Asymptotically we'll all be dead
Robert WaldmannOctober 23, 2010 4:30 pm
I think that Stiglitz is wrong about the mortgages. He is ignoring default risk in pricing mortgages. This is a rather odd oversight under current circumstances.
He does discus the Fed not TARP, but his general claim that the government does not have to mark to market is false. In TARP accounting (and only in TARP accounting) the government was required to mark to market. This is not a minor issue. In fact it is the reason that TARP subsector Banks and AIG was forecast to make huge losses, then the economy turned out worse than expected and now TARP subsector Banks and AIG is expected to make profits. The expected loss was not the expected effect on the national debt but that expected effect plus a huge penalty for bearing risk. Since it is a positively good thing for the Treasury to bear risk the calculations weren’t off by a mere 300 billion or so (as it seems) but much more, that is the gain aside from preventing collapse of the financial system was much larger than the current estimate of 25 billion (I’d say hundreds of billions larger).
I note that the Fannie Freddie losses are still grossly overstated due to the assumption that the Treasury should be risk averse. Since the Fannie Freddie position is not unwound the incorrect rule about pricing still affects Fannie Freddie estimates. It also grossly miss states the effect of Fannie Freddie bailout on the national debt if Fannie and Freddie were to pay the Treasury back tomorrow. This is a separate issue but both are due to the silliness described below.It is assumed that if the Treasury borrows at less than 3% and lends it to the GSEs at 10% and everyone pays all that is owed, then there is no effect on the national debt. That is, it is assumed that 10=3. This applies both to past payments by the GSEs and to predictions about future payments. In no other cases except TARP and the FannieFreddie bailouts does the Federal Government use such accounting. I promise you this is all true and the difference is hundreds of billions.
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