According to the Congressional Budget Office, if the government included market risk in its budget, programs like student loans and mortgage guarantees from the Federal Housing Administration, which are projected to bring in $45 billion in the 2013 budget, would suddenly appear to be headed for losses of $11 billion.
Before the recession, only budget wonks and academics talked about factoring in such risk, a technique also known as fair-value accounting. The once-obscure idea is now gaining traction, as Republicans campaign on showing Americans the true cost of government.
That’s partly due to Paul Ryan. He helped shepherd the Budget and Accounting Transparency Act of 2012, which would require fair-value accounting for all federal loan programs, through the House and then praised the practice in his budget plan. Democrats in the Senate haven’t acted on the bill. Yet Ryan raises an important question: What’s the budget for?
The federal government used to account for loans and guarantees on a purely cash basis. If money went out for a loan, it looked like an expenditure, the same as if the government had bought a fighter jet. Yet the transaction didn’t reflect the likelihood the funds would be paid back. Starting in 1990, the Federal Credit Reform Act directed agencies to estimate projected losses from possible defaults in each year’s budget. At the same time, agencies could chalk up the interest and fees that came in from loans and loan guarantees as projected income. That meant the programs often appeared to be making money for the government.
That seemed to work fine until the economy imploded. In 2007 the Federal Housing Authority’s mortgage insurance and loan guarantee programs made $618 million. In 2009 they lost $15.3 billion. What happened? Market risk. Deborah Lucas, an assistant director at the CBO from 2009-11, says the loans looked cheaper than they actually were and that the agency should have been factoring in the likelihood of a catastrophe all along, the way the private sector does.