Focus On Fannie, Freddie For Best Debt-Limit Deal

IBD Editorials ^ | May 25, 2011 | CHRISTOPHER PAPAGIANIS

[Kaslin]

This week the debt ceiling "crisis" officially arrived, as the U.S. government reached the $14.3 trillion legal limit on how much it is allowed to borrow. In coming weeks, Congress will vote on whether to raise this limit, but the debate is unfolding as credit rating agencies are starting to question whether the U.S. can maintain its AAA debt rating.

Absent significant legislative changes by Congress, the U.S. budget deficit will likely remain at elevated levels for the foreseeable future, even if the economy roars back to life. Policymakers are pressing for budget reforms designed to cut spending over the long haul in exchange for agreeing to raising the debt limit.

For example, Sens. Bob Corker and Claire McCaskill have a proposal that would create a federal spending cap. While well-intentioned, such mechanisms often contain loopholes that effectively block spending cuts from going into effect. They can also create incentives to obscure government spending and liabilities through the use of off-budget vehicles.

As Standard & Poor's made clear in its report downgrading the outlook for U.S. debt, it is precisely these off-budget liabilities that could push the federal government off a fiscal cliff.

Rather than rely on budget gimmicks moving forward, policymakers should attach an increase in the debt limit to a clear and inalterable timetable to resolve Fannie Mae and Freddie Mac — the largest of all off-budget enterprises in this country and probably the world.

The first argument for linking Fannie and Freddie to the U.S. debt limit debate is that their combined balance sheets now exceed $5 trillion. All these assets are financed by the issuance of debt securities that are now effectively guaranteed by taxpayers, but do not appear in the official budget for the government.

[Lurker]

is that their combined balance sheets now exceed $5 trillion

Let that number roll around in your head for a bit. Then get angry, very angry.

[NVDave]

And get angry at the correct parties, namely the Bush administration, and Treasury Secretary Hank Paulson. They were the feckless idiots who pulled Phoney and Fraudy onto the balance sheet of the US Treasury, because the ChiComs wanted to dump their paper at 100 cents on the dollar.

People who knew their buttocks from any particular warm rock about finance had been saying for years that the market was pricing Fannie/Freddie paper as tho it were backed by “full faith and credit” of the treasury when in fact it was not. Greenspan used to point this fact out every chance he got in the early 90’s.