Fannie and Freddie Make the U.S. Look a Lot Like Greece

As Americans shake their heads at the Greek debt crisis, they think, "Well, that could never happen here." Greece was hiding their debt so that investors didn't know the full extent of their fiscal problems. The U.S. wouldn't do something like that, would it?

The government's current policy to leave a great deal of its liabilities off-balance sheet makes the U.S.'s current debt levels look a lot more favorable than they really are. Future entitlement costs, for example, are already accrued, but remain included as unfunded liabilities, so aren't taken into account when the government talks about its debt.

Today, in his New York Times column, David Leonhardt examines the problem this poses for the future, saying:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece's debt, by comparison, equals about 115 percent of its G.D.P. today.

But this is more than just a future problem. George Mason University real estate finance professor and Mercatus Center senior scholar Anthony Sanders says the government sponsored entities Fannie Mae and Freddie Mac should be added into the debt equation. He testified before the House Financial services Committee back in March on housing finance reform. Even though the Treasury refuses to classify the GSE debt as sovereign debt, any distinction is nonsensical, since the government has promised to stand behind the agencies until at least 2012.

Here's a chart he created to show how the total U.S. debt changes if you add in Fannie and Freddie:

sanders cht1 2010-05.PNG

He also provided the following chart, which shows how the U.S. debt to GDP ratio changes if you add in the agencies:

sanders cht2 2010-05.PNG

As you can see, if you include the GSEs, the ratio is currently very close 115 -- the number that resulted in Greece's default. Sanders proposes that the GSE debt should be brought on balance sheet for the sake of transparency. This might also help accentuate the need for reform of Fannie and Freddie, which Congress is doing its best to avoid. Of course, this action would require a huge increase in the debt ceiling, which explains why this isn't a move Congress finds politically palatable.

The U.S. suffers from a similar problem as Greece. It spends like a socialist nation, but it taxes like a capitalist nation. And like Greece, the U.S. will be guilty of a failure of debt transparency until it recognizes all of its obligations to investors. It should start with the GSEs.