Farm Credit Fraud

James Bovard is the author of Feeling Your Pain: The Explosion and Abuse of Government Power in the Clinton-Gore Years (St. Martin’s Press, September 2000).

The federal government has been busy foisting new billions in loans onto uncreditworthy farmers. The lending binge is accelerating and paving the way for another massive loan collapse and another taxpayer bailout. The circumstances leading to the current binge are worth examining in order to understand why politicians are completely unfit to allocate credit.

For 81 days in 1996, federal agents and a group consisting largely of disgruntled farmers were locked in a standoff outside of Jordan, Montana. While the stranger aspects of the ideology of the self-proclaimed “Freemen” were widely reported, little attention was paid to the role of the U.S. Department of Agriculture (USDA) in paving the way to this confrontation.

Ralph Clark, the grade-school dropout who was the mastermind of the Freemen, and his partners had received over $650,000 in farm subsidy payments since 1985.¹ In addition, Clark received almost $2 million in federal farm loans. The federal government generously kept sending him annual payments of almost $50,000 to reward him for not growing crops on land he had bought with government loans—long after he effectively defaulted on those loans.

Why did Clark receive so many government loans? Because he was uncreditworthy. According to the Farmers Home Administration (FmHA), this alone made him worthy of a windfall of capital. And since he kept losing money year after year, that proved he deserved new loans. Clark symbolized the type of farmer favored by USDA: big—with a 7,000-acre, government-paid spread—and incompetent. Clark was a poster boy for farm aid lobbyists—portrayed sympathetically in Life magazine, with Geraldo Rivera on ABC’s “20/20,” and elsewhere. But when Clark’s racism and anti-Semitism became evident, his cachet with the Willie Nelson crowd suffered.²

For many farmers, the road to hell was paved with cheap government credit. FmHA encouraged many struggling farmers to continue farming until they financially destroyed themselves. According to the agency’s own records, by far the most frequent cause of bankruptcy among its borrowers is “poor farming practices.” The General Accounting Office (GAO) estimated that a quarter of FmHA bankruptcies occurred because the farmers received too many subsidized loans.³ GAO noted: “In some cases, continued FmHA assistance has actually worsened the financial condition of farmers who have entered the program.”⁴

In 1994, the Clinton administration forgave $138 million in losses from 74 farm borrowers—almost $2 million per farmer.⁵ In many cases, federal officials made scant effort to collect on the loans or to compel borrowers to surrender other assets to cover the government’s financial bloodbath. As of early 1996, 47 percent of farmers with direct FmHA loans were delinquent—a delinquency rate more than ten times higher than that of the average private bank.⁶

Clinton and Congress looked at a rural landscape littered with loan defaults and rushed to provide more subsidized loans. After the Freemen debacle, USDA continued to give scores of millions to farmers who had defaulted on earlier federal loans.⁷ But each inefficient farmer that the government kept on a tractor made it more difficult for efficient farmers to earn an honest living in the marketplace.

The 1996 farm bill authorized the Agriculture Department to make over $20 billion in direct and guaranteed loans to farmers in the following six years. Clinton sought even more subsidized farm loans, declaring in July 1997 that “we should expand eligibility for direct and guaranteed loans.”⁸ In a teleconference with rural radio stations in July 1998, Clinton summarized his ongoing farm-aid deliberations with Congress: “And I, finally, asked for a provision that would improve credit ability and modify the one-strike policy for farmers who have had a debt write-down.”⁹ The “one-strike policy” meant that if a farmer had defaulted on previous federal loans, he was ineligible for future subsidized loans. Characterizing this as “one-strike” makes the policy seem harsh and unfair—as if any farmer should be entitled to several cracks at squandering a few hundred grand of other people’s money. New loans for “socially disadvantaged” would-be farmers were a high priority for Clinton’s USDA. Unfortunately, there is nothing that a person learns from being socially disadvantaged that qualifies him or her to grow wheat efficiently.

Subsidies Doubled

The USDA almost doubled the amount of subsidized farm loans and loan guarantees it doled out between 1998 and 1999, reaching almost $4 billion. Congress authorized the department to make almost $6 billion in subsidized loans and loan guarantees to farmers in fiscal year 2000—the highest amount of federal agricultural lending since the mid-1980s.¹⁰ The guaranteed loan limit per uncreditworthy farmer was raised to $700,000. Agriculture Secretary Dan Glickman testified to Congress on September 17, 1999: “Demand for USDA loan assistance continues to increase. More and more farmers are becoming highly leveraged, with limited equity and low incomes. . . . They are turning to USDA for help. For these farmers, commercial credit sources are not available. . . . Additionally, the recently increased loan limits for FSA [Farm Service Agency] guaranteed loan programs is increasing the demand for guaranteed loan funding.”¹¹ By Glickman’s logic, the fact that there was a strong demand for free money proved farmers were suffering terribly and deserved more loans.

Clinton’s pro-deadbeat farm policy continued a cycle that goes back to the 1930s. Politicians create new programs and then pressure bureaucrats to lend farmers as much money as possible. Then, when loan default levels reach politically embarrassing heights, programs are “reformed,” lending criteria are tightened, and politicians summon bureaucrats to Capitol Hill and denounce them for their stupidity. Later, when the agricultural economy goes into another cyclical downswing, lending criteria are “loosened” and politicians again arm-twist bureaucrats to bail out as many potential voters as possible.¹² The federal government wrote off $15 billion in bad farm loans between 1989 and 1996.¹³ None of that mattered to Clinton and to congressmen who hungered to expand farm lending in the late 1990s.

But the Clinton administration did learn something from the farm-lending debacle. The name of the Farmers Home Administration was changed in 1995 to the Consolidated Farm Service Agency. The Clintonites upheld a hallowed tradition: FmHA’s predecessor agency, the Resettlement Agency, generated so much bad press that it was rechristened the FmHA in 1946. After FmHA wore out two generations of auditors, its name was retired to the Agricultural Boondoggle Hall of Fame.

Clinton’s Bogus Farm Emergency

Clinton’s farm credit policies were part of his campaign to make Americans believe that farmers as a class were suffering terribly. From 1995 onwards Clinton ceaselessly proclaimed his devotion to “strengthening the farm safety net.”¹⁴ In a September 15, 1998, speech to the National Farmers Union, Clinton declared that “we have a farm crisis more extensive than we’ve had in decades. . . . [T]here is suffering on the farm. There is agony on the farm. This is a horrible affront to everything we have worked so hard to achieve to lift the economy for all Americans.”¹⁵ A few months before, Clinton had proclaimed that “from the point of view of the farmers, it’s a terrible emergency.”¹⁶

Clinton’s farm policy was based on the myth of the deserving needy farmer. In 1998, the bankruptcy rate for farmers was less than .05 percent—less than one farmer in 2,000.¹⁷ The bankruptcy rate for all households, by comparison, was 1.3 percent—roughly one in 70.¹⁸ Though the bankruptcy rate for all households was more than 25 times higher than the rate for farmers, Clinton favored forcibly transferring more money from average families to farmers.

Clinton justified perpetuating farm subsidies because of the supposed uniqueness of agriculture. Clinton derided subsidy opponents in 1998 for not understanding “the intersection between global impacts on farm prices, the financing challenges that family farmers . . . face, and what happens to you just by getting up in the morning if it happens to be a bad day.”¹⁹ Because some farmers feel woebegone or hung over on Monday mornings, Uncle Sam must perennially throw money at them. When Clinton signed a farm bailout package on October 23, 1998, he declared that he was “pleased about other provisions in the bill that address the long-term need for farmers to get a fair income from the market.”²⁰ But the legislation flooded specific favored farmers with cash that they would not have received from voluntary exchanges with their fellow citizens. Clinton’s concept of “fair income” simply meant income provided by politicians.

Politicians profit from government credit programs not according to the soundness of the loans but according to their generosity. In early 1987, the FmHA proposed new regulations to rate applicants for loans according to the riskiness of the loans. Congress was outraged. Representative Byron Dorgan exclaimed, “These regulations could effectively be used to destroy the mission of the agency, to disqualify from loans exactly the type of farmers Congress intended the agency to serve.”²¹ The FmHA loses money because Congress designs the program that way. You can’t win votes with programs that don’t do borrowers any favors.

Whenever subsidies are being distributed on the basis of vague or illogical criteria, political pull will soon determine who gets the handouts. Local and state FmHA offices received numerous calls from congressmen’s offices, pressuring them to lend to campaign contributors and other politically preferred borrowers. The FmHA became a petty-cash drawer for farm-state congressmen.

Zero-Sum Game

Farm credit handouts present a classic case of self-defeating humanitarianism: Government cannot help the individual without hurting the group. “One farmer’s good fortune is his neighbor’s misfortune,” as the old saying goes. The more the government helps an individual farmer to plant, the less all other farmers will receive for their harvest. Every time congressmen say they are helping a farmer, they are subsidizing competition for all the other farmers. Every federal farm loan goes either to a creditworthy farmer who could obtain loans elsewhere—or to an uncreditworthy farmer who is kept on the land to the detriment of creditworthy farmers.

Congress has created a two-class system of farmers—welfare farmers and self-reliant farmers. But every dollar of aid the government gives to welfare farmers makes it more difficult for self-reliant farmers to prosper and survive. Good farmers had to pay inflated prices to acquire more land because the government bombarded bad farmers with cheap money to bid up the price of farmland.

Farm credit policies are among the clearest refutations of the competence of politicians to manage the economy better than private citizens can. A rational capital-allocation policy directs capital to wherever its returns are highest and shifts capital away from lower-paying investments. But for decades federal agricultural credit policy has consisted solely of jamming as many loans into agriculture as possible, regardless of the effects.

There is a limited amount of capital in America. Every subsidized loan to a near-bankrupt farmer means fewer loans for other Americans to buy a house, pay for an education, or start an independent business.

Wheeler McMillen, author of Too Many Farmers, observed in 1929 that “if a farmer doesn’t have enough pride and business about him to keep his credit good, certainly no one in the world is going to be able to do much for him.”²² Though McMillen’s sentiment may seem harsh in contemporary times, the record of bankruptcies and delinquencies by government borrowers vindicates his judgment. Unfortunately, politicians have completely avoided paying the price for the bad loans they authorized.

Notes

1. James Brooke, “Freeman Depended on Subsidies,” New York Times, April 30, 1996.
2. Ibid.
3. General Accounting Office, “Farmers Home Administration: Problems and Issues Facing the Emergency Loan Program,” November 1987.
4. General Accounting Office, “Farmers Home Administration: Billions of Dollars in Farm Loans Are at Risk,” April 1992.
5. Press Release, “Lugar Urges Drastic Reform of USDA’s Farm Loan Practices,” Office of Senator Richard Lugar, March 21, 1995. Lugar’s release was based on GAO analyses.
6. General Accounting Office, “Emergency Disaster Farm Loans: Government’s Financial Risk Could Be Reduced,” March 1996.
7. General Accounting Office, “Farm Service Agency-Information on Farm Loans and Losses,” November 27, 1998.
8. “Remarks Following a Meeting on Agricultural Assistance and an Exchange with Reporters,” Public Papers of the Presidents, July 23, 1998, p. 1458.
9. “Remarks in a Teleconference with Rural Radio Stations on Agricultural Issues and Farming,” Public Papers of the Presidents, July 23, 1998, p. 1458.
10. Agricultural Income and Finance, Situation and Outlook, Economic Research Service, U.S. Department of Agriculture, March 7, 2000.
11. “Dan Glickman Secretary Department of Agriculture House Agriculture Farm Crisis,” Federal Document Clearing House, September 17, 1999.
12. For details on the farm loan bubble and bust in the 1970s and 1980s, see James Bovard, The Farm Fiasco (San Francisco: ICS Press, 1989), pp. 127–53.
13. General Accounting Office, “Emergency Disaster Farm Loans: Government’s Financial Risk Could Be Reduced,” March 1996.
14. “Message to the House of Representatives Returning without Approval the ‘Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 1999,’” Public Papers of the Presidents, October 7, 1998, p. 2006.
15. “Remarks to the National Farmers Union,” Public Papers of the Presidents, September 15, 1998, p. 1796.
16. “The President’s News Conference,” Public Papers of the Presidents, June 25, 1999, p. 1189.
17. Fax from Jerome Stam, USDA Economic Research Service farm bankruptcy expert, April 6, 2000.
18. American Bankruptcy Institute statistical table.
19. George Anthan, “Clinton Supports Added Farm Aid,” Des Moines Register, June 30, 1999.
20. ”Statement on Emergency Assistance to Farmers and Ranchers,” Public Papers of the Presidents, October 23, 1998, p. 2114.
21. Congressional Record, September 26, 1987, p. H 768.
22. Wheeler McMillen, Too Many Farmers (New York: Morrow, 1929), p. 66.