A few weeks ago, TARP Inspector General Neil Barofsky ignited a media firestorm by adding up the cost of every financial rescue program ever proposed since 2007 and coming up with $23.7 trillion as possible government liability for the economic rescue.
The total was meaningless, because for the government to ever be on the hook for that much, every bank in America would have to fail, every mortgage held by the government would have to be worthless, and Treasury itself would have to default on its securities. (And Barofsky added in the full cost of programs that were discontinued or never even begun.)
Of course, that didn’t stop cable news anchors like Sean Hannity and Lou Dobbs from claiming that $23.7 trillion would be the total cost for government bailouts. And with that number finally out of the public discourse, along comes the Wall Street Journal’s editorial board, claiming that the federal government should add $5 trillion to the national debt by accounting for the possible liabilities of Fannie Mae and Freddie Mac:
Putting Fannie and Freddie on the national books would in an instant increase the national debt held by the public by 75%—to $12.7 trillion, from $7.3 trillion today…[T]his takes debt as a share of GDP to nearly 90%, or nearly double the peak it reached in the 1980s when the political class was hyperventilating even as the Reagan deficits were falling as a share of GDP. Congress would have to add that $5.4 trillion to the increase in the federal debt limit that Treasury Secretary Timothy Geithner is now requesting. But that would be truth-in-budgeting.
This proposal makes absolutely no sense. But it would be a really convenient way for conservatives to peg the Obama administration with an explosion in federal debt, and bolster arguments that increasing deficits and debt warrant cuts in spending.
Like Barofsky’s estimate, the Journal’s number assumes that every mortgage held by Fannie and Freddie goes into default and all of the homes turn out to be worthless. In other words, it accounts for all of the liabilities of the GSE’s while not taking into account any of their assets.
Conforming mortgages owned by Fannie and Freddie are actually performing far better than privately held and securitized mortgages. Fannie and Freddie account for 57 percent of the mortgage market, but only 22 percent of delinquencies, while private label companies have seven percent of the mortgages but 42 percent of the delinquencies. Does the Journal think all of those privately held mortgages need to be written off as a sunk cost as well?
Following the Journal’s proposal would be like assuming that the government will have to pay out every single deposit insured by the Federal Deposit Insurance Corp. — and thus putting them all on the government books today — when the likelihood of all that deposit insurance needing to be paid out is incredibly small and would be indicative of problems that far outweigh federal budget accounting. It’s a good way to pin a big number on the guys in charge, but it doesn’t accurately reflect much of anything.