Fannie, Freddie, and the national debt

When the news broke about the nationalization of Fannie and Freddie Friday night, I wondered how this might affect the national debt total.  Today we're starting to get an inkling.

The Congressional Budget Office has declared that if the Treasury is going to assume responsibility for Fannie and Freddie, it will have to take them onto its books.

Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”

The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: “We are working through this issue with Treasury and other stakeholders.”

The White House could take a different view on Fannie and Freddie and exclude them from its budgets. But this would be difficult because the CBO is regarded as the leading independent authority on US finances and its assessments guide spending decisions by Congress.

No one on Team Bush saw this coming?  If this doesn't speak to lame-duckitude, I don't know what does.  I really hope a reporter asks Hank Paulson about this, but I'm not holding my breath.

So if the national debt to date is $9.7 trillion, what's the new figure?  Well, the CBO isn't actually ready to stick its neck out on that.

The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.

As our own Chris Mayer wrote in an essay first published five years ago and reproduced in today's Rude Awakening:

It has often been said that there are no free lunches. Surely, Americans cannot continue to subsidize (indirectly) mortgage finance without cost. What most Americans cannot see is that such subsidization of the mortgage industry has led to the assumption of a great deal of risk on the part of the taxpayer. The longer the GSEs are able to expand as they have, the more certain it becomes that someday taxpayers will have to bear the cost of such excess. Like Russian roulette, the longer you play, the more certain it becomes that you will bear the risk for playing. 

One of Chris's investing strategies in a market roiled by Fannie and Freddie is the "Chaffee Royalty Program."   It's open to only a limited number of members, and only through Midnight EDT tonight — even sooner if the number of available slots is filled.  <details here.

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