investment decision.

Ugh. I didn’t even know we had a “Federal Financing Bank.” (I’m still unsurprisingly surprised every time I find something new that our government does or has done.) This sounds like a classic case of the negative consequences of government doing something it shouldn’t be doing. It’s one thing to spend money on research that will hopefully lead to public discoveries and benefits. It’s quite another to loan money to specific for-profit companies. I don’t know how this works on the budget, but I’m assuming the government was assuming they’d get their $535 million back, and now they won’t. If private banks didn’t see fit to loan them that much money at that rate, what makes the government smart enough to think it’s OK?

It’s bad enough that government just isn’t smart enough to do things like pick the best companies to loan money to. But when you allow that kind of power to elected officials, it inevitably invites corruption. Now we’re getting suspicious facts about the political connections of an investor, or the number of times somebody from Solyndra visited the White House. For now I’m willing to give them the benefit of the doubt. There’s not enough information yet to prove that there was corruption involved in the decision to give a giant low-interest government loan to Solyndra instead of, say, some other less lucky company. But I can say that similar situations involving the power of government officials in the past have led to decisions where corruption was involved. That’s just part of the way these things work, and the cost of corruption has to be considered in any discussion about the potential benefits of giving power to government officials to favor some people or businesses over others.

I feel like I’m spouting fairly cliched libertarian ideology here, but I don’t see a way around it. I try not to take too strong a stance on a lot of libertarian positions, but I feel pretty strongly about opposing government lending (but of course I’m open to being convinced to change my mind). The government essentially loaned money to homebuyers (through the formerly implicit “guarantee”), and then Fannie Mae and Freddie Mac crashed under an assortment of bad loans (Now the government’s trying to sue the banks for making the bad loans, and I’m sure there’s plenty of blame to go around, but the federal government is the cornerstone of it all). The government loans money to students at lower interest rates to help them go to college, but the more they loan the more college costs outpace inflation and the more we start to hear horror stories of college graduates with thousands of dollars in debt and no jobs or low-skilled jobs. The government loans money to businesses under the ideology of advancing green technology… and the companies go mysteriously bankrupt.

The problem with government lending is that if you don’t get the money back, it becomes government spending. The one-time TARP program under Bush lent a lot of money to banks, and apparently we actually got most of that back. But I still don’t think that justified the lending – just because you don’t always lose at Russian Roulette doesn’t make it a wise game to play. If individual banks or investors lends to too many bad investments, they go bankrupt. If the federal government does it… the lost loaned money just gets piled into the enormous debt load.

I’m sure every type of government lending has a good intention behind it. But I don’t think government officials have enough knowledge to decide who around the country deserves loans and who doesn’t, and I don’t think government officials are pure enough to keep that process from favoring political friends. A lot of government spending is bad, but I’m starting to think that government lending is far worse.