"The Only People Who Still Might Be Fooled Are the American Taxpayers, Who Are Ultimately Responsible When the Bills Come Due" → Washingtons Blog
"The Only People Who Still Might Be Fooled Are the American Taxpayers, Who Are Ultimately Responsible When the Bills Come Due" - Washingtons Blog

Wednesday, March 24, 2010

"The Only People Who Still Might Be Fooled Are the American Taxpayers, Who Are Ultimately Responsible When the Bills Come Due"

The Wall Street Journal ran an editorial last August pointing out that the American people are just about the only ones fooled by the government's use of off-balance sheet, SIV-type accounting to hide the debts of Fannie, Freddie, Social Security and Medicare:

The bigger issue is that all of Fan[nie] and Fred[ie]'s liabilities, whether kept inside the companies or hidden in a dark corner of the Treasury, are now Uncle Sam's responsibility. Moving their bad assets into a new Baddie Mae would only preserve the fiction that there is a difference between the government's obligations and those of Fan and Fred. Not even Barney Frank could believe that any more.


For the moment, despite 80% government ownership, their $85 billion bailout cost (with more losses to come) and their $5.4 trillion in taxpayer liabilities remain off-balance-sheet in the mold of Enron's special purpose vehicles or Citigroup's SIVs.

The politicians who created and pampered Fan and Fred like it that way. They know that offering federal "guarantees" looks much cheaper, in the official accounting, than actual outlays. But whether it's Fan and Fred, or the Pension Benefit Guaranty Corporation or the Federal Housing Administration, these deferred promises seem to come due sooner or later. Perhaps the politicians would be less profligate in issuing such guarantees if they had to admit the cost up front.

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. The nearby chart shows that this 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. Wall Street has sold Fannie paper to the world as if it were as taxpayer guaranteed as Treasury bills, and now we know it is.

Even as the companies careened toward failure a year ago, the Bush Administration was desperate to show it would cover all Fan and Fred debt. The Obama Treasury has been no different and has ginned up the two companies to expand their debts amid the housing meltdown by guaranteeing more residential mortgages. The Federal Reserve has bought $543 billion of Fannie and Freddie mortgage-backed securities and has plans to buy up to $1.25 trillion worth by year end. Foreign debt holders get the message. The only people who still might be fooled are the American taxpayers, who are ultimately responsible when the bills come due.

The larger issue is the integrity of the national balance sheet. As government spending soars, the political temptation to use off-balance-sheet vehicles of various sorts will only increase. Barney Frank is even pushing a bill to make the feds guarantee U.S. municipal debt. The danger is that the federal government will itself become the next Enron, with its biggest liabilities hidden from view, officially denied or tucked away in special purpose vehicles like Fannie Mae. Until the next crisis hits.

It's bad enough that the political class has played this dishonest game with the long-term liabilities of Social Security and Medicare, which are also kept off the balance sheet. But at least those IOUs are held by another branch of the government and can be legislated away by some future Congress. Debt held by the public can't be repudiated without the U.S. descending into Argentina-ville. It's time to come clean about the debts our government is racking up, and Fannie and Freddie are a good place to start.

Financial experts such as Nouriel Roubini and Bill Gross know, of course, that it is all a Ponzi scheme.

Foreign debt holders know about America's financial situation, which is why purchases of Treasuries by foreign central banks are declining.

But the American people are in for one rude shock ...


  1. I retired early, and I live in my camper - traveling the nation. It's been very sad in most cities I visit.

  2. Amazing that my macroeconomics professor is among the fooled

  3. The US Government is proceeding on the assumption that it will never be required to make good on its debt. There is no other explanation.

  4. I disagree about the Argentinaville comment. The U.S. could repudiate its debts tomorrow and be richer and more prosperous for it. JP Morgan has $1.7 trillion in assets, here's a simple plan, repudiate all debt, issue a new currency and back it with JP Morgan's assets. That would provide 10:1 backing for the new currency, and only JP Morgan would be out of luck.

    It's really important to remember that "debts" are really just pieces of paper with squiggly lines written on it. When people get kicked out of their houses because they can't pay the mortgage, that is a political event; it's not as if the actual house has become "under water," it's just that the police will attack people depending on the specific shape of the squiggly ink.

    Depressions are political events, please don't think the bad economy is because we've been "living beyond our means," we'e only been living beyond the means of the ink squiggles.


    This year, US public debt could reach end game


  6. Don't know where you get your numbers, but isn't the national debt ALREADY $12 BILLION?????? Where'd you get that $7B number from? 2005? 2006?

    Debt Clock -

  7. The scary thing to me is that all communities have two sets of books. The one we don't see, the CAFR, is often flush with money. My small community has $50 million that they have embezzled over the years coming from a tax base of $6 million. Of course they have been encouraged over the years to do this and they have rationalized that were doing the prudent thing. The scary thing is, just where is this money invested? What Ponzi scheme have they been bribed into? The $50 million figure is very small compared to the larger communities surrounding us. I hear of a $1.5 quadrillion derivatives market that has gone bad, is this who is guaranteeing that black hole?

  8. My main income is Social Security so talk like this makes me nervous. Without it, I would have no heat and electricity, and I'd be outside eating the bark off the trees--unless I couldn't pay my property taxes. Then me and a bunch of pets would be living in my van. I bet there are tens of millions of Americans on the brink like me.

  9. Maybe we could deflate the tires on the truck before we hit the bridge? like by 90% - gold and precious metals also. Everyone take a deep breath....and again.


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