Wednesday, August 22, 2012

Trillions of Dollars in Additional Government Debt ... Fannie Mae and Freddie Mac ... Another $5 Trillion and Counting ... Will We Ever Be Able to Pay It Off?

Our government has certain known and widely recognized liabilities which are firm, such as money we owe.

And then we have certain quasi-liabilities that we pretty much own, but could disown, such as commitments we've made. Like Social Security, Medicare and unfunded public sector pensions, for instance.

{NOTE: If we have at least $100 trillion in unfunded entitlements, which we do, and if we funded that by borrowing $100 trillion at 4% interest, the $4 trillion interest charge ALONE would be greater than our existing federal budget expenditures. Thus, the current budget deficit would overnight increase from ~$1 trillion to ~$5 trillion. That's just simple math.

But what about the money we actually owe but don't even acknowledge that we owe?  Like the $5 trillion in Fannie Mae and Freddie Mac liabilities, for example?

Government debt is said to be approximately $16 trillion today. Of course, that doesn't count the guesstimate of another $100 trillion in unfunded entitlements.

But Fannie Mae and Freddie Mac liabilities are real liabilities and represent another ~$5 trillion all by themselves. Why don't we count them as debt, too, and make it $21 trillion instead of $16 trillion? Or some higher number than that?

To get an answer to that simple question is not possible today. The simple fact is that not everything said to be true by government officials is indeed true.

And when it comes to whether we owe $16 trillion or even $21 trillion, what difference does it make? After all, there's another $100 trillion or more in unfunded entitlements lurking out there, too. And we're adding to that another $1 trillion plus each year. The debt just keeps piling up with no end in sight.

Time to End the Fiction of 'Frannie' says this:

"The case for keeping Fannie Mae and Freddie Mac off the government's books has gotten even weaker.

Last week, the Treasury Department said it would change the way the two mortgage giants operate in terms of their government lifelines. Rather than pay 10% dividends on the $188 billion they have received in government assistance, the two companies will now pay any profit they generate as a dividend—to the government not shareholders. If the companies generate losses, no payments will be made and the government will extend additional support.

The switch ends the curious arrangement in which Fannie and Freddie often had to take on more taxpayer funding, in the form of a preferred stock issued to the government, to make dividend payments on existing support. It also means, though, that the companies will never pay back the mountain of government-held preferred stock because all profit is now paid out as a dividend instead. 

While the two companies have been in government conservatorship since September 2008, this makes them even more permanent wards of the state and turns the government's preferred stock into a permanent, perpetual kind of security.

That bolsters the argument that Fannie and Freddie should be included on the government's balance sheet. Of course, that is politically unpalatable: The inclusion of their combined $5.3 trillion in liabilities would balloon the nearly $16 trillion in total federal debt outstanding and breach the debt ceiling. And, in fairness, the liabilities of Fannie and Freddie have assets against them.

Still, as debt investors have learned in Europe, any assessment of a country's financial position needs to take into account both on- and off-the-book liabilities. It's time to stop pretending that Fannie and Freddie are private companies or anything other than arms of the government."

Summing Up

We have huge liabilities that need to be put squarely on the table and acknowledged.

Then we can have a much needed and perhaps even an intelligent discussion about what we intend to do to resolve our enormous and rapidly growing national debts and ongoing fiscal deficits.

While paying down our debts is essential, first we have to stop ignoring the reality of our current obligations. Then we can focus on stopping the growth of our debts by eliminating the annual deficits.

We have tens of trillions of dollars that we owe, and we must deal with that liability over time. And that requires regular funding of the debt obligations. Period.

But first we have to accept the fact that the entire and complete liability exists. Only then can we make a determination as to how quickly we plan to extinguish that debt. So is it $16 trillion, $21 trillion, $121 trillion or as much as $250 trillion? Wouldn't it be nice to know?

With that reality, we could deal with it effectively, albeit perhaps painfully. The problem is actually a very simple one, even if it's not an easy one to solve. But solve it we must and therefore we will.

Allowing our government officials to continue playing ostrich, however, is a losing game for all concerned.

The truth needs to be discovered and then revealed. Then the problem needs to be discussed and solved. Isn't that supposed to be the American way?

Future generations are depending on us to do the right thing.

Thanks. Bob.

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