The CBO estimates the cost of the Fannie-Freddie backstop: Only $25 billion, but ...
The Congressional Budget Office has just issued its estimate of the likely cost of Hank Paulson's plan to let troubled mortgage giants Fannie Mae and Freddie Mac draw on a Treasury credit line (that is, borrow money from taxpayers). The verdict: $25 billion.
This is what the CBO calls "probability-weighted average" of the different potential outcomes. Its economists estimate that there's more than a 50% chance that Fannie and Freddie will be fine and won't need a cent, and almost a 5% chance that losses would total more than $100 billion. It should be added that don't really know that this is the probability distribution. Rating agencies and others thinking they knew the probability of mortgage defaults when they didn't are a large part of what got us into this problem. But you've got to make some sort of estimate or you're completely groping in the dark.
Finally, CBO director Peter Orszag notes that:
a strong argument can be made that if the Treasury used the proposed authority, the GSEs' operations should be incorporated directly into the federal budget.
Fannie's and Freddie's "book of business"--that is, their assets plus the mortgage securities they've guaranteed--adds up to about $5.2 trillion. The U.S. government's current external debt is $5.3 trillion. Incorporate the GSEs into the budget, and you double of the debt.
Except that it's not quite the same kind of debt. The Fanniefreddieplex's $5.2 trillion is backed by lots of valuable collateral; the government's $5.3 billion is a direct claim on future tax revenue (I mean, I guess we could sell the Capitol or Fort Knox to raise money, too, but that's not really the plan). That mortgage collateral may be worth slightly less than $5.2 trillion at the moment. But it's never going to zero, or anywhere near.
-
1
"Rating agencies and others thinking they knew the probability of mortgage defaults when they didn't are a large part of what got us into this problem."
I wonder why this aspect of the mortgage market crisis isn't getting more scrutiny. And it isn't just the credit agencies. Fannie and Freddie supposedly used sophisticated Monte Carlo simulations to "stress" their portfolios periodically and insure that the risks were at manageable levels. What went wrong with these analyses?
-
2
What went wrong with these analyses?
What went wrong is what usually goes wrong. The mathematics correctly calculate the likelihood of the assumed rates of various issues. Probably, a 5% chance that individuals would get into trouble at a level that had been seen in the worst 5% of the last decade. That the economy might cycle a bit worse than our extremely steady recent GDP growth rate would lead you to believe was likely. That the population of borrowers might be expanded to people with somewhat spottier credit histories.
But NOT that the combination of our "Ownership Society" policy promoting everybody buying a home; a hyper-leveraging fiscal policy that promoted consumption through massive foreign borrowing; a Fed policy of punch bowls wherever you turned; Wall Street innovations that needed massive volume of "the buck doesn't stop here" lending; and ultimately, just your ordinary speculative bubble that has hit tech stocks in memory, but not other assets; plus a nasty squeeze on income in the form of huge CPI increases that our Wise Men ignored as "not core."
Maybe more directly: we simulated that we could continue borrowing the next trillion dollars the same way we did the last couple of trillion. Wonder why that didn't work out so well? It sure was fun while it lasted, and maybe when the revisionists get their chance, the growth in the economy will be found to have been worth this nasty little train wreck.
- TIME The road to World Cup glory | http://su.pr/4BIr6L - 8 hours ago
- TIME Twitter App Showdown: Echofon Pro vs Tweetie 2. There can be only one. (via @techland) | http://su.pr/2NRR4C - 11 hours ago
- TIME The National Zoo's panda is leaving. See pictures here | http://su.pr/1wUNuY - 12 hours ago
Most Popular »
- Tennessee Mayor Accuses Barack Obama Of Hating On Charlie Brown, Peanuts
- Wii Fit Plus Review
- NV Sen Poll: Reid In Trouble
- Obama Shifts Date of Copenhagen Visit
- The PlayStation Turns 15, We Reminisce
- 'Forgotten Man' II: Two-Thirds of Jobless Blue-Collar
- 135 Money-Saving Resources and Tips, Special Holiday Season Edition
- False Economy: Think You're Saving Money? Think Again
- Twitter App Showdown: Echofon Pro vs Tweetie 2
- Loving The Joke
- How Strong Is the Evidence Against Amanda Knox?
- Will Federal Spending Mistrust Mean the End of Obama's Audacity
- Amanda Knox, Convicted of Murder in Italy
- Nicolas Sarkozy: A French Paradox
- Amanda Knox Testifies: The Murder Trial That Has Gripped Italy
- Helicopter Parents: The Backlash Against Overparenting
- India, Pakistan and the Battle for Afghanistan
- Astronomers Spot Planet-Like Object GJ 758 B in Orbit
- Foxy Knoxy Case Still Roils Italy
- Hate Your Job? Here's How to Reshape It
Quotes of the Day »
RSS