EconomistMom.com

I have no idea, but the Congressional Budget Office took a crack at that question today, releasing a letter to my former boss, House Budget Committee Chairman John Spratt.  CBO concludes that while there’s a small probability that the direct cost to the government could turn out to be around $100 billion, the “expected federal budgetary cost” is just $25 billion (over fiscal years 2009-10)–because there’s a better than 50-50 chance that the proposed new Treasury authority (what can be thought of as an available ”line of credit”) would not be exercised.  (Here’s a nice report by Jeanne Sahadi at CNN-Money.)

Whatever the officially estimated budgetary cost or the actual effect on the level of the federal debt turns out to be, however, these figures grossly understate the financial commitment implicit in this effectively unlimited “line of credit”–that is, grossly understates the value to Fannie Mae and Freddie Mac in being able to say to the market, “don’t worry, we’re good for it.”  As CBO Director Peter Orszag explains on his blog (emphasis added):

CBO’s estimate reflects the current budgetary treatment and existing scorekeeping conventions for federal credit assistance and equity purchases and does not necessarily measure the underlying change in the federal government’s financial condition as a result of this legislation. On the one hand, the acquisition of financial assets like equities is recorded as an outlay in the budget even though such purchases may not change the government’s underlying financial condition. On the other hand, even if enacting this legislation would not result in outlays over the near term, it might effectively strengthen the linkages between the GSEs and the federal government and thereby increase the government’s underlying exposure to the risks associated with the GSEs’ activities.

In other words, the unlimited line of credit is worth a lot even if it’s never tapped into.  And I say it’s effectively an unlimited line of credit, because just like anything else in the federal budget that we’re willing to deficit finance (borrow to pay for), the line of credit defined by the “statutory debt limit” (currently set at $9.815 trillion, which we’re about $360 billion away from today) can be increased at any time by act of Congress, at the request of the Treasury Department.  Congress routinely (albeit reluctantly) votes to increase this limit whenever the existing limit is about to be breached.  So this Politico story (by David Rogers, no relation) about the “bonus” of an increase in the debt limit that might be hastened by the passage of a Fannie-Freddie rescue bill, is a bit misleading, in saying:

From Paulson’s standpoint, [Congress raising the debt limit] would solve another problem of appeasing Congress’s concerns about his rescue plan. To be effective, the secretary has argued that no cap should be put on his new authority, nor should it be subject to the debt ceiling [i.e., count as debt subject to the debt limit]. 

But Paulson appears willing to accept that condition now, since he would be assured that the ceiling will be raised to a level giving him enough room to assist Fannie and Freddie if needed.

Secretary Paulson and David Rogers make it sound as if the statutory debt limit is a binding constraint or a real limit, when it’s not.  It’s a sort of self-discipline device–an acknowledgment and reminder of the debt problem which gives understandable heartburn to the members of Congress when they have to vote on it.  But regardless of whether this legislation adds to the “debt subject to limit” or the debt not subject to limit, any eventual outlays will add to the real public debt.  And regardless of the budgetary impact of this legislation, we know the debt limit will be increased later this year (whether before the election or during a “lame duck” session), because it will have to be, with or without this legislation.