It has been a rare opportunity to share with this forum my new paper, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, forthcoming with the Yale Journal on Regulation and available here. This week we have enjoyed a rigorous discussion about the implications of the government as a shareholder in the financial services and automotive industries.
As I expected from the Volokh community, the comments have offered a rigorous intellectual contribution to my work, and for many of the commentators I recommend reading the full paper for answers to their insightful questions. For this post, I will shift to the implications of Treasury Inc. for the federal budget, the subject of an in-process paper forthcoming with the Louisiana Law Review that will also be the focus of my comments at this years Federalist Society National Lawyer’s Convention.
Government deficits and debt have captured national attention in the last few months owing to their role in the venomous debate over health care reform. Our nation’s debt is officially $11 trillion. Yet the Obama Administration’s deceptive accounting practices for its ownership in the automotive and financial sectors hide a big slice of the real national debt and annual budget deficit. Vice President Cheney quipped that deficits don’t matter. Who knew that President Obama and Vice President Cheney had so much in common?
When Peter Orszag ran the Congressional Budget Office, he fought the Bush administration over consolidating Fannie and Freddie’s debt into the national budget. His position was that two principles of government accounting require consolidation. Principle one, we control these companies; principle two, we guarantee their debt. For more, take a look at, after I testified on this issue here, this press release from the Congressional House Oversight Committee about how I discovered the problem described in this post.
Orszag has been noticeably silent since joining the Obama Administration. Omitting appropriate liabilities from our government’s books is deceptive, allows us to borrow more than we should and feeds our habit for deficit spending.
The administration disputes its control of TARP companies. Yet the government tells GM what kind of cars to build and GM and Citigroup which directors to elect. It tells Fannie and Freddie which mortgages to subsidize. Secretary Geithner affirms that we stand behind the banks, which means we stand behind their debt as well. Budget consolidation principle one, check. Principle two, check.
This doesn’t mean we should consolidate debt of all companies taking TARP money, and government accounting principles aren’t fully prepared for this unique situation. Since the government is acting like a private investor by purchasing common stock, private financial accounting principles also provide useful guidance.
The first useful rule in financial accounting is that consolidation of debt is appropriate where a parent company controls another company by owning a majority of its stock. This covers GM at 60% Treasury ownership, AIG at 85%, and Fannie Mae and Freddie Mac at 100%. The second rule is that even if a shareholder has less than 50% ownership, if the equity and non-equity position of the parent combined make it the beneficiary of most of the company’s future profits, consolidation will also be appropriate. This should clearly cover Citigroup, with 34% government ownership (purchased with $40 billion of TARP money) and an additional $301 billion in outstanding guarantees from Treasury.
Look only at the outstanding debt of these five TARP companies (out of over 600 of them). Citigroup has $1.8 trillion in debt; AIG, $807 billion; Fannie and Freddie, $5.2 trillion; and GM, $10 billion. This means the Administration is hiding $7.8 trillion of the national debt. (As a comparison, Bernie Madoff hid $50 billion in other people’s money and is reviled as the crook of the century. The current administration, by the way, is hiding $7.8 trillion of the nation’s debt.)
The Obama administration predicts annual budget deficits of $1.75 trillion this year, $1.1 trillion next year and similar amounts going forward. Now, let’s consider adding $7.8 trillion to the national debt. Amounts added to the national debt should be added over time (in accounting jargon, amortized) into the annual budget deficit. Over 10 years, that’s an extra $780 billion each year. This means the annual budget deficit would increase by roughly 80%.
Sure, one day we may be able to sell off our government’s equity interests in TARP companies, and eventually remove them from our nation’s balance sheets. That would be great, and fiscal hawks would be happy to buy the champagne (nothing but Cristal, with a toast from special guest P Diddy) for such a celebration.
Until then, let’s remember that accounting statements for governmental bodies and private companies alike are intended to portray accurate pictures of those organizations at a certain point in time, reflecting the uncertainty of the future and the likelihood that significant owners (or residual credit holders) of most of a firms assets are likely to stand behind that firms debts, for no other reason that it is in their self interest. Particularly when a shareholder stands as both a creditor AND an unchecked regulator of the company in which they hold shares.
When the U.K. recently recognized in its budget the debt from its two bank bailouts, its national debt doubled overnight. Warnings later emerged that the U.K.‘s Triple-A bond rating may be in jeopardy, unprecedented for a modern Western nation.
If we properly accounted for our debt and deficit, we might be in the same situation. A downgrade of U.S. debt may even be beneficial, a sign that we’ve hit rock bottom and need to recover from this deficit addiction. Credit warnings would result in a diminished appetite for Treasury bonds, force the Treasury Department to borrow at higher interest rates and curb its habit for runaway spending.
Administrations are short-lived. In three or seven years President Obama and his staff will retire to the benefits of speaking fees, consulting contracts and cable news appearances. But the debt remains, and it is a legacy by which our children will rightly judge us. If we permit this administration to use accounting wizardry to hide our debts, we should not be surprised when we are judged harshly.
The full faith and credit of the U.S. is not a depthless well, and the administration’s current budget policies risk turning Treasury bonds into the ultimate subprime loan. Future generations could be saddled with inflation, increased taxes and interest payments on Treasury bonds that take up an ever-increasing share of the federal budget. It’s time for this administration to bring transparency to the federal budget process by accounting for TARP holdings properly.
Mahan Atma says:
You might have pointed out that the TARP debt was taken on under the Bush Administration, not Obama’s.
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October 20, 2009, 2:55 amRicardo says:
Look only at the outstanding debt of these five TARP companies (out of over 600 of them). Citigroup has $1.8 trillion in debt; AIG, $807 billion; Fannie and Freddie, $5.2 trillion; and GM, $10 billion. This means the Administration is hiding $7.8 trillion of the national debt.
Then the government also gets to take on the assets of these companies on its balance sheet as well, doesn’t it? Even if every company is insolvent, the government’s net indebtedness would not rise by anywhere near $7.8 trillion. Doesn’t transparency require taking the assets of these companies into account as well?
Moreover, it is clear that the government is not putting its guarantee behind all the debts of all of these companies. Citigroup’s S&P credit rating for senior debt is ‘A’ not ‘AAA’. Why should the government take all the debts of Citigroup onto its books when nobody in the market thinks the government is actually fully prepared to take on those debts? That’s the worst of both worlds: accounting for a debt for which nobody thinks you are actually liable.
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October 20, 2009, 3:25 amAnonymoose says:
I suppose we should also put the Social Security Trust Fund and other trust funds onto the general balance sheet, they’re in the red over the long term but social security alone has about a 2.5 trillion dollar surplus.
Seriously, who the hell gave this guy the keys to VC? Can I have a pair too? I can at least promise that I can add simple numbers when I make wild accusations about the leadership of the country and not forget half the equation.
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October 20, 2009, 3:41 amMark N. says:
Just as a typographical suggestion, the random capitalization here comes across as a bit frenzied:
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October 20, 2009, 4:01 amModa says:
Spoiler... This comment is full of SNARK and MOCKING because of your RIDICULOUS USE of pointless CAPITAL LETTERS and ALARMIST TONE.
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October 20, 2009, 4:06 amJ. Aldridge says:
Not just the Obama Admin, but others before him. Generally accepted accounting rules have never applied to the federal govt for very political reasons.
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October 20, 2009, 4:12 amRicardo says:
Here is how the Congressional Budget Office describes how it accounts for TARP and the GSEs:
This is in accordance with the Federal Credit Reform Act, with the exception of risk-adjustment to the discount factor. Is the Congressional Budget Office also engaging in fraud? A bit less name-calling and a bit more analysis would be helpful for having a substantive discussion of these issues.
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October 20, 2009, 4:15 amAnonymoose says:
Another question, the OP states that “most” of the deficit and national debt is being hidden by the Obama administration. “Most” means a majority of. But even in the numbers given above, this isn’t the case. The current debt is greater than 7.8 trillion dollars. The estimated deficit over the next 10 years is over 7.8 trillion dollars. The short run deficit projections are greater than the 780b/year figure given. It’s simply not accurate to state it, even accepting the numbers for the sake of argument.
Maybe the reason this was posted so late at night was because M. Verret is drunk?
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October 20, 2009, 4:24 amTweets that mention The Volokh Conspiracy » Blog Archive » Treasury Inc.: The Shadow National Debt -- Topsy.com says:
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Anonymous says:
And I might add that while Bush did not veto it, Obama took great pains to lead Congress into it, along with every other Democrat and some of the other guys, notably McCain. If anything, that gives Bush the least culpability for the legislation of the three.
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October 20, 2009, 6:33 amLymis says:
I agree. This article loses a great deal of its credibility without any discussion of whether these practices are new to the Obama Administration or carry-overs from previous practices. If they are, then they may very well be indications of things that are wrong with the government practice in general, but it’s clearly skewed to try to drop them on Obama, with the unspoken corollary that switching back to a Republican administration would automatically reverse them.
Given the state of things like deficits over the course of the previous administration, leaving out just how the current administration compares to the last seems like a bare minimum criterion for being taken seriously on this issue.
The CAPS don’t help with the CREDIBILITY, either.
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October 20, 2009, 7:39 amWidmerpool says:
Spoiler: WIMPY will GLADLY pay you TUESDAY for a HAMBURGER TODAY!!!
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October 20, 2009, 8:16 amPersonFromPorlock says:
Mahan Atma:
It’s no longer a matter of Republicans vs. Democrats, it’s We the People vs. a political class which, Republican or Democrat, is both irresponsible and, apparently, unremovable. Regardless of the exact amount of the debt, what’s needed is for young people to start talking about abrogating it once they’ve achieved political power. Given the political class we have, the only way to keep the nation’s future from being crippled by debt incurred for short-term political gain is to scare off the would-be lenders.
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October 20, 2009, 8:31 amMIke says:
One can write a paper about such nonsense?
If you want to put the dept of guaranteed banks on the govt books, shouldn’t you also put their assets? One might argue you should put the assets of both the unhealthy banks and the healthy ones, because the govt has the power to consolidate.
What’s the reasoning for transferring this debt to the budget as a yearly deficit? When the banks are cleared do you propose that is reported as a $7.8T surplus? If you’re reporting the debt as deficit, should you report bank income as govt revenue?
Of course I understand people being unhappy about the govt’s involving in the banking industry. But at least give a reasoned argument about what you think should have been done, or what you think should be done. More and more it seems libertarians/conservatives pretend that it would have sufficed to do nothing. If so, they’re living in a fantasy land.
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October 20, 2009, 8:35 amgeokstr says:
Yeah, sure.
If you believe there is actually real “money” or anything else of value in this “social security trust fund”, I have a full sized airport up in Pennsylvania with 3 passengers a week I can sell you — cheap.
In truth, this “trust fund” is just an accounting gimmick to fool the taxpayers that the gov has been saving this money just for them, when in fact it’s just filled with IOU’s from ourselves that will have to be funded with real cash from taxpayers eventually — starting like in a few years.
This of course has been done to hide true federal outlays for decades under both criminal enterprises known as “political parties”. And the size of the unfunded liabilities in Social Security/Medicare/Medicaid/other government pensions at all levels makes the current deficit and officially recognized “debt” look like penny ante. It’s probably well over 100 trillion by now.
If our children and theirs judge us harshly, I for one will not blame them a bit.
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October 20, 2009, 8:40 amGramarye says:
I have to join the general criticism of Prof. Verret’s blogging as amateurish both in content (at least for a group blawg of this stature) AND STYLE.
I’m among the biggest deficit and debt hawks you’ll find; I favor a balanced budget amendment to the federal constitution, and I’d be willing to pay substantially higher taxes to see it happen. I think America should be a creditor nation, not a debtor one (my apologies to the Bard’s notions about being a lender). I should be a fairly sympathetic reader when the subject is America’s addiction to deficit spending and questionable public accounting practices. This post is simply making me shake my head in disbelief.
As another poster noted, Citi’s credit rating is not AAA. Neither is AIG’s, though I don’t have the citation for it because I simply remember a debt offering including AIG debt on the secondary market my brokerage Web site a week or so ago. None of that is consistent with the existence of a federal guarantee of the debt of those entities.
Isn’t there enough federal debt that’s actually federal debt to criticize?
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October 20, 2009, 9:19 amInstapundit » Blog Archive » J.W. VERRET: The Shadow National Debt…. says:
[...] J.W. VERRET: The Shadow National Debt. [...]
Houston Lawyer says:
I don’t believe that you ever put potential obligations on your balance sheet. You put obligations that constitute debt now.
Our government has undertaken trillions of dollars in unfunded obligations over the past several decades that are not properly accounted for as debt. We just assume some how that we will have tax proceeds sufficient to pay these obligations. Both parties have worked pretty hard to ignore the costs of these obligations while assuring the beneficiaries that in no circumstances will their benefits be cut.
The only difference between Obama and his predecessors is that he doesn’t seem to see that someone (not making more than $250,000 per annum) is going to have to pay the piper.
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October 20, 2009, 11:06 ambyomtov says:
As others have said, including the debts without also including the assets is ridiculous. Furthermore, guarantees are contingent liabilities. Unlike the case of treasury bonds, there is no certainty that the govenrment will have to meet these liabilities.
A downgrade of U.S. debt may even be beneficial, a sign that we’ve hit rock bottom and need to recover from this deficit addiction. Credit warnings would result in a diminished appetite for Treasury bonds, force the Treasury Department to borrow at higher interest rates and curb its habit for runaway spending.
Beneficial. Sure. Nothing like higher interest rates to help an economy along.
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October 20, 2009, 11:12 amShelbyC says:
Somebody correct me if I’m wrong, but I don’t think the spoiler part was intended to be serious, was it?
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October 20, 2009, 11:20 amAndrew J. Lazarus says:
I am surprised that a professor doesn’t know that the Treasury Department does not decide how much to spend, rather Congress through its budget. And I am surprised that any sentient human being could still regurgitate the discredited “starve the beast” plan for shrinking government. You want smaller government? Campaign to abolish programs X, Y, and Z. Stop trying to pull off the trick three-bank shot and messing up the entire economy when it doesn’t work.
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October 20, 2009, 11:24 amjimbo says:
The usual hysterical rantings by someone who has no understanding whatsoever of the modern monetary system or the Federal Government’s relationship to it.
The Federal Government is a currency issuer in floating exchange rate regime. As such, it neither “has” nor “doesn’t have” money at any given point in time. It creates money by spending it into circulation, and destroys it by taxing it out of existence. The act of issuing bonds for such an entity is not, in fact “borrowing” in any normal sense of the word (Does the NY subway need to “borrow” Metrocard credits in order to add them to your card?), but instead a way to support nonzero interest rates.
For a good overview of this, go here:
http://www.moslereconomics.com
Start with the “mandatory readings” and go from there.
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October 20, 2009, 11:37 amcubanbob says:
This matter transcends political opinion. We cannot know where are going if we don’t know where we are. The debts are real and the liabilities are real and ‘creative’ accounting perpetuates the fraud. What is needed is a real effort to come with an accounting standard for government and apply it to all government from the local level to the national level. Clarity and honesty in reporting is essential if we wish to avoid a long term disaster.
Money is neither sentimental nor patriotic. Those with real money will start to shift the funds outside the US if the perception that the government is cooking it’s books. That will result in severe harm to the US economy. And any attempts to control capital flight will result in a panic move to get the capital out while one can.
The demand for entitlements or positive rights is infinite but the ability to fund them is not. And without a true accounting we as a society cannot make an honest determination of what we can afford to pay for versus what we want.
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October 20, 2009, 11:40 amShelbyC says:
Well, we’re just totaling debt. The government doesn’t have a “balance sheet” so I’m not sure where you put the assets. We’re not trying to determine a “book value” for the fed govt, a la “A = L+E”. And since the reason we have such strong equity positions in these companies is that they’re TBTF, we should expect to have to pay their debt.
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October 20, 2009, 11:41 amSteve says:
Well, we’re just totaling debt. The government doesn’t have a “balance sheet” so I’m not sure where you put the assets.
The point is that, even assuming the federal government ultimately stands behind the debt of these companies, we would certainly expect them to liquidate their own assets before the government steps in and makes up any shortfall.
If the government buys an office building that is worth $10 million and carries a $3 million mortgage, would we just add $3 million to the national debt and ignore the fact that the building has value?
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October 20, 2009, 11:52 amyankee says:
I would just like to observe that using ALL CAPS AS MUCH AS POSSIBLE makes your argument much more PERSUASIVE because you seem SO MUCH MORE REASONABLE and NOT AT ALL HISTRIONIC.
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October 20, 2009, 12:08 pmSean says:
Interesting that with an hour or two, at an ungodly time of night, of this post being published, there were groups of people jumping on to criticize in the comments.
Any chance of finding out where these comments were coming from? Sounds a little too efficient to be random readers, don’t it?
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October 20, 2009, 12:35 pmmacko says:
I can’t see how anyone can be so critical of congress when it is congress that always knows best. Everyone complains about the bailouts of Chrysler and GM but look at how quickly they are paying it back. The “Cash for Clunkers” program had to be tripled in size just to account for the demand for Chrysler and GM cars. The TARP funds for the mortgage companies is already paying off, just look at the housing market. People say Social Security is going broke but yet there is enough surplus to put a couple hundred billion dollars towards the defecit each much. That would hardly be something you could do if it was truly going broke. The stimulus package has been an enormus help. Just look at the hundreds of thousands that are terminating their unemployment benefits each month.
2010 is just around the corner. Vote the bums out. Let anyone’s second term be their last.
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October 20, 2009, 12:35 pmShelbyC says:
But didn’t we just balk at doing exactly that? Doesn’t being too big to fail mean that we can’t just liquidate their assets?
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October 20, 2009, 12:43 pmAnonymoose says:
Even if the trust fund is totally bare and filled with IOUs, using it to calculate the total national debt still makes far more sense than the proposal above. I was more trying to point out how foolish the original post was than saying “don’t worry,
Captain Hammerthe Social Security Trust Fund will save us!” When even counting the various govn’t trust funds notional value against the general fund debt makes more sense than your accounting of the debt, it’s time to go back to the drawing board. Mr. Verret, I suggest you do so.Quote
October 20, 2009, 12:44 pmShelbyC says:
Yankee, I’m pretty sure the all caps thing is a joke. It sure seems to have failed though.
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October 20, 2009, 12:45 pmAnonymoose says:
It’ll save us from the hyperinflations! Not as well as the almighty gold standard, but better than what we’re doing!1!
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October 20, 2009, 12:58 pmAnonymoose says:
That was my thought, but then I read the actual post. I guess it could just be satire and going over my head.
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October 20, 2009, 12:59 pmbyomtov says:
Well, we’re just totaling debt.
Well, that may be an interesting exercise, but it tell us much here. These particular debts are nothing like more commonly incurred federal debt, and certainly don’t justify Verret’s hysteria.
In particular, normal federal debt is repaid out of tax revenue. That is not the expectation here. If I borrow money to buy a car I expect to pay it back out of my regular income. If I borrow to buy a business I expect the business to pay it back out of cash flow. I may be on the hook if the business fails, and the remaining assets are inadequate to cover the debt, but that’s hardly the same thing.
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October 20, 2009, 1:05 pmbyomtov says:
it doesn’t tell us much here.
Sorry.
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October 20, 2009, 1:05 pmKstills says:
You’re kidding, right?
Mosler thinks that the subprime loans were the result of fraud?
Um...no...
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October 20, 2009, 1:13 pmShelbyC says:
If you’re an investor investing in a business that you expect to make money that’s certainly what you expect. But if you’re the government bailing out a business that is too big to fail I’m not sure the expectation is as clear.
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October 20, 2009, 1:17 pmAnonymoose says:
Uh, are you arguing that the assets wouldn’t be used to pay off the debts and would be held while the government paid off the debt incurred by a “too big to fail” company in full while leaving the assets of a company untouched?
You realize that 1) “assets” are more often things like outstanding loans than real estate and 2) in the real world firms like AIG and Citi have been spinning off non-core (and I believe possibly some core) assets at a furious pace to pay off obligations and to reserve against future losses, right? I mean, AIG is basically expected to not exist in a few years and the government to take a loss on the whole deal, but AIG is seeking to spin off the profitable parts of itself, and use the proceeds to repay the government investment that saved their ass. Likewise, Chrysler and GM are making pretty big workforce cuts, shutting factories, and spinning off whatever they can to help make good on their debts, while at Citigroup there are billion dollar deals being done to spin off subsidiaries like Banco Popular and their Japanese brokerage agency to raise a cash backstop for expected future losses from their loan portfolio. Mr. Verret’s hypothetical simply doesn’t exist in the real world.
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October 20, 2009, 1:37 pmAnonymoose says:
Also, I don’t know that the correct term is “too big to fail,” the more accurate phrase is “too big to fail quickly and with uncertain final outcomes”- the government action with places like AIG seems more to step in and moderate the failure so there aren’t shocks to the financial industry, propping up the companies to avoid the mess that occurred when Lehman failed. AIG isn’t being propped up so it can return to the market as the behemoth it was in 2007, it’s being propped up so it can be resolved at a pace that doesn’t freak out its counterparties.
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October 20, 2009, 1:41 pmFat Man says:
We are so screwed.
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October 20, 2009, 1:45 pmShelbyC says:
I don’t know. But typically we don’t treat govt sources of revenue (National Parks where folks pay fees, the taxation power, etc) as assets precicely because the govt isn’t expected to use them in a way that maximizes revenue. And the fact that the govt has an equity stake in these companies is due to the fact that they have other goals that revenue maximization.
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October 20, 2009, 2:00 pmuberVU - social comments says:
Social comments and analytics for this post...
This post was mentioned on Twitter by Cerno: The government is is hiding $7.8 trillion of national debt: http://bit.ly/3qcd15...
Shertaugh says:
Wow. This reads like one of those hatchet jobs over at the National Review. Amazing how our debt/deficit history began on 1/20/09.
Not sure who invited this person to post. But it was a mistake. Big mistake. If I want diatribes against Obama, I can tune into the Fox New’s round table.
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October 20, 2009, 2:57 pmmacko says:
everyone continues to debate terminology, capital letters etc instead of the point of the story which is that the government is candy coating the debt. Taking money from SS to pay the debt is robbing peter to pay paul. The bailouts happened because our government told banks how to do business and thereby took on the responsibility for the mortgage fiasco. They are not saving the banks they are saving themselves. By not having a better plan to free up credit and get people back to work there weren’t any car loans. Bailing out chrysler and GM is a temporary fix to save obama’s union boys. The previous administration had started the bailouts but the newest has gone overboard and we have a one party congress that has told us flat out that they will do as they please without interference from the party of “NO”.
once again. VOTE THE BUMS OUT!
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October 20, 2009, 2:59 pmConcerned Citizen says:
The total amounts of money everyone is bandying about are meaningless. Whether or not George W. Bush or Obama are to blame are meaningless. The future liabilities, assets reported, shadow debt, etc. all of this is meaningless. Whether or not this information is public or hidden from view doesn’t matter, either.
The only thing that matters is the perception in the marketplace of the ability of the USA to make good on its debt. This is influenced by actions that take place daily and many of these participants have superior information to the commenters on this blog. If this perception becomes negative, as it has decidedly, people will vote with their wallets and take their marbles and play elsewhere. They will move their money to other countries, exchange dollars for other currencies and gold (itself the ultimate hard currency) or exchange it for assets. You will know what information is available and what people think about that information if the dollar goes down another 50%.
The markets are intelligent and they will decide the value of the USA’s balance sheet, including “The Shadow National Debt”. One thing is certain. If we keep doing what we’re doing, it will not end well.
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October 20, 2009, 3:00 pmJ says:
Dollar = Pelosi Peso
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byomtov says:
ShelbyC,
You seem to be saying you fear these companies will continue to lose money indefinitely, and be unable to pay down their debts. Then the government will ultimately be stuck with the debt, because the assets won’t be worth much. Is that correct?
I think the actions cited by anonymoose, among other things, make that scenario improbable.
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October 20, 2009, 4:36 pmShelbyC says:
I think that’s more likely for organizations like fannie, freddie, and GM.
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October 20, 2009, 5:11 pmRicardo says:
Those people with superior information believe the following:
1. That a yield of 4.15% is perfectly acceptable for a 30-year Treasury.
2. That the inflation-indexed equivalent ought to trade in such a way to imply* an annual expected inflation rate of approximately 2.21% over the next 30 years.
3. That it is perfectly reasonable for the USD to trade against GBP at around the same rate it was trading back in 2002 and at a much stronger exchange rate than only 18 months ago.
Government bond yields
Exchange rates
* It’s a bit more complicated than this, naturally. As a rough approximation of what the market thinks about inflation though, it is a pretty good guide. If all those people with superior information thought hyperinflation was at all a real possibility, the yield spread would be much, much wider.
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October 20, 2009, 10:45 pmThales says:
I’m sorry to say that this post is simply intellectually dishonest, for reasons that a number of commentators have described above. Whatever one’s view of the public debt, long term entitlement spending, the methodology of Keynesian fiscal stimulus, the propriety of governments taking equity stakes in companies, etc., the merit of the post evaporates when it blithely collapses the distinction between fixed and contingent liabilities and implicitly assigns a value of zero to all of the associated assets discussed. It assumes that *all* of the debt guaranteed (explicitly or implicitly) by the federal government will default in full. I will agree that the picture is probably less rosy than painted by OMB and like administration sources (a fact that has likely been true since the history of the presidency began), but the premise of the post is simply ludicrous.
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October 21, 2009, 12:17 amJR says:
Actually, Thales, as best I can tell it doesn’t even make an assumption as plausible as you make it sound. (I echo all your other points.) Rather it seems that Prof. Verret has added all the debt (whether or not those liabilities exceed assets) of every company in which the government owns a significant equity stake. But why draw the line there? It’s black-letter that mere control doesn’t pierce the corporate veil nor undo limited liability, so it’s not as though the government could be compelled as a matter of law to make good these debts. Nor does the number reflect debts that as a matter of fact
the government will have to cover. Fannie and Freddie amount for $5.2 trillion—but come, come now, no one thinks that figure represents the entire shortfall of insured and purchased mortgages (for that to be true, every single mortgage would have to have a zero return—an implausible assumption, even as a low-end parameter).
Nor does it appear that Prof. Verret is attempting to identify those so-called “too big to fail” institutions that enjoy an implicit guarantee by the federal government. That list extends far, far beyond those companies enumerated here. Further, if potential liabilities for such companies are properly considered part of the national debt, without discounting for the probability that the government will in fact have to pay such liabilities, or for the amount of assets offsetting such liabilities, then the proposed rule is really that the debt must include all such prospective liabilities. Well, those prospective liabilities are not new, to put it lightly; they’ve existed from the time the first company became too big to fail. To argue that the national debt must account for all accountable payments—not all possible payments, as noted, because it’s quite impossible that the full figure could ever be realized—of debt necessary to prop up such companies is the same to argue that the debt is several times bigger than it’s always been thought to be, and has been for the better part of a century. Yet following that reasoning is at odds with Prof. Verret’s insinuation that “the Obama Administration’s deceptive accounting practices” are responsible for this condition, and so we must infer he didn’t mean that (unless we’re to take him as having been careless in the pursuit of a political shot).
If Prof. Verret had drawn the line where Thales suggests, to include all debt implicitly or explicitly guaranteed by the government, then the distinction would have at least a certain sort of internal logic. (It would have its own problems, for reasons I assume are quite obvious and which rhyme with “schmunschmanageably schmeculative.”) But the distinction as-drawn lacks even that spare virtue.
I’m not the first to note this, but Prof. Verret’s article seems nothing more than half an hour of talk radio masquerading behind footnotes. Or to translate for the Internet: Epic financial-sector policy critique fail.
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October 21, 2009, 4:01 amEconomics and Investing: | Theology Today says:
[...] N. suggested this piece over at Volokh about how the FedGov conceals some of its debt: Treasury Inc.: The Shadow National Debt. (It is hidden under a TARP, dontcha [...]
The Morning after Health Care Reform: A Progressive Fiscal Wake-Up Call | Progressive Fix says:
[...] I know — it’s soooo 1995 to worry about such things. But we face a serious problem, and despite the promises of reform advocates, the legislation being considered is not going to make it less severe. CBO projects the 2009 deficit to be 11.2 percent of GDP, which will put the federal debt held by the public at 53.8 percent of GDP (see Tables 1–2 and 1–6). Not since 1945 has the deficit been this big (see Table 1.2). Not since 1955 has the federal debt been so large (see Table 7.1). And all that understates the magnitude of the problem. If you take into account the net liabilities incurred in the federal government’s takeover of Fannie Mae, Freddie Mac, GM, and Chrysler, and the bank assets purchased as part of TARP, things look far worse — we could potentially be understating deficits over the next 10 years by as much as 80 percent. [...]
Rob Andover says:
Subject: National Debt
I have studied this subject very deeply. Even Macro economic Professors are confused. The general gist of the situation is that at this point and for quite a while it doesn’t matter what party is in power. The financial state of the US is in the hands of private individuals that control the federal reserve. The plan is to continue to inflate the economy until the system is at the brink of collapse. Then then the UN in the form of European banking will step in and offer us a solution that we cant refuse. That is to join the one world economy. They will issue Ameros, American currency at equal value as the Euro. Everyone with think Oh what a saving grace! But it will be a knife in the back because then we will be controlled economically by a power that is not our own. It will bleed it’s way into the social structures and the laws and before you know it we have world wide pseudo-socialism. Unfortunately this is not conspiracy theory. I wish it was.
About the only economic alternative would be for us “the US” to:
1) Take ownership and control of the Federal Reserve
2) Cancel all debt owed to the federal reserve ( a reduction of 45% of deficits)
3) Hunt down the corporations that have profited from this exploitation and take ownership of them.
4) Pay down the remaining debt with the proceeds obtained.
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November 21, 2009, 9:29 amjigs says:
How to prevent debt? It is all people questions. How are we going to prevent debt? There are too many agencies that are telling that they can prevent debt. There are some that they are telling the truth but the most is just a joke and they are just a bunch of scams.
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February 1, 2010, 10:02 pmTreasury Inc. - The Shadow National Debt | KEYTLaw says:
[...] The Volokh Conspiracy: “describes how most of the NATIONAL DEBT and BUDGET DEFICIT is being FRAUDULENTLY HIDDEN by the OBAMA ADMINISTRATION. . . . Look only at the outstanding debt of these five TARP companies (out of over 600 of them). [...]