Accounting for the Cost of Government Credit Assistance
By Ingo Walter, Seymour Milstein Professor of Finance, Corporate Governance and Ethics and Vice Dean of Faculty, & the Financial Economists Roundtable
They propose adopting a discount rate that captures all the risks borne by taxpayers. This would eliminate two perverse incentives caused by application of the current rules: (1) credit and non-credit assistance would be made more comparable in the budgetary process; (2) the government would be able to buy and sell loans at market prices without significant budgetary effects, eliminating the current budgetary arbitrage opportunity in buying loans at market prices and booking them at higher values using the current accounting rules. Moreover, a more accurate assessment of the guarantees issued by Fannie Mae and Freddie Mac, now under government conservatorship, would facilitate their ultimate privatization. And the true budgetary implications of credit assistance would be more transparent to program administrators, policy makers and the public.
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