Is Uncle Sam's Debt Higher Than We Thought?

In A Proper Accounting: The Real Cost of Government Loans and Credit Guarantees, the editors of the online newsletter Knowledge@Wharton point out that while our attention has been focused like a laser beam on the U.S. government’s enormous debt and the danger of falling off the Fiscal Cliff, we’ve ignored the massive costs and risks embedded in the government’s lending programs.

The article notes that “flaws in the way the government accounts for its loans and credit guarantees” underestimate the costs for student loans and other credit programs totaling more than $2.5 trillion, plus more than $5 trillion in mortgages backed by the federally owned companies Fannie Mae and Freddie Mac. According to the Financial Economists Roundtable (FER), a group administered by the Wharton Financial Institutions Center, if the government used accounting methods accepted by most businesses, our budget deficit would be even larger.

Said Deborah J. Lucas, finance professor at MIT's Sloan School of Management and FER member, “The federal government is the world's largest financial institution, but policymakers and [government] managers are handicapped by an accounting system that is seriously deficient. The accounting standards that the government sets for private financial institutions require far greater transparency than the rules that it imposes on itself.”

According to the FER, the 2008 collapse of Fannie Mae and Freddie Mac, private companies that operated as government-sponsored enterprises, is a “recent and costly example where the government treated its implicit loan guarantees as having no cost.” When the federal government stepped in and took over Fannie and Freddie, the price tag for taxpayers was more than $120 billion.

The roundtable insists that government accounting practices create the “budgetary illusion that government credit programs reduce the government deficit.” They point to a group of lending programs that includes student loans and mortgages guaranteed by the Federal Housing Administration that the Congressional Budget Office projects to reduce the federal deficit by about $45 billion in 2013, while an accurate accounting would show them likely to cost $11 billion.

Imagine if you ran your household finances like that? The article concludes with some good news. H.R. 3581 addresses necessary accounting adjustments has passed in the House, and awaits action in the Senate.