Wednesday, March 14, 2012

America Is Using Tricks To Hide A Debt Crisis Worse Than Greece

When the federal government guarantees a student loan, that loan is subject to accounting treatment that was established by the 1990 Fair Credit and Reporting Act (FCRA). It should come as no surprise that the FCRA methodology is not “fair” at all.
The Congressional Budget Office (CBO) succinctly described the problem in a new report.  (Link):
FCRA Treatment Does Not Give a Comprehensive Accounting of Federal Costs.
In CBO’s view, FCRA-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans.
A few questions come to mind:
How extensive is this problem?
Is there an alternative to FCRA?
How large is the understatement of risk at the federal level from the loan guaranty programs?
The answer to A is that the problem is enormous. CBO has provided some details:
CBO’s list of outstanding federally guaranteed debt comes to $2.665 Trillion. But that is just a part of the story. Note that the report includes $1.18T of FHA guarantees and $258B of Veteran's Home loans. These guarantees all relate to mortgages. If the credit risks associated with FHA’s/VA's mortgage activity is included in the numbers, then why are the guarantees and loans provided by Fannie and Freddie excluded? The answer is that a more appropriate method of accounting would trigger a a huge increase in total debt. No one wants that, right? The CBO waves away over $6 Trillion of additional debt with this very simple footnote:
Excludes the activities of Fannie Mae and Freddie Mac, purchases by the Treasury of securities issued by Fannie Mae and Freddie Mac, the financial assets acquired through the Troubled Asset Relief Program, and certain other transactions that involve credit assistance.
Adding all the pieces that should be included brings the total to $9 Trillion!


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