Memo to Gingrich: Credit Unions are Not GSEs

Let me begin this post with a disclaimer, of which many of our readers are already aware. The Competitive Enterprise Institute and do not advocate the election or defeat of any political candidate. What we do do is offer our perspective on many of the policies the candidates have to offer. Often a candidate will receive kudos from us for one idea, but strong criticism for another.

In the case of former Speaker of the House Newt Gingrich, I have applauded his and other candidates’ calls to repeal the burdensome accounting mandates from the Sarbanes-Oxley Act of 2002. A few days ago on OpenMarket, Rand Simberg gave qualified praise to Gingrich’s idea for a lunar colony, so long as involved lifting regulatory barriers and not government subsidies.

But in last night’s Fox News debate, Gingrich made an egregious factual error that needs to be corrected. This would be his outrageous assertion that the nation’s thousands of credit unions are “government-sponsored enterprises” akin to the disgraced Fannie Mae and Freddie Mac.

“Credit unions, co-ops, a lot of government-sponsored enterprises do a lot of good,” Gingrich said in response to a question from Chris Wallace about Gingrich’s $1.6 million in consulting fees from Freddie Mac in 2002 and his public praise around that time of the “GSE model”

But these entities Gingrich cited do not bear any resemblance to the “GSE model.” In fact, credit unions are some of the least subsidized financial institutions.

As government-sponsored enterprises, even before they were bailed out and taken into conservatorship in 2008, Fannie and Freddie had special federal charters and special lines of credit with the U.S. Treasury. They had implicit government backing that became explicit when the entities imploded in 2008.

Credit unions, by contrast, are member-owned cooperatives that receive no government support, save for the deposit insurance that banks also receive. They are owned owned by member depositors who receive excess funds in the form of dividends. Members can also take out loans from the credit union for items such as cars and homes.

Although credit unions not taxed at the corporate level, their members  are fully taxed on the dividends on their accounts, and are taxed at the “ordinary income” rate for interest and not the lower rate for dividends. Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of single taxation. This structure is similar to those of some community banks that are subchapter S corporations.

In fact, credit unions have been left out of many of the subsidy programs available to banks. They were excluded from the Small Business Lending Fund, passed in 2010 to subsidize banks to lend to small businesses (which like other bailouts, hasn’t worked out to well.)

Nor do most credit unions lobby for these types of subsidies. Their biggest priority over the last few years has simply to get Congress to lift the regulatory barriers that prevent them from lending more than a tiny percentage of their assets to small businesses.

Fortunately, there is a bill in Congress called the Small Business Lending Enhancement Act (identical versions of which are in the House and Senate) that has garnered the support of libertarian Sen. Rand Paul (R-Ky.) and liberal Sen. Mark Udall (D-Colo.). This no-cost stimulus would simply lift the government’s cap and allow credit unions to lend more to small businesses. You can read more about this issue in this piece I wrote  for

Gingrich should take a cue from his supposed hero Ronald Reagan, who recognized credit unions as the voluntary organic institutions they are. In Presidential Proclamation 5211 (1984), Reagan said, “Credit unions are uniquely democratic economic organizations, founded on the principle that persons of good character and modest means, joining together in cooperative spirit and action, can promote thrift, create a source of credit for productive purposes, and build a better standard of living for themselves. Because credit unions exemplify the traditional American values of thrift, self-help and voluntarism, they have carved a special place for themselves among the Nation’s financial institutions.”