There's one very important aspect is missing from the sweeping financial reform proposals currently being mulled over in Washington: to fix or wind down the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. But yesterday, I learned of one piece of legislation sponsored by Rep. Scott Garrett (R-NJ) which seeks to force Washington to face the GSE problem. He's sponsoring a bill that calls for transparency and accountability for the cost that the GSEs impose on taxpayers. How does he hope to do that? Make the GSEs a part of the budget. While only a start, I think this legislation makes a lot of sense.

Garrett appeared on CNBC this morning to explain his bill, called the Accurate Accounting for Fannie Mae And Freddie Mac Act (clip at end of the post). The idea is simply to have the cost of the GSEs included as a part of the President's budget. Then, they'll be impossible to ignore. Garrett says:

We should treat this just like any other expense and other money we're spending put it on budget "a)." And "b)," all the debt that's out there for Fannie and Freddie, that's $1.6 trillion, that should apply to our debt limit as well. Two simple facts. CBO suggests it; we think that it's a good idea.

And since the U.S. now fully owns and explicitly guarantees these companies, I don't see how you could dispute the sense in doing exactly what this bill would dictate. The GSEs impose a very real cost on taxpayers. Of course, this would also require Congress to raise the U.S. debt ceiling by a whopping $1.6 trillion. But since the government is on the hook for all of the GSEs' obligations, then their debt becomes government debt.

On his web site, Garrett explains just what kind of an obligation we're talking about (his emphasis):

$21 billion estimated taxpayer subsidy cost for 2010 according to CBO

$64 billion estimated taxpayer subsidy cost for 2011-2020 according to CBO

$291 billion added to federal debt in 2009 to support GSEs according to CBO

$8.1 trillion GSE securities outstanding according to data released by the Federal Reserve on December 10, 2009 (Neither CBO nor OMB incorporates debt securities or mortgage-backed securities issued by Fannie Mae and Freddie Mac in estimates of federal debt held by the public.)

UNLIMITED Treasury assistance to the GSEs through 2012

The hope is that, by recognizing that the U.S. government is now responsible for this massive mortgage market exposure, more sweeping reform for the GSEs would follow more quickly, or at least follow eventually. As long as policymakers pretend that this isn't a problem, they will continue to ignore Fannie and Freddie.

Unfortunately, I'm not convinced that even this basic measure that I view as relatively uncontroversial will get anywhere. In the interview, Garrett indicated that Democrats weren't yet on board. Until they are, there's little Congress will do. However, about a month ago I noted that House Financial Services Chairman Barney Frank (D-MA) believes that the GSEs do need reform. Let's hope he leads Democrats to consider this and more significant measures to fix the very serious problem that the GSEs pose to taxpayers going forward.


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