Kick the Anthill

September 18, 2008

Honorable Mitch McConnell
Minority Leader
United States Senate
Washington, DC 20510

Dear Senator McConnell,

I am requesting that I be consulted before the Senate enters into any unanimous consent agreements regarding S. 2166, the Jubilee Act for Responsible Lending and Expanded Debt Cancellation of 2008. I objected to the previous unanimous consent agreement, and I reserve the right to object to any future unanimous consent agreements or rule waivers regarding this bill.

I have a number of concerns with this legislation.

The Jubilee Act requires the Secretary of the U.S. Treasury to “commence immediate efforts. . .to accomplish. . .cancellation by the United States of all existing debts owed to it by eligible low-income countries.”[1] This will effectively transforms at least $1.13 billion of U.S. loans to other countries into foreign aid grants that will no longer be repaid to the U.S. taxpayer.[2] In other words, S. 2166 authorizes a $1.135 billion foreign aid package.

The national debt now exceeds $9.4 trillion. That means over $30,500 in debt for each and every man, woman and child in the United States. The U.S. debt is expanding by about $1.4 billion a day, or nearly $1 million a minute. S. 2166 would significantly contribute to the already overwhelming burden of debt that Congress has created.

This violates a principle I have laid out in a letter sent at the beginning of the 110th Congress to all my Senate colleagues, to withhold my consent for unanimous passage of any bill that authorizes new spending without an equivalent reduction in existing spending authority for a lower-priority or less effective program.

S. 2166 also requires the Secretary of the U.S. Treasury to “commence immediate efforts” within international financial institutions, such as the World Bank,” to ensure “that the provision of debt cancellation to eligible low-income countries is not followed by a reduction in. . .development assistance to the [low-income] countries by international financial institutions.” This section of the bill could be interpreted to support the notion that contributors to international financial institutions, such as the U.S. taxpayer, should be required to refund the international financial institutions for the entire amount of the loans forgiven. In other words, U.S. taxpayers, who have already paid their share of the forgiven multilateral loans, would be required to pay this amount a second time as a bailout for the banks.

Unfortunately, the U.S. Treasury Department, during a G8[3] summit in 2005, already made a commitment to provide a bailout to multilateral banks that participated in the Multilateral Debt Relief Initiative (MDRI). MDRI is an initiative that gives 100 percent relief on eligible debt from three multilateral banks[4] to a group of low-income countries, most of whom never intended to repay the loans.[5]

In the outcome document from the 2005 G8 Summit, the U.S. Treasury Department and its counterparts in the other G8 countries agreed to “compensate” the multilateral banks “on a ‘dollar-for-dollar’ basis” the full amount of the debts to eligible low-income countries that will be forgiven.[6] The outcome document goes on to say that the G8 will “provide MDRI financing additional to donors’ regular support” which represents “an increase of about 25 percent over” the baseline funding level the G8 normally sends to the banks.

Regular support of the development banks comes in the form of replenishments, which are wealth transfers from G8 countries given to the banks every three years with which the banks redistribute to low-income countries. The agreement made by the G8 was to include the multilateral banks’ bailout within the regular 3-year replenishments to the banks.

The total debt relief G8 countries, including the U.S., agreed to is more than $41.3 billion over 40 years. This means $41.3 billion in mostly bad loans to low income countries have been transformed into foreign aid grants that will never be paid back. By agreeing to bail the banks out for these bad lending decisions, the G8 is passing the cost of the scheme to G8 taxpayers. The total cost will be up to $82.6 billion to cover the original loan plus the cost of the bailout.

The U.S. taxpayers’ share of this bailout is almost $7.5 billion over 40 years. Even though the U.S. Treasury was not authorized by Congress to commit to this increase in foreign aid spending, Treasury plans on making the first installments of the U.S. portion of the bailout this year without informing Congress. In its budget request to Congress in 2009, the Treasury Department does not report to Congress any information about its agreement to bail out the multilateral banks or that its request for its next 3-year replenishment to the banks includes its first installment of the bailout.

It wasn’t until I asked specifically about the bailout that the Treasury Department admitted that it has hidden the first installment of the U.S. share of the bailout in the U.S. replenishment payments for 2009. According to the Treasury Department, these bailout payments will not cost the taxpayer additional funds. It claims that by sending the normal 3-year replenishment to the banks earlier than planned, the money will gain enough interest while sitting in the multilateral banks’ accounts that will pay for the U.S. share of the bailout. What the Treasury Department fails to understand is that this interest belongs to the U.S. taxpayer, and by denying the taxpayer this interest, the cost of the bailout is indeed carried by the U.S. taxpayer.

Another disturbing element to the bailout agreement that U.S. Treasury made at the 2005 G8 summit is that the additional money the U.S. and other G8 taxpayers will be sending to the banks for the bailout will be used for “providing further resources for. . .development efforts”[7] within low-income countries whose loans were forgiven. In other words, the U.S. Treasury Department agreed to saturate the multilateral banks with even more U.S. taxpayer cash, so the banks can continue their misguided policies responsible for issuing bad loans and the subsequent bailout schemes.

Development policies that require massive transfers of wealth from developed nations to low-income nations, or socialism, have proven not only to fail at eradicating poverty but actually prolong and worsen economic conditions in many impoverished countries. I strongly believe that when we act as a government to help people, we make sure that our help first doesn’t make the problem worse, and second, really works and doesn’t just make us feel good about having tried to help.

Wealth transfers, whether it be in the form of foreign aid packages or debt relief, is based on the false premise that transfers of riches from wealthy nations to poor nations will buy economic growth in those recipient nations. There is no credible evidence that suggests this approach has ever actually produced economic growth, and sadly, there is a growing body of economic research that suggests just the opposite. [8] All evidence demonstrates that poverty decreases only with the increase in economic freedom, free trade, the protection of property rights, elimination of corruption, and predictably enforced rule of law. In other words, poverty is the result of corrupt governments and the absence of liberty—not the lack of wealth transfers.

The American people are already burdened with over $9.4 trillion of debt due to uncontrolled spending by Congress. The U.S. taxpayer is always called upon to bail out failed wealth-transfer programs, whether it is multilateral banks, government-run mortgage companies, or federal retirement plans. It is unlikely that there will be anyone willing to bail out the U.S. taxpayers once this unsustainable spending frenzy finally catches up with us. I cannot, in good conscious, contribute to this problem.

In order for me to vote “yes” on the passage of S. 2166, the bill should be improved in two key ways. First, the cost of transforming over $1 billion of U.S. bilateral loans into grants should be offset by an equivalent reduction in existing spending authority for a lower-priority or less effective program.

Second, S. 2166 should include a prohibition on providing multilateral banks bailouts from the U.S. taxpayer for current or future debt relief initiatives. If multilateral banks desire a $7 billion increase in U.S. funding, they should make a request to Congress, and Congress should conduct oversight investigations, debate whether wealth transfer programs achieve measurable results, and, if there is measurable evidence supporting it, decide whether or not to grant the increase while offsetting it from existing spending elsewhere.

Thank you for protecting my rights on this legislation.

Sincerely,
Tom A. Coburn, M.D.
U.S. Senator

Read the full context here.  Go do something about Henry Paulson here.

BONUS: Dr. Coburn Urges Senate Leaders to End Partisan Obstruction of Child Protection Legislation