On New York City’s Avenue of the Americas, tourists can find a mathematical landmark that has grown in infamy as it has grown in digits. It is the National Debt Clock, and it has served as a publicly-displayed meter of the federal government’s spending habits for more than a decade. But as economists and politicians debate the merits of recognizing the future outflows of Social Security and Medicare as part of the debt, two different entities have already made the clock obsolete — Fannie Mae and Freddie Mac.
The aftermath of the housing bubble is causing Washington’s twin lending giants to apply much more immediate pressure to the federal balance sheet. Combined, they have over $5 trillion in liabilities that government officials have repeatedly insisted are not obligations of the taxpayers. With Fannie and Freddie debt trading at prices nearly identical to Treasury debt, however, the markets assume that the taxpayers are on the hook, which means that somebody has to lose big.
Investors still expect to receive future payments for a reason. By guaranteeing more than 90% of all U.S. mortgages in tandem with the Federal Housing Administration, GSE (government-sponsored enterprise) losses replace losses to major banks. And by issuing over $1.6 trillion in corporate debt on top of those guarantees, the public-private hybrids have pumped the financial system full of assets supposedly worth that same amount. Fannie and Freddie are not just too big to fail — they are all that’s keeping the balance sheets of corporate America too rigged to fail. The withdrawal of significant taxpayer support would be tantamount to pulling the bottom out of a house of cards already deemed untouchable.
The Obama administration acknowledged this reality last Christmas Eve, when it eliminated the $400 billion cap on the GSE bailout. But with the executive branch’s Office of Management and Budget persisting in its recognition of only the cash infusions given to the mortgage zombies to meet immediate obligations amounting to less than $200 billion, the White House is effectively dismissing its own action and pretending that Fannie and Freddie won’t even make it halfway to their former limit. Moreover, the OMB’s 2011 budget estimates that those infusions will only cost a paltry $5 billion in the next fiscal year after adding up to $56 billion in 2010. The countless billions needed to shore up long-term debt? Nonexistent.
“The Treasury and White House do not want to recognize the losses that are there,” said Mark Calabria, director of Financial Regulation Studies at the CATO Institute, in an interview with The Daily Caller. “With the public mood about deficits, they don’t want to add another trillion to the national debt. But someone has to take those losses. It’s highly unlikely that the debt holders will take the hit. There’s a chance that they won’t get 100 cents on the dollar, but even that’s not very likely.”
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