Verret in Christian Science Monitor: Full Faith and Credit not a Depthless Well

The definition of the national debt ceiling needs to include the debt of companies controlled by the government via bailouts, says Professor J.W. Verret, adding that the government would have less incentive to bail out companies if that were the case.

Verret argues for greater transparency in the federal budget process by properly accounting for companies held by the government through the Troubled Asset Relief Program (TARP).

"Omitting appropriate liabilities from our government's books allows us to borrow more than we should and feeds our habit for deficit spending," says Verret. "This doesn't mean we should include the debt of all companies taking TARP money. Yet when the government acts like a private investor by purchasing common stock, private financial accounting principles should be employed."

"The full faith and credit of the US is not a depthless well," Verret warns. "Future generations bear the risk of high inflation, increased taxes, and interest payments on Treasury bonds that take up an ever-increasing share of the federal budget."

The real cost of US debt, Christian Science Monitor, May 25, 2010. By J. W. Verret.

"The first rule in financial accounting is that consolidation of debt (putting it on the books) is appropriate when a parent company controls another company by owning a majority of its stock. This covers GM at 60 percent Treasury ownership, AIG at 80 percent, and Fannie Mae and Freddie Mac at 80 percent.

"The second rule is that even if a shareholder has less than 50 percent ownership, if it is the beneficiary of most of the company’s future profits, consolidation is appropriate. This may also cover the government’s stock, warrants, and debt interest in Citigroup and some of the other banks.

"Counting only outstanding debt of these five TARP companies (out of more than 600): Citigroup has $1.8 trillion in debt; AIG, $760 billion; Fannie and Freddie, $5.7 trillion; and GM, $43 billion. This means at least $8.3 trillion of the national debt is missing from the government’s books. If the government is able to privatize these companies, then we can remove their debt from our books, until then their debt is the government’s debt.

"The statutory limit on the national debt is the one real limit on runaway government spending. Lifting that limit requires legislators to go on the record voting in favor of an increase, something they try to avoid however they can.

"Congress is required to vote every few years on whether to raise the national debt ceiling. The debts of bailed-out banks, however, aren’t included. If they were, the president may have a reason to privatize banks he now controls to evade that politically inconvenient vote for his party."

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