It started all so innocently. To support family home ownership, the federal government during the Great Depression created Fannie Mae and Freddie Mac, corporations that could purchase mortgages, bundle them, and sell them as investments. This gave greater capacity to local banks and savings and loans to help others realize their American Dream.
Then things went wrong. Following the double crashes of the Hong Kong Stock Exchange in the early 2000s, Asian capital searched the world for low-risk investments. Securitized home mortgages sold by a quasi-governmental U.S. agency were just the thing. Freddie and Fannie sold billions of dollars worth of these “products” and, in a few short years, investment houses around the world catered to this new, highly lucrative market.
We all know what happened next. Investment bankers started selling any kind of junk mortgage investments. By 2008, a global financial system collapsed of its own weight, creating the Great Recession. Millions lost their homes; millions were thrown out of work.
With that searing experience in the rear view mirror, one would think we’d never do something like that again. Or would we? My worry is that the Marathon County board has failed to learn the hard lessons of 2008.
This month, the county board discussed approval of a Property Assessed Clean Energy (PACE) program. Supported by the Wisconsin Counties Association, PACE encourages banks to loan money to businesses and not-for-profit organizations for energy efficient improvements (new furnaces, solar panels, air conditioners, etc.) by stipulating that any loan default can be repaid by a property tax assessment, which can be enforced, in turn, through county foreclosure.
During a presentation on Thursday, proponents told county board members that PACE promoted energy savings and economic development with no risk to county finances. No PACE loans in Wisconsin have defaulted, they said.
Some county board members were enthusiastic. “It’s a no brainer,” concluded county board vice-chairman Lee Peek, Wausau.
Yet I wonder if supervisors have any idea of what kind of financial monster they could be creating.
The Wall Street Journal in January reports PACE financing, now allowed in 34 states, is the fastest growing type of financing in the United States. The program has facilitated $3.4 billion in loans and that total is expected to double within a year.
What seems to be propelling this exponential increase? Investors. They’ve discovered PACE loans and now packaging them as government-guaranteed investments. Germany’s Deutsche BankAG recently sold $284 million worth of PACE loans.
PACE proponents say Wisconsin’s approach to property tax-guaranteed lending is cautious and responsible. This state doesn’t allow residential PACE loans, they say; the program demands that certified engineers financially guarantee energy savings in projects over $250,000.
This all sounds good, but I think these assurances miss the vital point: With the Great Recession barely over, we should be loathe to run to any program, no matter how worthy, that would have government erase risk from lending. Did we not learn anything? This formula invites mischief.
The county board needs to check their instincts. They should not be so quick to mix government and business. Let government pave roads, jail offenders and help the poor. Let banks, however, loan money to business.
Nobody thinks our capitalistic system is flawless. At the same time, we should have enough faith in our system of commerce to question whether government intervention (loans, tax breaks, grants, free training, free land) is needed for every instance of “economic development.”
Not all county supervisors are in favor of PACE. One opponent is Jim Schaefer, Wausau. “This is not county government business,” he told the county board last Thursday, referring to PACE. “This is not something we should get involved in.”
The PACE program returns to committee for further review. I hope supervisors give the program real scrutiny. There’s more at issue here than resolving some marginal legal qualms. Instead, the committee should return to Schaefer’s basic question. Why is the county approving PACE in the first place?
Peter Weinschenk is editor of the Record Review newspaper, serving Marathon, Athens, Edgar and Stratford, where this column also appears.