Here’s the abstract for a paper I recently completed on Off-Balance-Sheet Federal Liabilities:
Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.
What follows is a brief summary of the paper.
One important category of federal off-balance-sheet commitments involves housing. The government’s commitments began in 1934 when Congress established the Federal Housing Administration to insure approved mortgages, an agency that’s still going strong today. Last year, the FHA issued $213 B in new guarantees, bringing its total portfolio of insured mortgages to $1.3 trillion.
In 1938, Congress created Fannie Mae as a separate entity to purchase mortgages, and in 1970 chartered Freddie Mac to compete with Fannie. Throughout their history, both entities had features of both public and private enterprises. They were able to issue their own debt at favorable interest rates and offer separate credible guarantees on massive volumes of mortgage-backed securities in part because of the common perception that the government would back them up if they ran into trouble. Any doubts about this were resolved when Fannie and Freddie were taken into conservatorship in 2008. With any profits that the GSEs make currently going to the Treasury, it is reasonable to assume that any losses they currently make would also come out of the Treasury.
As of the end of 2012, the outstanding debt and guarantees issued by Fannie and Freddie (along with those of the Federal Financing Bank, Federal Home Loan Banks, Farm Credit System, Federal Agricultural Mortgage Corporation, FICO, and REFCORP) came to $7.5 trillion, or 2/3 the size of the total Treasury debt held by the public. In my paper I discuss the role of the huge federal involvement in the housing boom and bust of the last decade.
Another category of federal commitments that we are likely to be hearing more about in the next few years is student loans. I was surprised to discover that most of this federal commitment has recently become an on-balance sheet liability, as the Department of Education has evidently been using funds borrowed by the U.S. Treasury to buy up some of the federally-guaranteed student loans that have now run into trouble. Borrowing by the U.S. Treasury on behalf of the Department of Education came to $714 B as of the end of fiscal year 2012, accounting by itself for 6% of the outstanding publicly-held U.S. debt. The contribution of remaining off-balance-sheet commitments for these and other non-housing federal loan guarantees appears to be relatively modest.
|Treasury debt held by public||4,867||5,837||9,052||11,299|
|Student and other loan guarantees||468||547||419||325|
|Other government trust funds||1,308||1,487||1,646||1,862|
|Total off-balance-sheet commitments||56,544||67,305||61,398||70,085|
A separate category of off-balance-sheet commitments involves deposit insurance. The Federal Deposit Insurance Corporation had issued guarantees on bank deposits worth $7.4 trillion as of the end of 2012. However, this should decline by about $1.5 T with the expiration of some of the Dodd-Frank extensions on guarantees. Moreover, the FDIC ended up with a positive cash flow even through the stress of the financial crisis. In the most recent experience, I would say that deposit insurance worked as intended– bank runs were avoided at no loss to the taxpayers. On the other hand, Curry and Shibut (2000) estimated that the earlier FSLIC deposit guarantees ended up costing U.S. taxpayers $124 B as a result of problem saving and loans during the 1980s.
In arriving at the figures in the table above, I have added the reserves created by the Fed under its emergency-lending programs and QE1-3 as another off-balance-sheet liability of the federal government, regarding interest-bearing reserves as essentially an overnight loan from banks to the Fed. On the other hand, I also subtract off the Treasury securities and MBS held by the Fed, viewing QE as basically swapping one on- or off-balance-sheet federal liability (Treasury debt or GSE MBS) for another (interest-bearing reserves). Because I treat cash held by the public as imposing no further potential demands on the U.S. Treasury, my conclusion is that the Fed was on balance reducing the federal government’s net liabilities by $1.1 T as of the end of 2012.
The biggest category of off-balance-sheet liabilities comes from the additional funds that the trustees of the Social Security and Medicare trust funds believe would need to be found in order to fulfill commitments to current program participants (i.e., those currently aged 15 and older). These are reported to be $26.5 T for Social Security (see Table IV.B7 of the trustees report) and $27.6 T for Medicare (Table V.G2). As I write in my paper:
These numbers are so huge it is hard even to discuss them in a coherent way. As noted above, the calculations that go into them are easily challenged. But although one can quarrel with the specific numbers, there is an undeniable important reality that they reflect– the U.S. population is aging, and an aging population means fewer people paying in and more people expecting benefits. This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States. One would think we should be saving as a nation today as preparation for retirement, and if in fact we are not, the current enormous on-balance-sheet federal debt is all the more of a concern.
Adding all these items together, I calculate total off-balance-sheet federal liabilities of around $70 T, or 6 times the size of reported on-balance-sheet liabilities. My paper concludes:
Some may argue that the current off-balance-sheet liabilities of the U.S. federal government are smaller than those tabulated here; others could arrive at larger numbers. These off-balance-sheet concerns may or may not translate into significant on-balance-sheet problems. But one thing seems undeniable– they are huge. And implicit or explicit commitments of such a huge size have the potential to have huge economic consequences, perhaps for the better, perhaps for the worse.