Government Backstops ... Taxpayers are On-the-Hook While Backstops Remain Off-the Books ... It's Crazy

Most of us are aware of the fact that our government is $16 trillion in debt.

Most of us are also aware that many states have tremendous unfunded pension liabilities amounting to perhaps $3 trillion or more.

And lots of us are aware as well that federal unfunded entitlements such as Medicare and Social Security promises amount to another $100 trillion or so.

But how many of us know that we're also on the hook for more than 90% of home mortages and almost all of the student loan defaults which will occur, along with many other 'off-the-books' government backstops for banks and pension plans.

Fannie, Freddie and the Government's House of Cards is subtitled 'Taxpayers own or insure most mortgages and are also on the hook for failed banks, pension plans and student loans:'

"The disturbing thing . . . is that the entire home mortgage industry—not only Fannie and Freddie—has been effectively nationalized. True, there are still lots of private banks and mortgage companies generating and servicing mortgages, so the government doesn't "own" the whole industry. But the government (or the lucky half of the population who pay income taxes) now owns most of the risks. . . .

As of December, . . . government agencies—mainly Fannie and Freddie but also the burgeoning Federal Housing Administration—bought or insured more than nine out of 10 home mortgages originated last year, a $1.3 trillion business. In 2006, the government share was only three in 10. . . . Student loans, which were subsumed by the government in 2010, represent another trillion-dollar business, and delinquencies are rising rapidly. Some observers ask whether these will cause America's next "subprime" crisis.

Then there is the exposure supervised by the Financial Stability Oversight Council, created in 2010 by the Dodd-Frank financial-reform law. . . . Plus, of course, there is the Federal Deposit Insurance Corporation, the Pension Benefit Guaranty Corporation and other lesser and long-standing government insurers.

And none of this includes the astronomical obligations represented by the future promises of Social Security, Medicare, Medicaid and ObamaCare to vast numbers of Americans.

Thanks to developments over the last four years, the government is now insuring a large chunk of America's nearly $16 trillion economy—while being essentially bankrupt, having run budget deficits exceeding $1 trillion for the last four years. The future insurance and entitlement obligations are, of course, off the books. . . .

With Uncle Sam backing you, risk analysis is thrown out the window. Current FDIC bank-capital standards give a zero risk rating to securities guaranteed by government agencies, meaning that holding them doesn't require banks to raise more capital to cover these newly acquired assets against potential losses. That makes it all the more attractive for banks to acquire more of these securities.
To implement affordable housing in the Clinton years, the Department of Housing and Urban Development lowered capital standards for Fannie and Freddie and encouraged them to be very tolerant in their mortgage purchases. . . .

The moral is that government backing—implicit during the heyday of Fannie and Freddie and explicit today—leads to sloppy banking and ultimately to defaults. Taxpayers, with little knowledge of the commitments made on their behalf, become responsible for the losses."

Summing Up

The foregoing collection of chickens, many of whom will be coming home to roost on the backs of taxpayers, is yet another simple but potentially devastating example of OPM in action, courtesy of our government knows best gang.

And that's just one more good reason to have a small government with limited powers to take money from We the People and make guarantees on our behalf.

As Americans we really do need to get much more 'educated' about the dangers of government assistance and 'middle class' support.

Because there really is no such thing as a free lunch when government is at the table.

And the simple fact is that there aren't ever going to be enough 'rich' people left to pick up the tab when lunch is over and the bill comes due.

Eventually, we'll ALL have to chip in large amounts of money to pay the piper if we don't get our collective act together soon.

That's my take.

Thanks. Bob.