01.31.2010 0

Pay No Attention to that Debt Behind the Curtain!

  • On: 02/18/2010 09:36:33
  • In: Fiscal Responsibility
  • By Bill Wilson

    If government-owned-and-operated Fannie Mae and Freddie Mac’s net liabilities of about $6.3 trillion were added to the national debt, it would total about $18.7 trillion today. That’s a whopping 129 percent of the nation’s Gross Domestic Product, which currently stands at $14.463 trillion.

    Americans concerned about the future solvency of the nation should not only find that number startling, but use it as a call-to-action to reduce the debt, because those liabilities may very well be added to the total national debt in the not-so-distant future.

    The truth is, that debt ought to be counted based upon the fact that taxpayers own the companies. Remember that Government Sponsored Enterprises (GSE’s) Fannie and Freddie were nationalized in September 2008 as the companies succumbed to the market crash.

    The taxpayers own the companies, and the companies owe $6.3 trillion in debt. Therefore, the taxpayers owe another $6.3 trillion. Right?

    Wrong. As reported by Bloomberg.com, “White House budget director Peter Orszag delayed a decision on whether to bring the companies’ $1.6 trillion in corporate debt and $4.7 trillion mortgage obligations onto the federal budget. As the director of the Congressional Budget Office, Orszag criticized the Bush administration for keeping the 2008 rescue of the government-sponsored enterprises off budget… At the time, Orszag said ‘the degree of federal control over Fannie and Freddie is so strong, we are incorporating them into the federal budget.’”

    The White House’s reasoning? According to the Bloomberg report, “We want to be sure, that as we move to reform the GSEs, we are focused on retaining strong market stability in our housing sector,” said Michael Barr, assistant Treasury Secretary for financial institutions.

    In other words, if the debt were reported as it should be, the effects to the economy would be devastating. So, they’re lying about it, and pretending instead that the companies “are privately owned and controlled,” as noted by the Obama $3.83 trillion budget. And yet, as pointed out by Bloomberg, the companies may need another $77.4 billion from the Treasury to stay solvent over the next two years.

    Will that be considered off-budget too? That aside, there is good reason to assume that off-balance-sheet liabilities may soon be added to government budgets the world over. As noted by the Wall Street Journal’s Richard Barley, “Will the next stage of the crisis involve markets effectively forcing governments’ unfunded off-balance-sheet liabilities back center stage? Western governments will be hoping they don’t—but there are signs it is happening already.” Indeed.

    The story of Greece’s off-balance-sheet liabilities raising its reported 2009 debt is telling. That nation is in quite a pickle, too, after its socialist government saw fit to revise its reported debt from €251.2 billion at 99.6 percent of the nation’s GDP, as Greece’s National Statistical Service reported in May 2009, to about €294 billion at some 116.5 percent of GDP that it will top this year, as reported by AFP.

    The thinking behind the revisions, according to the New York Times, was apparently entirely political, and rife with unintended consequences.

    Mr. Orszag, meet Manolis Kontopirakis.

    Manolis Kontopirakis, former head of Greece’s National Statistical Service, reports the Times, “said the huge discrepancy between the initial forecast of 3.7 percent of gross domestic product for the 2009 deficit and the final figure of 12.7 percent was the product of two factors: the excessive optimism of the previous conservative government and the new Socialist government’s desire to put the blame on its predecessor and make any economic rebound seem more impressive.”

    The report continues, “But the officials failed to anticipate the impact the new figure would have on world financial markets. ‘The new government completely underestimated the market reaction,’ he said. ‘They just didn’t expect the turmoil.’”

    So, the Greeks did the right thing in telling the truth, albeit for the wrong reasons. The U.S., on the other hand, knows intuitively what the market implications will be if Fannie and Freddie are reported as on-budget, and is simply not telling the truth. Again, for the wrong reasons.

    The U.S. can improve upon this Baumian “pay no attention to that debt behind the curtain” routine by finally bringing truth to the nation’s budgeting, and leveling with the people once and for all about the true liabilities the nation faces. At ALG, we are certain that if the net liabilities of, say, Fannie, Freddie, the Federal Reserve, Medicare, and Social Security for starters were all on-budget, the public uproar would be sufficient to force Congress to actually reduce the debt for the first time in over 50 years.

    Let’s start with Fannie and Freddie. The Obama Administration may want to, as a political matter, indefinitely maintain control of the mortgage giants. If so, then those liabilities should be counted as on-budget, accepting that the taxpayer-assumed liabilities will in all likelihood affect the nation’s credit rating one way or another.

    If, on the other hand, the public decides that $6.3 trillion in new debt is simply too much of a risk, then the mortgage giants should be sold off piece by piece, and the government should get out of the mortgage industry all together. But, Obama cannot have it both ways, where the political benefits of control are preserved without incurring the financial costs that are plain for the world to see.

    Just ask Greece.

    Bill Wilson is the President of Americans for Limited Government.

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