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How Much Do Federal Loan Programs Really Cost?

On Monday, March 19th, e21 held an event: "How Much Do Federal Loan Programs Really Cost? Debating the Use of Fair Value Estimates."

How the federal government reports the costs of its rapidly expanding loan programs seems like an arcane accounting matter. But a burgeoning debate over exactly that issue promises to affect many wide-reaching federal programs such as student loans, the Federal Housing Administration, Fannie Mae and Freddie Mac, and new proposals for infrastructure spending.

In recent years, some have argued that the current accounting rules are flawed – they systematically exclude a portion of the risks taxpayers bear in the government’s loan programs and therefore understate the cost of every federal loan program. This flaw makes all of the major loan programs appear profitable for the government, even though the programs make or guarantee loans at terms below market rates. A growing body of research shows that using a more comprehensive measure of risk (i.e. fair value) shows that federal loan programs aren’t profitable and in fact provide subsidies to borrowers at a cost to taxpayers.

Earlier this year, the U.S. House of Representatives passed the Budget and Accounting Transparency Act of 2011 (H.R. 3581) to amend the Federal Credit Reform Act so that cost estimates reflect the “fair value” of loan programs. But as this reform gains momentum in Congress, some budget experts oppose the change, arguing that fair value estimates – like those used in the private sector – are not appropriate for valuing government loan programs.

e21 assembled some of the leading experts on both sides of the fair value budgeting issue for a panel discussion on the topic, which was moderated by Daniel Indiviglio, a columnist for Reuters Breakingviews:
Deborah Lucas
, Sloan Distinguished Professor of Finance at the Massachusetts Institute of Technology Sloan School of Management
Douglas Elliott, Economic Studies Fellow, Initiative on Business and Public Policy at the Brookings Institution
Doug Criscitello, Director, Global Public Sector Practice at Grant Thornton LLC; former CFO, U.S. Department of Housing and Urban Development
Richard Kogan, Senior Fellow at the Center on Budget and Policy Priorities
Paul N. Van de Water, Senior Fellow at the Center on Budget and Policy Priorities
Mike Konczal, Fellow at the Roosevelt Institute

Read the Center on Budget and Policy Priorities paper, "House Bill Would Artificially Inflate Costs of Federal Credit Programs," here. Download the CBPP slides here.

Read two of Mr. Delisle's e21 pieces here and here.

Click here for a recent CBO paper supporting fair-value accounting.

Read Mr. Elliott's paper, "Changing the Budget Rules Could Alter How the Federal Government Lends," here.

Event video:

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