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Sunday, September 19, 2010

Accounting for Scott Sumner II

Scott Sumner presented an updated estimate of the cost of the financial rescue. He calculated 158 billion which is 165 billion lost saving Fannie Mae and Freddie Mac minus 7 billion profit from loans etc (mostly purchases of prefered shares) of big banks.

This is nonsense accounting. In the case of the large banks, Professor Sumner looks at the present discounted value of cash flows both ways. In the case of the GSEs, he looks at their current debt and assumes that they will repay less than none (he wrote $165 billion and growing).

For the 7 billion figure he seems to use a CBO estimate from March. He provided no link or citation, but the CBO did make that estimate of $7 billion profit in March.
For the GSEs he presents no source, evidence or data whatsoever.

I believe that his rule of accounting is assume whatever makes things with an acronym including G look bad.

The CBO updated its forecasts in August. I'm not sure if Professor Sumner is aware of that detail. The current estimated cost of TARP is 66 billion. So why, when he relies on the CBO for some of his numbers, does Sumner calculate 158 billion and rising ?

I think it's because he doesn't bother checking the latest data before blogging.

Here it is (warning big pdf)

The CBO estimates a net transfer of 41 billion from the Treasury to the GSEs in fiscal 2010 on top of 96 billion in 2009 (which started October 1 2008 so the sum is most of it). The sum 137 billion is much less than the GSEs debt to the Treasury because the Treasury demands huge dividends on its prefered shares (10% per year).

I also note that the CBO estimates that interactions with Fannie Mae and Freddie Mac from 2011 to 2020 will reduct the debt in 2020 by 44 billion in expected (present ?)value. However the TARP law requires the CBO to discount flows with a high interest rate to compensate for risk. This is not how the US federal government deals with any other cash flow and makes no sense.

So the expected cost is 93 billion plus spending in fiscal 2008 and some interest. Not close to 165 billion.

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