Another Kind Of Government Debt
August 31, 1995
We're all familiar with the federal debt, the one that's about to hit $5 trillion. But there is another government debt, called "the shadow debt," which totals more than $7 trillion.
The off-budget shadow debt, which is distinct from the federal debt, is comprised of loan guarantees, direct loans and other forms of government commitments. Off-budget debt has been likened to someone cosigning for a car loan for another party. It is a commitment and the lending party can hold the cosigner responsible if the borrower defaults. Although the federal government - as cosigner in effect - is not likely to have to pay more than a small portion of the shadow debt, still it is a contingent liability of the government.
Credit markets do not distinguish between off-budget and on-budget debt, and there is a link between high levels of debt, high taxes and slow growth. The shadow debt includes such items as:
- Deposit insurance of $2.8 trillion, with up to $70 billion set aside for claims.
- The Farm Service Agency, with a face value of $49 billion in direct loans on the books and $29 billion set aside for bad loans.
- The Small Business Administration, with $69 billion budgeted for 1996 to clean up bad loans.
- The Federal Housing Administration, which last year guaranteed loans valued at close to $400 billion.
These and various other programs can be grouped into four types:
- Insurance programs totaling nearly $5 trillion of exposure, with $186 billion earmarked for claims. l Direct lending programs amounting to $155 billion.
- Private loan guarantees, estimated to total more than $1.2 trillion by the year 2000.
- Government-sponsored enterprises which are in a murky area, not quite private companies and not quite government managed - such as Fannie Mae and Freddie Mac - the government-chartered mortgage trading firms.
Source: Jeff A. Taylor, "Ignoring Government's Shadow Debt," Investor's Business Daily, August 31, 1995.
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