Reischauer “Strongly Opposes” House Bill to Inflate Cost of Federal Credit Programs

January 24, 2012 at 1:48 pm

We’ve issued an analysis explaining the serious problems with a bill before the House to change the federal accounting of direct loans and loan guarantees, which would artificially inflate the cost of federal credit programs.  Meanwhile, Robert Reischauer, former director of the Congressional Budget Office and outgoing president of the Urban Institute — and a CBPP board member — sent the following letter to Rep. Chris Van Hollen (D-MD) explaining his opposition to the bill.

The Honorable Chris Van Hollen                                           January 23, 2012

1707 Longworth H.O.B.

Washington, D.C. 20515

Dear Representative Van Hollen,

I am writing in response to your request for my views on the desirability of adopting “fair value accounting” of federal direct loan and loan guarantee costs in the budget as proposed in H.R. 3581.  I strongly oppose such a change.

The accounting convention used since enactment of the Credit Reform Act of 1990 already reflects the risk that borrowers will default on their loans or loan guarantees.  Under Credit Reform, costs already are based on the expected actual cash flows from the direct loans and guarantees (with an adjustment to account for the timing of the cash flows).  H.R. 3581 proposes to place an additional budgetary cost on top of the actual cash flows.  This additional cost is supposed to reflect a cost to society that stems from the fact that, even if the cash flows turn out to be exactly as estimated, the possibility that the credit programs would cost more (or less) than estimated imposes a cost on a risk-averse public.  Under the proposal, this extra cost would be the difference between the currently estimated cost of direct loans and loan guarantees to the federal government and the cost of those loans and loan guarantees if the private market were providing them.

A society’s aversion to risk may be an appropriate factor for policymakers to take into account in a cost-benefit assessment of any spending or tax proposal but adding a cost to the budget does not make sense. Nor is it clear that the cost of societal risk aversion should be based on individual or institutional risk which is what the private market reflects. Inclusion of a risk aversion cost for credit programs would be inconsistent with the treatment of other programs in the budget (many of which have costs that are at least as uncertain as the costs of credit programs–for instance, many agriculture programs and Medicare)–and would add a cost element from a traditional cost-benefit analysis without adding anything based on the corresponding benefit side of such an analysis. It would also make budget accounting less straightforward and transparent.

H.R. 3581 represents a misguided attempt to mold budget accounting to facilitate a cost-benefit analysis, with the result that neither the budget nor the cost-benefit analysis would serve their intended purposes well.

I would be glad to discuss these issues in more detail if you would like.

With best wishes.

Robert D. Reischauer

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1 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    I appreciate the work you are doing. The people are being hugely lied to with this fair value hoax for student loans.

    Not only is the government making profit on the lending system, it is actually making a substantial profit on defaults, and has been for years.

    I have been working on this issue for years, and but for you and a handful of other folks, no one seems to be standing up to this fraud…and this is to the massive harm of the public interest.

    I hope you will see a recent piece I wrote up to describe this more fully:

    http://studentloanjustice.org/fva.html

    Regards,

    Alan Collinge



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