Let’s talk about fair-value accounting (FVA)!
Hey, where ya goin’?–get back here right now!!
This morning’s WaPo editorial page takes what I and my CBPP colleagues have long considered the wrong view about how the federal budget should account for its lending programs. I take you through the weeds here, but the long and short of it is that the WaPo and others, including (importantly) CBO, argue that the federal budget should raise the risk premium on government loans in such a way that would reflect higher costs to the budget than is currently the case.
Here’s where the WaPo betrays a significant misunderstanding of the issues at stake here:
The policy rationale [for current accounting vs FVA] is that government, unlike banks, is relatively indifferent to credit risk; its social priorities, such as educating the populace and promoting homeownership, override getting every last dime back for the taxpayers. If you forced Congress to account for the market risks of its portfolio, that would limit its ability to spend on other worthy purposes.
Government’s “social priorities” have nothing to do with it. Our current approach would be correct if we were underwriting pet rocks instead of education (and current rules would enforce the reflection of the relative default risks such a switch would entail).
What’s relevant here is the fact that private lenders face various disadvantages relative to the government and they reasonably want to be compensated for them, so they charge more for their loans. They can’t borrow as cheaply as Uncle Sam, they can’t tax, they can’t print money, they won’t make loans unless they expect to make a profit on them, and so they’re more risk averse. So they add a risk-premium to their interest rate.
This doesn’t make the government a riskless lender, of course. The full likelihood of defaults or late payments and the probability of changes in interest rates need to be taken account of – as they already are. But to charge the government for market risks it does not face is to create phantom costs, which in turn, invoke the need for phantom offsets.
I can see why the hawkish WaPo editorial page favor a move to FVA but I don’t get the CBO’s rationale. And they are, of course, an extremely powerful voice in this debate. In my earlier piece (see link above), I tried to empathize thusly:
The FVAers [including CBO] seem to think the current accounting methods give the government an unfair advantage over private lenders, and want to put them on equal footing. They seem put out, for example, by the fact that our student loan program is scoring as a “negative subsidy”—it’s making money—right now, as the government is taking advantage of favorable spreads between its borrowing and lending costs.
Perhaps the FVAers want to artificially pump up the budgetary costs of the loans because they worry that a government that can lend more cheaply than the private sector will fail to impose enough discipline on its lending programs. While I’m obviously opposed to the shift to FVA, that’s not an unreasonable concern. I don’t want to see the government take advantage of its unique ability to lend at lower costs than private lenders such that it gets into all kinds of different markets. Student loans are different, since they support an important public good. But if this is the FVAer’s motivation, I kinda see where they’re coming from.
See…real fiscal empathy! But that doesn’t make it right.