[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-83

            THE ECONOMIC EXPOSURE OF FEDERAL CREDIT PROGRAMS

=======================================================================

                                HEARING

                              BEFORE THE 

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 17, 2015

                               __________

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman      Kevin Brady, Texas, Vice Chairman
Mike Lee, Utah                       Justin Amash, Michigan
Tom Cotton, Arkansas                 Erik Paulsen, Minnesota
Ben Sasse, Nebraska                  Richard L. Hanna, New York
Ted Cruz, Texas                      David Schweikert, Arizona
Bill Cassidy, M.D., Louisiana        Glenn Grothman, Wisconsin
Amy Klobuchar, Minnesota             Carolyn B. Maloney, New York, 
Robert P. Casey, Jr., Pennsylvania       Ranking
Martin Heinrich, New Mexico          John Delaney, Maryland
Gary C. Peters, Michigan             Alma S. Adams, Ph.D., North 
                                         Carolina
                                     Donald S. Beyer, Jr., Virginia

                  Viraj M. Mirani, Executive Director
                 Harry Gural, Democratic Staff Director
                           
                           
                           
                    
                           
                           
                           
                           
                           C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana.........     1
Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative 
  from New York..................................................     3
Hon. Mike Lee, a U.S. Senator from Utah..........................     5

                               Witnesses

Dr. Douglas Holtz-Eakin, President, American Action Forum, 
  Washington, DC.................................................     7
Mr. Jason Delisle, Director, Federal Education Budget Project, 
  New America, Washington, DC....................................     8
Mr. Douglas Elliott, Fellow, Brookings Institution, Washington, 
  DC.............................................................    10
Dr. Paul Van de Water, Senior Fellow, Center on Budget and Policy 
  Priorities, Washington, DC.....................................    12

                       Submissions for the Record

Prepared statement of Hon. Daniel Coats..........................    28
Letter dated June 16, 2015, from the National Education 
  Association to Representative Maloney..........................    29
Letter dated June 16, 2015, from the National Association of Home 
  Builders to Senator Coats and Representative Maloney...........    31
Letters for the record submitted by Representative Maloney.......    34
Prepared statement of Hon. Carolyn B. Maloney....................    51
Prepared statement of Dr. Douglas Holtz-Eakin....................    53
Prepared statement of Mr. Jason Delisle..........................    60
Prepared statement of Mr. Douglas Elliott........................    71
Prepared statement of Dr. Paul Van de Water......................    82
Questions for the Record submitted by Senator Mike Lee and 
  responses from Dr. Douglas Holtz-Eakin and Mr. Douglas Elliott.    84
Question for the Record submitted by Senator Bill Cassidy and 
  response from Dr. Douglas Holtz-Eakin..........................    90
Questions for the Record submitted by Congresswoman Alma Adams 
  and responses from Dr. Paul Van de Water and Mr. Douglas 
  Elliott........................................................    92
Letter dated June 17, 2015, from Deborah Lucas to Chairman Coats, 
  Ranking Member Maloney, and Members of the JEC.................    94

 
            THE ECONOMIC EXPOSURE OF FEDERAL CREDIT PROGRAMS

                              ----------                              


                        WEDNESDAY, JUNE 17, 2015

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m. in Room 
216 of the Hart Senate Office Building, the Honorable Dan 
Coats, Chairman, and Mike Lee, presiding.
    Representatives present: Schweikert, Grothman, Carolyn B. 
Maloney of New York, Delaney, Adams, and Beyer.
    Senators present: Coats, Lee, Cotton, Sasse, Klobuchar, and 
Heinrich.
    Staff present: Connie Foster, Harry Gural, Colleen Healy, 
David Logan, Viraj Mirani, Barry Nolan, Leslie Phillips, Sue 
Sweet, Jim Whitney, and Phoebe Wong.

   OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S. 
                      SENATOR FROM INDIANA

    Chairman Coats. The Committee will come to order.
    The Committee today will examine the economic exposure of 
Federal credit programs. I would like to thank our witnesses 
for being here. We will be introducing them shortly.
    As I begin, I want to thank Senator Mike Lee for agreeing 
to spearhead this program. He helped with us in terms of 
putting all this together and inviting the witnesses. He will 
be here very shortly.
    I have a conflict and have to be on the Senate floor. I 
apologize to the witnesses and my Committee members here that I 
have to do this, but I will put it in the capable hands of 
Senator Lee to conduct this hearing.
    He has played a leading role in raising attention to this 
issue. As I have indicated, he and his staff have helped us in 
putting together the hearing, including identifying some of our 
witnesses.
    Today we will examine why accounting for our federal assets 
matters, and why inaccurate monitoring can bring economic harm 
to borrowers who pay higher interest rates to cover the 
defaults of others, private lenders who are frozen out of the 
markets they seek to serve, and taxpayers who may be exposed to 
unqualified losses.
    During my prior service in the Senate, I was one of the nay 
votes for the Omnibus Budget Reconciliation Act of 1990. 
Twenty-five years later, I never imagined that I would be 
chairing a hearing to debate the impact of accounting rules 
passed back then.
    This situation reminds me of an old Yogi Berra quote, ``The 
future ain't what it used to be.'' The 1990 Reconciliation law 
included the Federal Credit Reform Act, accounting rules 
crafted in reaction to the rocky credit history of the 1980s.
    The Resolution Trust Corporation held the assets of failed 
savings and loans and put the Federal Government in the loan-
workout business. Sadly, fraudulent student loans made during 
the decade, that decade, led to a 20 percent student-loan 
default rate and a loss equal to almost 10 percent of 
outstanding loans.
    Cash accounting for all these asset changes within a budget 
year presented a volatile picture of the Federal budget that 
properly represented spending trends. Since then, the Federal 
Government has followed the rules of FCRA, recording an annual 
present-value adjusted, quote, ``subsidy cost'' to account for 
losses it may incur in the future charged against loans it has 
made directly, as well as guarantees it provided for loans made 
by others.
    It took 10 years to refine the complicated net present 
value calculations used for FCRA, but by 2002 government 
accountants calculated that the federal portfolio of $1.3 to 
$1.4 trillion in loans and guarantees generated annual subsidy 
costs in the range of $5 to $12 billion.
    This brings us to the financial crisis of 2008 which 
ballooned the government's loan assets. FCRA's accounting rules 
converted loan subsidy costs into deficit reducers. Since 2008, 
government accountants have booked nearly $200 billion in 
annual subsidy gains while the amount of federal loans and 
guarantees has more than doubled.
    As a result, it is clear that the more credit market 
exposure the government takes on, the more that expectations of 
future revenue rise under the current accounting rules without 
equal accounting for higher risk.
    At the end of September 2014, loans made or fully 
guaranteed by the Federal Government totaled over $2.9 
trillion. This includes $1.1 trillion in student loans. The 
Federal Reserve reported that nonmortgage consumer debt totaled 
$3.3 trillion as of September 30, 2014, giving the Federal 
Government a one-third share of the U.S. consumer loan market.
    Add that to the 70 percent of the mortgage market that the 
Federal Government holds through direct loan guarantees and 
Fannie Mae and Freddie Mac, and the Federal Government is the 
largest consumer lender in the country.
    A lot has changed in those 25 years. So today we must ask 
ourselves: Do accounting rules passed 25 years ago reflect the 
complexity of today's financial world?
    I would now like to recognize Ranking Member Maloney for 
her opening statement, and just before I do I want to hand over 
this gavel. When I first got a gavel in my hand I thought, wow, 
I can get something done here.
    So, Mike, be careful. Don't take us past the jurisdiction 
of the Committee. It would be tempting, but I am putting this 
in very capable hands. And thank you for heading up this 
hearing. But first, let us hear from Senator--I mean, 
Congresswoman Maloney.
    And then after you give your opening statement I would ask 
you to introduce the witnesses and take care of the hearing.
    Senator Lee [presiding]. Right.
    [The prepared statement of Chairman Coats appears in the 
Submissions for the Record on page 28.]

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Representative Maloney. Thank you so much, Chairman Coats, 
for holding this hearing. And I thank all of our panelists for 
being here today.
    In this morning's hearing we will compare two systems for 
budgeting federal credit programs. The first, the Federal 
Credit Reform Act of 1990--so-called FCRA--was signed into law 
by George H. W. Bush in 1990. It has proven a reliable tool for 
budgeting federal credit programs.
    The second, so-called ``Fair Value Accounting,'' is a 
program supported by some of my colleagues in the Republican 
Party that will make federal credit programs seem more 
expensive. If implemented, this system will necessitate cutting 
loan programs, or raising interest rates. In my mind, there is 
nothing fair about ``Fair Value Accounting.''
    At its root, today's hearing is about two vastly different 
philosophical approaches to government. My Republican friends 
believe that the Federal Government, in this case federal 
lending programs, should operate just like the private sector. 
But the Federal Government is not the private sector. The 
principal motivation of the private sector is to maximize 
profit.
    The principal role of government is to provide services 
that the private sector cannot or will not provide. These 
differences are especially clear in federal lending programs.
    Private institutions make loans that they think will be the 
most profitable. But the United States Government sees things 
differently.
    For example, it lends to a group of individuals with little 
or no income and no credit history. They are known as ``college 
students.'' And there are more than 20 million of them in the 
United States today.
    The vast majority of student loans are issued or guaranteed 
by the Federal Government. Why does the government take on this 
risk? Because it helps millions of Americans go to college who 
might otherwise not be able to afford to go.
    It also benefits the rest of us by creating a more educated 
workforce. A better workforce will make our country more 
competitive, and will make our economy stronger and our country 
stronger. This is a social good not recognized by private 
lenders.
    I want to turn to the specific question of how we measure 
the cost of Federal Government loan programs. How these 
programs are accounted for and how their budget impact is 
assessed will affect the broader deficit outlook in choices we 
make as policymakers.
    The current procedure under the Federal Credit Reform Act 
appropriately calculates the lifetime costs of federal credit 
programs, reflecting both the risk of default and the 
government's cost of borrowing.
    FCRA has been very accurate. OMB found that in the more 
than 20 years that FCRA has been in place, the initial cost 
estimates of all credit programs differed from their actual 
costs by less than one percent of their face value. As they 
say: If it ain't broke, don't fix it.
    But today we are apparently trying to fix a system that 
already works very well. It is part of a broader ideological 
initiative. In tax policy Republicans are trying to change the 
rules of the game by instituting so-called ``dynamic scoring.'' 
This would make tax cuts seem less expensive than they really 
are.
    In federal credit policy, Republicans are trying to change 
the rules of the game using an accounting system that will make 
programs like student loans look more expensive. The result of 
this so-called fair value accounting will be cuts in federal 
loan programs. For example, less money available for students 
at higher interest rates.
    Under fair value accounting, the cost of federal credit 
programs, which are funded by the purchase of low-interest 
Treasury Securities, would be evaluated as if they were forced 
to borrow with an additional risk premium demanded by the 
private sector.
    As the Center on Budget and Policy Priorities put it, fair 
value budgeting requires that the budget, quote, ``reflect 
amounts that the Treasury would never actually pay anyone,'' 
end quote. It will make federal lending programs appear more 
costly than they really are.
    Millions of Americans have something to lose if proponents 
of this accounting system have their way. I regret that we 
don't have any of their representatives on the panel today. 
However, Chairman Coats and I have received letters from a 
number of organizations that strongly oppose the fair value 
accounting system. I have a stack of them here (indicating), 
and I have a letter with me right now from the National 
Education Association which states, and I quote:
    ``NEA opposes the use of fair value accounting in federal 
credit programs, especially student loan programs, because it 
would artificially raise their costs and make them appear to be 
more expensive to the Federal Government than they really 
are.'' End quote.
    I ask unanimous consent to place this letter into the 
record.
    Senator Lee. Without objection.
    [The letter appears in the Submissions for the Record on 
page 29.]
    A letter from the National Association of Home Builders 
states, and I quote, ``Fair value accounting would artificially 
raise the rates on home loans.'' And I would also like to enter 
that letter into the record.
    [The letter appears in the Submissions for the Record on 
page 31.]
    Other organizations also oppose using fair value accounting 
for budgeting purposes: The National Association of Realtors, 
the National Association of Independent Colleges and 
Universities, The Retired Enlisted Association, The National 
Rural Electric Cooperative Association, The Student Aid 
Alliance, The National Multifamily Housing Council, and many, 
many others, and I would like to place these letters that I 
just mentioned into the record.
    [The letters appear in the Submissions for the Record on 
page 34.]
    Representative Maloney. In conclusion, I ask that we listen 
to both sides of the debate today, but that ultimately we not 
let ideology trump reality. Fair value budgeting would distort 
the budget process, undercut federal credit programs, and 
ultimately deprive millions of Americans of the financial 
support that they need to get an education, buy a home, or 
start or operate a small business.
    I look forward to our discussion today, and I thank each of 
the witnesses for appearing before the Committee. And I yield 
back. Thank you.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 51.]

  OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM UTAH

    Senator Lee. Thank you, Representative Maloney, and the 
documents you have submitted will be submitted into the record, 
without objection.
    I want to thank Chairman Coats for calling this hearing, 
and also for his insightful remarks, and for the remarks that 
we have heard so far from Representative Maloney.
    From the early days of our Republic, we have had an ongoing 
debate about the role to be played by the Federal Government 
within the credit market. The provision of credit to the states 
and its assumption by the newly formed Federal Government was a 
topic of great debate and discussion during the drafting of the 
Constitution in 1787 and during the early Congresses formed 
pursuant to that document.
    Provision of credit by the Federal Government has a 
somewhat more recent history. As Mr. Elliott, who is one of our 
witnesses today, noted in his book ``Uncle Sam In Pinstripes,'' 
the provision of federal credit began in the way we are 
discussing today in the early part of the 20th Century. It 
began with farm programs under President Theodore Roosevelt.
    These programs have ballooned over the past century. Today 
we frequently hear about $18 trillion in total outstanding 
public debt. It is far less common to hear about the $3 
trillion in Federal Government loan exposure that Journalist 
Michael Grunwald identified earlier this year.
    This federal credit system has grown over the years at 
times responding to perceived political needs, and at other 
times responding to political pressure from special interests, 
natural mission creep, and bureaucratic ambitions.
    This has left us with a system that no one would design. We 
have a housing finance system that leans almost entirely on 
federal backstops in the FHA and VA.
    We have a student loan program administered almost entirely 
by the Federal Government, a program that notably took 
considerable writedowns over recent weeks.
    We have the Export-Import Bank that was founded before 
exporters could easily fly across the ocean to visit customers, 
and now exists largely to facilitate deals between large 
corporations and large banks, while leaving the taxpayer on the 
hook.
    From TARP to farm programs, the Federal Credit System is 
hard to think of as a system at all, except for one feature. If 
things go wrong, the Federal Government is on the hook. If 
things go wrong, the taxpayer ends up with the bill.
    It is critically important that Congress debate the wisdom 
of such a system's existence at all, including the 
Constitutional and prudential justifications for the provision 
of federal credit.
    Today we look to start that debate by discussing something 
much simpler than this larger discussion. Namely, we are 
looking to find valid means to analyze costs, compare 
management structures, and establish a general rubric to make 
apples-to-apples comparisons.
    We hope to be able to both compare different credit 
programs against each other, and compare credit programs 
relative to spending, tax, or regulatory programs designed to 
accomplish similar goals.
    Getting on the same page on these questions will be a key 
step in the process of reforming these programs.
    So I thank the Chairman again for this opportunity and I 
look forward to the testimony that we are going to hear from 
each of our witnesses.
    And with that, I would like to introduce our witnesses 
before we hear from them. We will start on this end of the 
table and then move over.
    Dr. Douglas Holtz-Eakin is the President of the American 
Action Forum, and most recently was a commissioner on the 
Congressionally chartered Financial Crisis Inquiry Commission. 
During 2001 to 2002, he was the Chief Economist of the 
President's Council of Economic Advisers. From 2003 to 2005, 
Dr. Holtz-Eakin was the sixth director of the Congressional 
Budget Office. From 2007 to 2008, he was Director of Domestic 
and Economic Policy for the John McCain Presidential Campaign. 
And following the 2008 election, Dr. Holtz-Eakin was the 
President of DHE Consulting. Dr. Holtz-Eakin received his B.A. 
from Denison University, and his Ph.D. from Princeton 
University.
    Jason Delisle is the Director of the Federal Education 
Budget Project, which is part of the Educational Policy Program 
at New America. Mr. Delisle is a leading expert on the federal 
student loan program, and federal financing for higher 
education. Before joining New America in 2007, Mr. Delisle was 
a senior analyst on the Republican staff of the United States 
Senate Budget Committee. Prior to that position, he served as a 
legislative aide in the office of Representative Thomas Petri. 
Mr. Delisle holds a Masters Degree in Public Policy from George 
Washington University, and a Bachelor's Degree from Lawrence 
University in Appleton, Wisconsin.
    Douglas Elliott, a Fellow in Economic Studies at the 
Brookings Institution, is a member of the Initiative on 
Business and Public Policy. A financial institutions investment 
banker for two decades, principally at J.P.Morgan, he was the 
founder and principal researcher for the Center on Federal 
Financial Institutions, a think tank devoted to the analysis of 
federal lending and insurance activities. He recently wrote the 
book, ``Uncle Sam In Pinstripes,'' evaluating the U.S. federal 
credit programs, the only comprehensive review of the Federal 
Government's credit activities to be written in the last 
quarter century. Mr. Elliott graduated from Harvard College 
magna cum laude with an A.B. in Sociology in 1981, and in 1984 
he graduated from Duke University with an M.A. in Computer 
Science.
    Last but not least, Paul Van de Water is a Senior Fellow at 
the Center on Budget and Policy Priorities where he specializes 
in Medicare, Social Security, and health coverage issues. He is 
also Director of the Center's Policy Futures Initiative. 
Previously he was Vice President for Health Policy at the 
National Academy of Social Insurance. Van de Water worked for 
over 18 years at the Congressional Budget Office. From 1994 to 
1999, he was Assistant Director for Budget Analysis.
    So with that, why don't we hear from the witnesses. Let's 
hear from all of you. If you can try to keep your remarks 
within about five minutes, then we will proceed to questions 
from there. And we will start with you, Dr. Holtz-Eakin.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, Ph.D., PRESIDENT, AMERICAN 
                  ACTION FORUM, WASHINGTON, DC

    Dr. Holtz-Eakin. Thank you, Senator Lee, Ranking Member 
Maloney, and Members of the Committee, for the chance to be 
here today.
    As has been emphasized in your remarks and Chairman Coats' 
remarks before that, there is an enormous commitment of 
taxpayer resources to federal loans and loan guarantees. If you 
look at the tables put out most recently by the Office of 
Management and Budget, there are $3.3 trillion since 2014 in 
such loans and loan guarantees outstanding. And in light of the 
magnitude of this commitment of resources, I applaud the 
Committee for looking into this. I think it is an extremely 
important topic to understand.
    I will be brief. I will just make three basic points.
    Point number one is that the 1990 Federal Credit Reform Act 
was actually an enormous step forward in that it leveled the 
playing field between direct federal lending and the guarantee 
of private loans by the Federal Government. Both have the same 
economic function; they provide the same credit flow to the 
ultimate consumer; and they are both backed by the taxpayer and 
are a commitment of the taxpayers' resources.
    However, having said that, the Federal Credit Reform Act 
does have a glaring hole. If you look in the OMB tables, those 
$3.3 trillion in loans and loan guarantees are assumed to make 
a profit, a profit, of $22.3 billion, and not be perceived as a 
cost to the taxpayer.
    That is counter to anyone's intuition and reveals the flaw 
with the Federal Credit Reform Act, which is it omits an 
important source of risk--the market risks that are associated 
with credit activities.
    That omission of market risk causes FCRA to underestimate 
the true cost of credit evaluated in that fashion. And it is 
important when Congress is making decisions to not only have a 
firm handle on the benefits of credit programs, but also their 
actual cost to the taxpayers with all kinds of risks involved.
    The big difference between FCRA and fair value accounting 
is fair value accounting incorporates this market risk. It 
recognizes that as the economy fluctuates there is a tendency 
for loan failures to bunch during downturns, and that risk 
should be involved in the calculation of potential losses and 
any credit activity.
    It also recognizes that the taxpayer has to come up with 
the money to cover those losses at a time when money is 
especially valuable. During downturns, Americans are less 
affluent and they do not want to have to cover these losses. So 
fair value accounting gets that into the mix.
    The second reason it is pretty obvious that something needs 
to be done is it should not be the case that if you take a loan 
in the private sector and simply drag it across the line 
between the private sector and government, it should somehow 
become more valuable or less risky instantaneously because of 
the label on it. And that is exactly what happens under FCRA.
    And indeed we have seen examples of this in recent 
legislation where we have used a government takeover of a 
private loan portfolio to finance government activities. That 
is a pure budget gimmick and one of the main reasons I think it 
is important to examine fair value accounting.
    And the third point is that fair value accounting is not 
some untested theoretical proposition. When I was the Director 
of the Congressional Budget Office, we undertook numerous 
studies of what important federal backstops would look like 
under fair value accounting. We looked at the Pension Guaranty 
Corporation. We looked at the Student Loan Program. We looked 
at the then-Chrysler bailout from the 1980s. We looked at the 
guarantees for Air West during 2001-2002. We looked at Fannie 
Mae and Freddie Mac. And in each case, you would see a clear 
pattern: things that looked like they were profitable with the 
government became a cost to the taxpayer; things that were 
costly to the taxpayer were underestimated and needed to be 
revised upward.
    Since then, we have actually seen fair value accounting, 
both in resources given to the Housing GSEs, Fannie Mae and 
Freddie Mac, and for accounting for the TARP program and the 
budgeting of that intervention.
    So this is not something that is untested. This is not 
something that could not be done, and doing it would give a 
fair presentation of the commitment of taxpayer backstop to the 
credit programs, and I would encourage the Congress to move 
forward with it.
    Thank you.
    [The prepared statement of Dr. Douglas Holtz-Eakin appears 
in the Submissions for the Record on page 53.]
    Senator Lee. Mr. Delisle.

  STATEMENT OF MR. JASON DELISLE, DIRECTOR, FEDERAL EDUCATION 
          BUDGET PROJECT, NEW AMERICA, WASHINGTON, DC

    Mr. Delisle. Thank you, Senator Lee, Ranking Member 
Maloney, and Members of the Committee. I am glad to have the 
opportunity to testify about the cost of federal credit 
programs and the Federal Student Loan Program in particular.
    The Federal Government's direct loan program plays a vital 
role in our postsecondary education system and our national 
economy. It guarantees access to credit at favorable terms for 
millions of Americans who pursue credentials that range from 
short-term certificates to graduate professional degrees.
    And despite the recent backlash against student debt, a 
government loan is a perfectly logical tool to support 
postsecondary education. Loans allow students to move some of 
the future earnings that they would gain from an education to 
the present, and to finance the education itself.
    Moreover, a robust private market for student lending is 
unlikely to develop because of information asymmetries and poor 
economies of scale. And a private market would likely make 
credit most readily available to those who need it least. It 
would also restrict credit availability in times of economic 
stress, the point at which demand for higher education surges.
    So while the case for a government student loan program is 
strong, so too is the case for knowing what it costs. One point 
helps make that clear.
    The student loan program is quickly set to become the 
largest government loan program. With $1.2 trillion in debt 
outstanding, it is on the verge of eclipsing mortgage 
guarantees made through the Federal Housing Administration.
    Yet despite the need for reliable information about what 
this program costs, Congress has actually prevented the 
nonpartisan Congressional Budget Office from doing just that. 
As a result, we have the highly unusual situation of the 
Congress asking CBO to provide it with the best estimate of 
what the budget agency believes the program costs, while 
dictating what information the CBO must use to construct its 
estimate.
    In the early 1990s, Congress made important changes to the 
way federal loan programs are treated in the budget with the 
enactment of the Federal Credit Reform Act, or FCRA. That law 
put federal loan programs on an accrual basis and was a big 
improvement over measuring loans on a cash-in/cash-out basis.
    But what lawmakers also included was a provision in the law 
that systematically understates the cost of government loan 
programs. And I am using the words of the Congressional Budget 
Office there.
    They mandated that budget analysts, including the CBO, 
discount risky cash flows associated with a loan at a risk-free 
rate--the interest rates on U.S. Treasury securities. Thus, the 
average expected cash flows for government loans are treated as 
if they were financially indistinguishable from those of the 
U.S. Treasury with the same expected performance.
    The CBO has argued that that approach does not provide a 
comprehensive measure of what federal credit programs actually 
cost the government. Indeed, FCRA suggests that the government 
can earn a profit on student loans even though it provides them 
at terms much more generous than taxpayers would offer 
voluntarily.
    FCRA's risk-free discounting can also make it appear, 
albeit erroneously, that when the government purchases loans at 
market prices it immediately records a financial gain. Worse 
still, the riskier the loan that the government buys, the 
larger the immediate financial gain.
    The Center on Budget and Policy Priorities warned in 2005 
that those dubious results created a, quote, ``supposed free 
lunch,'' unquote. And in response argued fervently that 
expected returns on risky assets must be risk-adjusted, citing 
the CBO and many economists.
    But as I am sure you will hear today, the CBBP now says 
that view was, quote, ``mistaken.'' The economists at the CBBP 
cited in 2005, including the CBO, have not, however, changed 
their position.
    A better accounting approach, one endorsed by the 
Congressional Budget Office and many financial economists, 
would discount loan cash flows using a market-based rate, one 
that is higher than a U.S. Treasury rate. That approach 
incorporates a cost for bearing market risk, also called ``fair 
value accounting.''
    So at first glance, the support for fair value accounting 
would suggest that Congress should amend FCRA and require that 
budget estimates for loan programs use a market-based discount 
rate. But I would recommend a different approach.
    Requiring that cost estimates use a specific type of 
discount rate, a U.S. Treasury rate, or a market-based rate for 
that matter, is a highly unusual intrusion on the discretion 
Congress affords the CBO.
    When the CBO develops estimates for other federal programs 
like the Pell Grant Program, Congress does not require it to 
assume a certain rate of inflation or student enrollment 
growth; the CBO uses whatever it believes is most appropriate.
    In that regard, Congress should simply amend the language 
of FCRA to give budget agencies the freedom to use the discount 
rate they deem will result in the best estimate. This will 
surely result in fair value accounting because the CBO already 
supports that. And that is a great result because it will be an 
accounting decision that is free of Congressional and partisan 
interference.
    That concludes my testimony today. I look forward to 
questions that you may have.
    [The prepared statement of Mr. Jason Delisle appears in the 
Submissions for the Record on page 60.]
    Senator Lee. Thank you, sir. Mr. Elliott.

      STATEMENT OF MR. DOUGLAS ELLIOTT, FELLOW, BROOKINGS 
                  INSTITUTION, WASHINGTON, DC

    Mr. Elliott. Thank you, Senator. And thank you all for the 
opportunity to testify today on an area of great interest to 
me.
    Senator Lee was kind enough to describe my background. I 
founded the Center on Federal Financial Institutions and worked 
at it as a volunteer for three years because I do believe that 
this is a very important and underlooked area, and he was kind 
enough to mention my book as well.
    Given the political nature of so much of the discussion, 
let me note that I am as close to a political neutral as you 
will find on this topic. I do not belong to a political party. 
I have served in no administration. And I am a moderate on the 
political spectrum. So you can factor that in as you listen to 
me.
    In my book I made a number of recommendations for improving 
the effectiveness and efficiency of the federal credit program. 
I would like to repeat a few of them here.
    Specifically, we should target borrowers more carefully, 
take more account of the relative risks of different loans, use 
the same budget rules for all federal credit programs, use 
risk-based discount rates for federal budget purposes, 
formalize the process of initiating new federal credit 
programs, create a federal bank to administer all of these 
programs, focus more on optimizing the allocation of money 
between these various programs, spread best practices across 
the programs more effectively, and improve the compensation and 
training of federal financial workers.
    Now given your interests and the time constraints, I will 
focus on risk-based discount rates.
    Accounting systems such as the federal budget are tools 
that should be designed to meet specific needs and should 
differ depending on those needs. There is not a ``right'' moral 
answer. These are tools.
    Our current budget approach for federal credit programs 
ignores the variability of potential results. Given how 
strongly the budget numbers drive decision making, we are 
effectively acting as if Congress and the taxpayers do not care 
about risk--which I do not believe to be the case. Instead, I 
believe subsidy costs in the federal budget should reflect this 
uncertainty for several reasons, which mostly come down to how 
they are likely to change the decision making.
    First, it is important that federal credit programs be 
structured to minimize risks where possible, while still 
achieving the overall objectives. This is less likely to happen 
when the budget numbers that drive them ignore risk.
    Second, the benefit to borrowers of government loans is 
higher for risky loans, since these would be priced higher by 
the private lenders but are not usually priced higher by the 
government. Ignoring that risk for federal budgeting has 
distorting effects on the choices that Members of Congress 
make. In particular, there will be a tendency to direct scarce 
federal dollars to sectors where there is more uncertainty in 
the outcomes since those borrowers will find the federal loans 
more valuable. They will lobby harder for them, and they are 
more likely to apply for and to accept such loans, choosing 
them over private alternatives.
    Third, risk-based pricing, one of my other recommendations, 
is considerably more likely to be implemented if the budget 
appropriately reflects risk as a cost. The situation today in 
which a loan with a wide range of potential outcomes is treated 
as costing the same as a relatively certain loan discourages 
political decisions that take account of such risk.
    Now there are reasonable counterarguments to moving to 
risk-based discount rates, although I do not personally find 
them compelling. The principal one is that the U.S. Government 
can spread any unexpected losses over a very wide tax base and 
many years of time, and therefore does not need to worry about 
the variability of outcomes. However, the way in which federal 
credit losses are ultimately offset is by increasing taxes or 
decreasing federal expenditures. And it seems very unlikely--
sorry, it seems very likely that taxpayers would prefer less 
risk of a big tax increase to more risk of one, even if the 
latter were offset by a potential on the other side for 
unusually good performance and future tax reductions.
    This is especially likely since, as Douglas referred to, 
credit losses are concentrated in those years when the economy 
is particularly bad and taxpayers are unlikely to feel capable 
of comfortably bearing the resulting tax increases.
    There are also various technical arguments about 
maintaining the consistency of federal credit programs with 
other programs, and of dealing with swings in estimated costs. 
These are reasonable concerns, but they are outweighed by the 
fact that Congress uses the initial subsidy estimates as by far 
the most important figure on which to make decisions. As long 
as these are the critical numbers, I believe it is important to 
incorporate risk appropriately into them in order to improve 
the quality of decisions. Thank you very much for your time and 
consideration.
    [The prepared statement of Mr. Douglas Elliott appears in 
the Submissions for the Record on page 71.]
    Senator Lee. Thank you, Mr. Elliott. Mr. Van de Water.

STATEMENT OF PAUL VAN de WATER, SENIOR FELLOW, CENTER ON BUDGET 
             AND POLICY PRIORITIES, WASHINGTON, DC

    Dr. Van de Water. Senator Lee, Ranking Member Maloney, 
Members of the Committee, thank you for the opportunity to 
appear here today. The current method of accounting for federal 
credit programs, as you have heard, fully records on a present-
value basis all of the cash flows into and out of the Treasury. 
And that fully reflects the risk of default.
    In contrast, fair value accounting would add an extra 
amount to the budgetary cost based on the fact that loan assets 
are less valuable to the private sector than to the government 
for several reasons: Businesses must make a profit. They cannot 
put themselves at the head of the line when collecting a debt. 
They borrow at higher interest rates than the government. And 
private-sector investors are risk-averse. That is, they dislike 
losses, in this case higher than expected loan defaults, more 
than they like equally likely gains, lower defaults. But none 
of those factors that affect private-sector lenders represents 
an actual cost that the government incurs when it makes loans. 
Fair value accounting is misguided for four reasons.
    First of all, the budget should reflect only the Federal 
Government's actual income and outgo, that is, funds that the 
Treasury actually receives or disburses. Including in the 
budget a cost for risk that the government does not actually 
pay would overstate spending, deficits, and debt, making the 
federal budget a less accurate depiction of the Nation's fiscal 
position.
    Second, fair value accounting would treat different federal 
programs inconsistently because it would not impose a risk 
version penalty on noncredit programs, many of which have costs 
that are at least as uncertain and variable as those of credit 
programs. Regardless of one's position on whether a particular 
credit program is worthwhile or not, the budget should put 
credit programs and other programs on a level playing field. 
Fair value accounting would tilt the playing field against 
credit programs, thereby distorting the process of setting 
priorities.
    Third, even if one thought that the Federal Government 
should be risk averse on behalf of its citizens, as advocates 
contend, fair value accounting presents an incomplete and 
misleading picture of federal credit programs. Federal loan 
programs do not necessarily increase financial risks for U.S. 
citizens overall. If the cost of a loan program turns out to be 
higher than originally estimated, taxpayers will indeed 
eventually have to cover the higher costs. But students, 
farmers, homeowners, or other borrowers will have received more 
help. Fair value accounting considers only the first half of 
this equation.
    Fourth and finally, cost estimates by themselves are not 
designed to assess whether a federal program is worthwhile, and 
they should not be expected to do so. Deciding whether a 
federal program or project is worth undertaking or expanding 
entails evaluating many factors in addition to its cost to the 
government, and risk is indeed one of those.
    Doug Elliott suggested that leaving risk out of a cost 
estimate suggests that the government does not care about risk. 
I would have to disagree with my friend Doug on that topic. 
There are a lot of things that get left out of cost estimates 
that are extremely important. As an example, building a bridge 
in a lightly populated area is likely to be less valuable and 
may not be worth doing compared to resurfacing a heavily 
traveled highway in the Northeast corridor. A bill's cost 
estimate is never going to reflect all of these different 
factors, and trying to do so is a vain effort.
    My conclusion is the same as that of former CBO Director 
Robert Reischauer who says that fair value accounting, quote, 
``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.'' Thank you.
    [The prepared statement of Dr. Paul Van De Water appears in 
the Submissions for the Record on page 82.]
    Senator Lee. Thank you very much. Thanks to each of you for 
your testimony.
    Well it seems to me that if we are using accounting methods 
that do not accurately reflect reality, then the fundamental 
problem here is that we are lying to ourselves. We are fooling 
ourselves. And we are fooling ourselves with regard to a very 
large sum of money.
    Dr. Holtz-Eakin, are we making these decisions under flawed 
accounting rules without a good idea of the relevant tradeoffs? 
That is, if we are analyzing these incorrectly, do we really 
have the ability accurately to ascertain whether some other 
program, or no action at all, might be preferable?
    Dr. Holtz-Eakin. I do not believe so. I think that, you 
know, fair value accounting would affect a lot of different 
aspects of the operation of the government. It would affect the 
analysis of new programs. It would affect the re-estimates that 
occur each year. It would affect the balance sheet 
presentation. But the most important thing it would affect 
would be the decision making by the Congress about the relative 
costs of programs.
    Now the Congress has the right to determine the value of 
programs. That is what it does. But it should be presented with 
an accurate measure of the costs so that they can make good 
decisions, and they are not right now.
    Senator Lee. And if we are not doing that, then we are 
fooling ourselves. We are not getting accurate information, or 
we are presented information saying this is worth it, this is 
making money, when in fact it is not; we are not making logical 
decisions.
    Dr. Holtz-Eakin. I think the most important point that Dr. 
Delisle made was that the Congress has precluded the CBO or 
anyone else from giving a fair representation of the expected 
cost of the programs. That is not in your interest.
    Senator Lee. And, Mr. Delisle, we are not really talking 
here about changing programs; we are talking about analyzing 
them accurately? Is that correct?
    Mr. Delisle. Right. So we are talking about the cost, and 
usually in these debates we hear a lot about the benefits of 
the programs. Fair value is completely agnostic to the benefits 
of the program. You can have a government program that costs 
money and provides benefits to people. I think that fact is 
actually quite intuitive.
    It is credit reform that flips that upside down and 
suggests that you can provide benefits to people and also earn 
a net return, which does not really make much sense.
    Senator Lee. And I would ask both of you, what are the 
risks to the taxpayer when we pretend that programs raise money 
for the government while CBO finds that they lose money under 
fair value? What kind of risk does that present?
    Dr. Holtz-Eakin. There are hypothetical answers to that, 
but I will give you a real one. We did an estimate of the 
taxpayer cost of the implicit subsidy in guarantee to Fannie 
Mae and Freddie Mac. We did it back in 2003 or 2004, when I was 
CBO Director. That number was about $20 billion a year, or $200 
billion.
    It was painfully close to what the taxpayer ultimately had 
to shell out in the crisis for the housing GSEs. That is the 
risk you run. You will not budget for real costs that will 
happen in very bad moments.
    Mr. Delisle. Well I would--the sort of, the flaws in the 
Federal Credit Reform Act actually make the entire world of 
finance appear as a gigantic arbitrage opportunity for the 
Federal Government. To show you how distorting that is, you 
have heard that Greece has a bit of a debt problem. And the 
market is charging them quite a high interest rate on their 
bonds. Under FCRA, if the Federal Government purchased Greece's 
debt, it would book an immediate profit.
    I cannot imagine many members of the Committee suggesting 
that that looks right to them.
    Senator Lee. Maybe we should look into that, though?
    [Laughter.]
    Mr. Elliott, on the net, examining all federal programs in 
the aggregate, and all costs and benefits of these programs, 
does the academic literature indicate that during normal 
economic times that federal credit programs are net negative, 
or a net positive, for the economy?
    Mr. Elliott. We do not know, is the short answer. One 
reason we do not know is there are many judgment calls that 
have to be made.
    I think there are certain programs--student loan programs, 
for example--where it is very clear that there is a market 
imperfection that really cannot be solved other than by having 
a very significant federal role.
    In programs like that there is no question in my mind that, 
at least properly run, provide a significant economic benefit. 
Many of the other programs, it's harder to say. In many ways 
they are more redistributional than anything else. It is 
choosing which segments of the population to help, and Congress 
many have valid reasons for helping them, or they may not.
    Senator Lee. Thank you. Okay, I see my time has expired. 
Ranking Member Maloney.
    Representative Maloney. Thank you.
    Mr. Van de Water, changing to fair value budgeting would 
have far-reaching consequences for students, and Veterans, and 
home buyers, and small businesses who benefit from our various 
federal credit programs. Fair value budgeting would not 
actually make federal credit programs more costly, but it would 
certainly make them all appear more costly than they really 
are.
    It would do this by assuming banks and governments are 
somehow alike, and assigning to government credit programs the 
same costs of lending as those faced in the private sector.
    So would increased phantom costs resulting from fair value 
accounting be passed along to borrowers in the form of higher 
interest rates and fees?
    Dr. Van de Water. We can only speculate as to what the 
result would be, but certainly by increasing the cost of credit 
programs relative to those of noncredit programs, it would 
change the incentives, exactly as Doug Elliott has just said, 
in a way that would make it highly likely that the Congress 
would either reduce the scope of the lending programs, or 
change the terms--that is, increase the interest rates, charge 
higher origination fees, whatever, in ways to make the programs 
less generous.
    So I think it is clear that changing the accounting method 
would be likely to have real impacts on borrowers.
    Representative Maloney. As the cost of these federal credit 
programs appear to increase, would the federal deficit also 
increase?
    Dr. Van de Water. That is one of the complications that 
this introduces. The problem, as I see it, with fair value 
accounting is that it introduces a cost in the budget which is 
not actually a cash-dollar cost that the government ever 
incurs.
    The good thing about our current accounting system is that 
we actually have a benchmark at the end of the day for figuring 
out whether things actually worked out the way we estimated. 
Namely, we can observe the cash flows.
    But if one starts adding a cost--in this case a cost for 
risk--which is not a cash cost, we lose that ability to track 
the budget to what actually happens.
    And the proposals for fair value accounting, depending on 
the proposal, make various adjustments to make sure the books 
balance in the end even when you have added this imaginary 
cost.
    Representative Maloney. And would higher apparent costs for 
federal credit programs disadvantage them relative to other 
federal programs? And if so, how?
    Dr. Van de Water. That is exactly right. As the other 
witnesses have indicated, the essence of fair value accounting 
is to add to the estimated cost of federal credit programs an 
additional item, a risk premium, a risk penalty, to reflect the 
fact that there is uncertainty in what the disbursements of the 
credit programs will actually be.
    But the same thing is true for many, many other federal 
spending programs as well. In advance, we do not know exactly 
what they are going to cost, and we do not know precisely in 
what years they will be incurred.
    So by adding a risk penalty for credit programs but not for 
other federal programs, we are thereby putting the credit 
programs at a disadvantage.
    Representative Maloney. Thank you.
    Mr. Delisle, there are more than 20 million college 
students now in the United States, and many of them rely on 
student loans provided by or guaranteed by the Federal 
Government.
    Fair value accounting would likely mean that student loan 
programs will shrink and/or that interest rates will go up. How 
would you defend fair value accounting to a large meeting of 
college students?
    Mr. Delisle. Well, I would say, like I said at the 
beginning of my testimony, there is a strong rationale for 
having a federal student loan program. And it is important to 
provide subsidized credit to them. I am a hundred percent for 
that.
    But what the program costs should be agnostic to what we 
think the benefits are. Right? Cost/benefit analysis is two 
parts. You have got to get the costs right, and you have got to 
get the benefits right. They are two different things.
    Representative Maloney. And Mr. Elliott, we have received--
I went through a whole stack of letters from organizations, 
stakeholders in our country that were basically opposing fair 
value accounting. To name a few: the National Education 
Association, the National Association of Home Builders. The 
Retired Enlisted Association, The National Rural Electric 
Cooperative Association, The Student Aid Alliance. Many other 
very active associations, including the National Association of 
Realtors, have gone on record against fair value.
    And if you were advising a Member of Congress on this 
issue, how would you recommend that he or she explain the issue 
to these organizations?
    Mr. Elliott. I think I would argue along the same lines 
that Jason just did, which is essentially we want Congress to 
be making decisions based on the best possible cost numbers, 
the best possible benefit numbers.
    I am not at all surprised that a set of borrowers basically 
would prefer us to use lower discount rates on the theory that 
that will not give us any incentive to increase the rates. So 
there is nothing we can say to them that will change their 
position.
    Representative Maloney. Well my time has expired.
    Senator Lee. Okay. Next we will recognize Mr. Delaney; then 
after Mr. Delaney, Mr. Schweikert, and then we will proceed 
from there.
    Representative Delaney. Thank you. I want to thank all the 
witnesses for being here today and sharing their testimony.
    Mr. Elliott, you mentioned a concept that I thought was 
very interesting, which is creating a bank within the 
government and consolidating all the lending activities out of 
that bank, which I would love to follow up with you more on 
that. That seems to be a pretty interesting idea. You could 
have consolidated accounting, and credit, and portfolio 
management, and all those kinds of things, and it would make 
these programs inherently less sloppy, right, because there 
would be more rigor around how they are managed.
    From an accounting standpoint, if that bank had its assets 
effectively mark-to-market, which is in some ways what this 
does, would you suggest that its liabilities also be mark-to-
market? Because my experience with financial institutions, if 
you mark one side of the balance sheet you have to mark the 
other side, as well.
    How should we think about--a lot of this discussion is 
about marking the assets to market to provide greater 
transparency. Are they priced right? How do they compare to the 
market? Et cetera. Would we then also have to mark the 
liabilities to market?
    Mr. Elliott. So two parts. First, thank you for your 
positive comments about the idea of a single federal credit 
bank. I do think there are--there is great potential there for 
improved efficiency, which----
    Representative Delaney. Right. And we will follow up on 
that later.
    Mr. Elliott. In terms of the question, what the Federal 
Credit Reform Act does is it looks at both the positive and 
negative cash flows out from this point in time forward.
    Representative Delaney. Yes.
    Mr. Elliott. All those, whether positive or negative, at 
any point are discounted back at the same discount rate.
    Representative Delaney. Right.
    Mr. Elliott. So your question then would have to be, to get 
to what you are calling the liability side, is we would have to 
decide how were we funding those.
    Representative Delaney. Yes.
    Mr. Elliott. Which we do not do in the budget. We do not 
say this part is from borrowing; that is from a three-year 
borrowing; that is from a seven-year borrowing----
    Representative Delaney. But you could, right? If you ran it 
as a bank, you could basically have a relationship with the 
Treasury Department and issue different series of notes to the 
Treasury that they would buy. And you would have a whole 
liability stack.
    Mr. Elliott. You know, it is an interesting point and not 
one I have seriously considered, to be honest, because it is 
not--it is so far different from how we budget now I have just 
not given it thought.
    Representative Delaney. Because I just think when we talk 
about mark-to-market accounting, which is basically where we 
are going in this discussion, it is like people talk about that 
with banks all the time. They say the banks should mark your 
assets to market, which most banks do not mark their loans to 
market.
    But in reality, they then should mark their liabilities to 
market, right? And banks have much better liabilities than 
nonbanks do. So those liabilities would mark up, and you would 
mark the assets down, and you would kind of end up in the same 
place.
    So I think it is important if we think about mark-to-market 
accounting for the assets that we also have to have some 
framework for thinking about it for the liabilities so that you 
do not overcorrect so much. Because in fact the government 
borrows at a much better rate than your average AAA borrower.
    And so in fact the government's liabilities are worth more, 
right? So just when you would mark these assets down, you would 
be marking the liabilities up.
    But I think there might be a better way to get at some of 
the issues that I agree with you on as to whether we are 
pricing these things right, whether we really understand the 
cost. And Mr. Holtz-Eakin, or Dr. Holtz-Eakin, maybe you could 
comment on this.
    I have talked about a proposal where, rather than changing 
the accounting we simply require the government on a regular 
basis to sell off 10 percent of all its exposure in all these 
credit programs. Right? So you take all the credit programs, 
Ex-Im, housing programs, things we do for small businesses, go 
down the list and say on some regular basis you have to sell 
off 10 percent of your exposure to the market.
    And then we see how the market prices it, right? And that 
to me--because using accounting to figure out if things are 
priced right is theoretical and it is based on assumptions, and 
people can always play with assumptions. But when you actually 
have to sell a piece to the market, you are actually getting 
real transparency. And that information in some programs should 
maybe dictate how they are priced, but other programs we just 
should know it.
    We should say, hey, we are making loans to startup energy 
companies that would sell it for 20 cents on the dollar. That 
is a huge subsidy. Should we be using that money elsewhere?
    Would you comment on that proposal?
    Dr. Holtz-Eakin. I think that is quite useful. In terms of 
the two things that are going to be affected, the first is, as 
you mentioned, the mark-to-market on the balance sheet. I am 
actually less concerned about that.
    Representative Delaney. Yes.
    Dr. Holtz-Eakin. I am much more concerned about the income 
statement, making sure we get that cost right.
    Representative Delaney. Yes.
    Dr. Holtz-Eakin. One of the practical difficulties people 
always ask is, how do I get the right market risk to do the 
discounting?
    Representative Delaney. If you sell a piece, you know.
    Dr. Holtz-Eakin. This gives you some information.
    Representative Delaney. Right.
    Dr. Holtz-Eakin. And I think it is something that is worth 
exploring.
    Representative Delaney. I talked to the chairman of the 
Financial Services Committee, House Chairman Hensarling, about 
this, because there is a big debate with Ex-Im right now. Folks 
at Ex-Im say they're priced to the market.
    Dr. Holtz-Eakin. Right.
    Representative Delaney. All these other people come in and 
say they're undercutting the market. My point is, well we 
should just make them sell off part of their balance sheet 
every year and then we will know. Right? If people pay par, 
they are pricing it right. If they pay at a big discount, then 
there is a big subsidy. And then we can decide, are we okay 
with that?
    Dr. Holtz-Eakin. Right. And you are going to get a maturity 
strip----
    Representative Delaney. Right.
    Dr. Holtz-Eakin [continuing]. So you can get the estimates 
right.
    Representative Delaney. You would have to do it in a 
logical way. So that is something I also think should be put on 
the table in this discussion as you all think about this.
    Thank you.
    Senator Lee. Okay. We are now going to go to Senator 
Klobuchar, and then to Mr. Schweikert.
    Senator Klobuchar. Thank you, Congressman. I appreciate it.
    Thank you to all our witnesses. It is great to see some of 
you back--Dr. Holtz-Eakin--and to be back here at the Joint 
Economic Committee on this important hearing.
    I thought I would start out with veterans' housing. Since 
2001, the VA has helped 3.75 million Veterans buy their own 
homes.
    Mr. Van de Water, how would changing to the fair value or 
added-cost accounting method affect the VA's Home Loan Program, 
in your view?
    Dr. Van de Water. Senator, the general effect of fair value 
accounting is to increase the estimated cost of credit programs 
compared to the way that cost is recorded under the current 
accounting mechanism.
    And while we cannot be sure exactly how Congress would 
respond to that change with regard to any particular program, 
including veterans, I think it is highly likely that if the 
program were to appear more expensive that it would fare less 
well in the annual competition for resources, and therefore, it 
is likely, although not entirely certain, that the Veterans 
Housing Programs would become smaller, or that the loan terms 
would be changed in a way to reduce the subsidies for 
borrowers.
    Senator Klobuchar. Okay. Thank you. Mr. Elliott, Minnesota 
cares a lot about infrastructure. We are the State that had 
that bridge collapse six blocks from my house, killing 13 
people. And as you know, we have some issues with 
infrastructure, everything from bridges, roads, rail, and I am 
a fan of doing something about it, and I support a lot of the 
work that Congressman Delaney and others have been doing in 
this area.
    How would switching from the current financing system using 
the 30-year Treasury rate with credit premium to the fair value 
or added-cost accounting affect investment in infrastructure, 
in your view? Are there other funding mechanisms that we should 
examine?
    Mr. Elliott. Currently, in my view, we understate the cost 
of all the programs, and therefore Congress would be looking at 
higher costs to do the same thing using the current approach. 
As would Paul, I cannot say what Congress might then choose to 
do in terms of that. Presumably higher costs might make them do 
less, but who knows.
    In terms of other ways of doing it, there are of course 
things like public-private partnerships, but I honestly will 
confess I am not an expert on those.
    Senator Klobuchar. Perhaps, Mr. Delaney, you could ask him. 
No, there's a lot--Senator Warner will actually be putting our 
bill out today, a bipartisan bill similar to some of the work 
that Congressman Delaney has done. And so that is part of the 
answer, but clearly not the only answer.
    I just wanted to end on the Ex-Im Bank. We have 170 
Minnesota businesses that have been helped by the Ex-Im Bank 
just in one year alone. I visit all 87 counties in my State 
every year, and I often visit these small businesses. The topic 
usually isn't even Ex-Im, but then I find out that they are 
exporting. We are such a big export State, we have 17 Fortune 
500 companies, and it has spawned a lot of the smaller 
companies that export. But they literally have no expert on 
Kazakhstan or something, and they use the Ex-Im Bank to help 
them, and help them with financing.
    Mr. Van de Water, does the current system under the Fair 
Credit Reporting Act of 1990 reflect the costs of the Ex-Im 
Bank to the taxpayers? And how would the funds returned to the 
American taxpayer be accounted for under the new rules?
    Dr. Van de Water. Yes, Senator. The current accounting 
mechanism fully reflects all of the cash that goes into or out 
of the Treasury. So in that sense, the current accounting 
mechanism does reflect the full cost of the Export-Import Bank 
and other credit programs.
    The difference is that fair value accounting would add to 
that cost, to the recorded cost, an additional sum to reflect 
risk, which is not an actual cash cost to the Treasury or to 
taxpayers.
    Senator Klobuchar. Okay. Does anyone want to add anything, 
or disagree?
    Mr. Elliott. If I could just add one thing, briefly.
    Senator Klobuchar. Yes.
    Mr. Elliott. One of the issues we sometimes lose sight of 
is both potential approaches are simply ways of trying to 
summarize a long series of future cash outflows and inflows. 
The human mind is not capable of dealing with it, if we were to 
tell you it was X amount this year, X amount this year, you 
could not usefully do that.
    So we have to bring it to a value in today's dollars. These 
are both reasonable ways of doing it, but what we are arguing 
about is what would be the effects of doing it one way or 
another in terms of how you would make your decisions.
    Senator Klobuchar. Right. Okay. Well I will just make one 
last shameless pitch for the Ex-Im Bank, which is not the 
subject of this hearing but, as has been pointed out, could be 
affected by the way we do accounting and may affect taxpayers 
and those involved. And that is that we have 80 developed 
nations across the world that have similar financing 
authorities, and we would be the only one that didn't.
    We have China having major financing opportunities for 
their businesses, and I just hope we find a way in the next few 
weeks not to shut the Ex-Im Bank down. You are nodding your 
head, Dr. Holtz-Eakin. Do you agree with me?
    Dr. Holtz-Eakin. Perhaps to the chagrin of my fellow 
conservatives, I am compelled by a theoretical argument that it 
shouldn't exist. I think if you look at the data, you can make 
the case that Ex-Im should be reformed in some fairly dramatic 
ways; that its exposure cap might actually be restricted until 
we saw the moment where actual exporters could not get 
financing, and then we would know we need it. But I don't know 
how you can decide in the absence of that evidence that it 
shouldn't be around.
    Senator Klobuchar. Very good. That's a perfect end to my 
questions. Thank you everyone.
    Senator Lee. Okay. Congressman Schweikert, and then we will 
go to Congressman Beyer.
    Representative Schweikert. Thank you, Senator Lee.
    First off, Mr. Delaney, thank you. That is actually a 
creative idea. You know, part of the discussion here for many 
of us who are sort of fixated on sort of price theory is what's 
the actual pricing of the value of both the credit risk, the 
programmatic risk, and how do you discover that? To the 
Democrat witness, all those years in those finance classes, I 
need to go back and get my money back from those professors 
because I have now heard things I have never heard before.
    One of my personal fixations here, Mr. Chairman and Dr. 
Holtz-Eakin, I would love--because I think you have actually 
written parts about this--is what is the actual value of credit 
programs? And how do you actually value the risk profile of 
them?
    Because we seem to have a setup today with the massive 
amounts of--most Americans have no concept the amount the 
Federal Government is on the hook for. I mean, what was it, the 
Politico article last year, or several months ago, ``The Real 
Bank of America'' was in the trillions, and trillions, and 
trillions, and trillions, and trillions of dollars that we were 
on the hook for.
    You would do more than just the fair value accounting. 
Wouldn't you ultimately try to develop a risk pricing model for 
these programs? How would you go about doing that?
    Dr. Holtz-Eakin. So a couple of things. First, I would echo 
what my friend, Mr. Delisle, says again and again, which is be 
very clear about what is a cost and what is a benefit. So when 
you say what is the value of a credit program, that sounds like 
the benefit to those who are served by it. There may be some 
empirical evidence, but that is also a judgment call in the end 
of the policymakers.
    If you are going to measure costs, step number two is to 
first of all quantify all the costs that are actually present 
in the economic environment. And in this instance, for credit 
programs it is out there in markets. We can find out. We can do 
price discovery the way Mr. Delaney suggests, or use other 
techniques, but, you know, take comprehensive measures----
    Representative Schweikert. If----
    Dr. Holtz-Eakin. Let me finish with one more thing, because 
this is the important point. And the point that Mr. Van de 
Water made earlier was, look, other programs have costs as 
well. Social Security has some risks. Medicare has some risk. 
We are not quantifying that.
    That actually makes the major point, which is: You cannot 
pretend the Federal Government is a riskless entity. All it 
does is transmit the risk in the economic environment through 
it back to the taxpayers who are subject to those risks to 
begin with.
    So measure them comprehensively. Trace them back to the 
taxpayer, because that is ultimately who is going to pay.
    Representative Schweikert. You may have actually nailed it. 
Forgive me if I mispronounce. Is it Deso?
    Mr. Delisle. De-lyle.
    Representative Schweikert. Delisle. I would not have even 
gotten close.
    Mr. Delisle. That's all right.
    Representative Schweikert. All right. So a bifurcation of 
this argument is in some ways that I almost am hearing that I 
don't want to know the real pricing because it may take away my 
policy optionality over here because we might not do this.
    How do I mentally get my fellow Members of Congress to sort 
of bifurcate this thing? We need to know the real cost of what 
we are doing, and then on this side deal with the policy side 
of it? Because when many of us start to really dig into the 
unfunded liabilities, it is stunning. We are seeing some in 
academia saying we are well over a couple hundred trillion in 
the 75-year window of unfunded liabilities. Yet, if you were to 
share that with fellow Members of Congress they would just 
stare at you.
    How do we do that education?
    Mr. Delisle. You do it exactly the same way you do it for 
every other federal program, which is, you say to the 
nonpartisan Congressional Budget Office: Do your best. Tell me 
what you think it costs. But don't tell me what you think we 
should do after you've given us that information; we will 
handle that.
    Loans are different because it is the only place that I 
know of where Congress has told the CBO to use a certain set of 
assumptions in its estimate. So the CBO can't do that. And that 
is why we are here today.
    If there were no provision requiring the CBO to use a 
certain kind of discount rate in its estimate, we would not be 
here. Mr. Schweikert. So, Doctor----
    Dr. Holtz-Eakin. If I could add something, there is another 
big difference between these credit programs and those other, 
quote, ``unfunded liabilities.''
    Credit programs are a contract. You have to honor it. Once 
that loan is issued, that is a loan contract and the taxpayer 
is on the hook.
    The so-called, quote, ``unfunded liabilities'' are not 
liabilities; they are programmatic decisions made by Congress 
and can be changed. There is settled law on that fact. And the 
term ``unfunded'' I dislike intensely because it suggests the 
only need is to fund them, and there is not enough taxes out 
there to do that.
    So this is about the decision making for the structure of 
those programs.
    Representative Schweikert. Well the simple reality--I have 
been here five years, and I think I have never been able to 
have a rational vote on mandatory spending. And in four years, 
76 percent of all of our spending will be programmatic.
    So it is the clash of math and policy, and it is collapsing 
very fast around us.
    With that, Mr. Chairman, I will yield back.
    Senator Lee. Mr. Beyer.
    Representative Beyer. Thank you, Senator.
    Mr. Elliott, if the current FCRA regulation takes the 
present value of the long-term cash flow out and the long-term 
cash flow in, doesn't this already reflect the likelihood of 
default of some of these loans? And doesn't this methodology 
then already build the risk into the portfolio?
    On top of that, how do you--how do you answer the objection 
over the past two decades that FCRA has proven to be extremely 
accurate in projecting the actual cash flow of all these 
federal credit loan programs?
    Mr. Elliott. There is a confusion with the term ``risk.'' 
If you mean ``risk'' the potential for losing, the expectation 
of losing money--that is, some loans will not pay you back-- 
FCRA does a good job of taking that into account.
    What we are talking about here is, when you enter into a 
program some of them--there is a high likelihood you will end 
up where you expect to be. And there are other programs with a 
much wider range of possibilities.
    And so the question is: Do you as a Member of Congress want 
a budget number to reflect the difference between very certain 
results and very uncertain results? Or do you not?
    Representative Beyer. It seems to me that one of the issues 
here is that we are trying to compare the Federal Government's 
credit to that of a major financial institution, a bank, a 
profit-making institution. And clearly we are involved in this 
as a federal government because we are making loans that banks 
would not make--student loans being the best example.
    And we are doing that because we have a larger social 
purpose.
    So, Dr. Van de Water sort of reminds me of the asymmetric 
warfare, that fair value takes societal costs but not societal 
benefits. It is like the dynamic scoring, which my dear friend 
Congressman Delaney has written about very well in various op 
eds in The Post, that dynamic scoring takes in all the benefits 
of a tax cut but absolutely none of the benefits of investing 
in education, and health care, and housing, and the like.
    I got an e-mail from the University of Virginia that asked: 
Would a move to fair value accounting capture both the values 
of pursuing higher education and the monetary and nonmonetary 
positive externalities of having a highly educated populace 
that has access to federal student loans?
    Dr. Van de Water. Well the answer to that is, of course 
not. And we wouldn't expect that a federal budget cost estimate 
would include things like that because many of those things are 
benefits to the individual students. They are extremely 
important benefits. Some of them have carryover benefits for 
the economy as a whole.
    But that is a perfect example, that there are a lot of 
costs and benefits that are never going to show up in a cost 
estimate that are essential for the Congress to evaluate in 
deciding whether to go ahead with a program, or to expand it. 
But for accounting, I have been arguing that we should retain 
as a benchmark cash actually going into and out of the 
government.
    And you should not expect a cost estimate to contain 
anything beyond that.
    Representative Beyer. And my suggestion is, when you have 
risk, things that cannot be assessed down the line, that can 
also be offset by the societal benefits that we are also 
choosing not to mention.
    Dr. Van de Water. Exactly. Because while a loan program, a 
student loan program, for example, increases risks for 
taxpayers, it is reducing the risks for the student borrowers. 
And at the same time, if the defaults turn out to be higher 
than expected, it means, as I said in my testimony, that 
taxpayers will be bearing a higher cost, but it also means that 
the student borrowers will be receiving a higher benefit.
    Those are both very important facts, but neither one of 
them belongs in the cost estimate, in my view.
    Representative Beyer. Thank you. Mr. Delisle, one slightly 
tongue-in-cheek question, which is: Why would we ever buy Greek 
debt? And then the more serious one is:
    Given that we don't have a profit motive as the government 
in our federal credit, the market risk premium represents an 
opportunity cost that is not tied to cash flow. Doesn't the 
cash flow make much more sense than an opportunity cost that 
may never be realized? Especially when the historical data 
suggests that in fact we are doing just fine?
    Mr. Delisle. Do you believe that the average expected cash 
flow, as CBO estimates it from a student loan, is guaranteed to 
occur exactly the way they project it to occur? If so, FCRA is 
your model.
    If you do not think average expected cash flows are 
guaranteed to occur the way they are estimated, then fair value 
is your model.
    In terms of why would we ever buy Greek debt? FCRA tells 
you there is absolutely no budget reason not to do so.
    Representative Beyer. Except that we have the larger social 
purposes. We have put these things in place because we are 
trying to build a better America, a better economy. I am not 
sure that buying Greek debt is on that list.
    Mr. Delisle. But it does not cost you anything. FCRA says 
you make money doing it, immediately. So why wouldn't you do 
it, if you make money and you help out--you solve a financial 
crisis. There is no budgetary reason not to do it. But I am 
very delighted that you are having problems with sort of the 
notion that there is no budget reason not to do that.
    But I should say, on the issue of measuring the benefits, 
you are holding fair value accounting to a higher standard than 
all the other ways we do cost estimates. None of them--not cash 
accounting, not FCRA--none of them factor in the benefits.
    When you do the estimate for a highway project, it does not 
include the value of the benefits. None of the approaches do. 
So this isn't a flaw with fair value. You are simply asking 
more of fair value than you are asking of any of the other 
accounting methods.
    Representative Beyer. Thank you. Mr. Chairman, thank you.
    Senator Lee. Senator Cotton.
    Senator Cotton. Thank you. I apologize if we've been over 
this ground. I am just coming from presiding over the Senate.
    I would like to start, Dr. Holtz-Eakin, with you. Could you 
outline any real challenges or risks to simply using fair value 
accounting as one source of knowledge, even if it is not 
mandated for use, even if it is not something that we put in 
the statute but it is something that informs our policy 
judgments?
    Dr. Holtz-Eakin. I see no downside to that. Indeed, some of 
that happens now. We have seen CBO put out estimates of the 
budgetary impact of various credit programs under both FCRA 
accounting and what they would look like under fair value, so 
that Congress has some notion--the Ex-Im Bank being a notable 
example.
    Senator Cotton. Okay. Tell you what, why don't we just go 
down the panel and hear responses to that.
    Mr. Delisle. I'm sorry? The question again was?
    Senator Cotton. So is there any risk or drawback of using 
fair value accounting as at least one source of information to 
inform policy judgments, even if we don't amend FCRA and make 
that the method of accounting?
    Mr. Delisle. Well I think that the risks in using fair 
value are the same as they are in using other accounting 
methods; that, you know, the information you know today ends up 
not being perfect, and so something changes in the future to 
make your original estimate different, or off. Those exist in 
all the forms.
    I should point out though that there has been some 
conversation about how the Federal Government is different from 
private entities. I think that that is a perfectly valid 
argument if the Federal Government had its own money. It 
doesn't have its own money. It has our money, and it has to use 
our value for the price of risk. That's only fair. And where do 
we go to assess our collective value for risk? We look at the 
market prices. Because you have a massive voting system on what 
something is worth, and I think that is the appropriate place 
to go to figure out what these loans actually cost.
    Senator Cotton. Could I ask you to say more about the 
conversation you cited about the differences between the 
Federal Government and businesses? I hear that, and I hear my 
thinking that says, yes, the Federal Government is different. 
It is not a for-profit enterprise. Therefore, it makes 
decisions not based on market or financial signals, but on 
political decisions oftentimes. And frequently, whereas market-
based institutions pick winners and losers which is in the 
nature of a capitalist society, the government tends to pick 
losers. Because if they were winners, they would have gotten 
financing in the private marketplace.
    So could you say a little bit more about that?
    Mr. Delisle. So my first response is, nonprofit credit 
unions are nonprofit. They also can borrow at a very low rate 
because they have a government guarantee on their deposits. 
Even they don't make loans at terms as generous as the Federal 
Government because they don't think it is worth it. So there is 
clearly something more going on than your profit motive. I also 
think that, you know, the same could be true for pension funds, 
right? Pensions funds are nonprofit. But they assign a value to 
assets at the market price. And I think that is the fairest 
value, regardless of your intentions and your motivations.
    Senator Cotton. All right. Mr. Elliott, any real risk of at 
least using fair value accounting as a way to inform our 
decision making?
    Mr. Elliott. I think it would be a step forward, very 
clearly. The one risk is, there is an argument that having two 
sets of numbers makes it a little harder for people to-- there 
is a danger of talking past each other. But I would still 
rather have the extra information.
    Senator Cotton. Okay.
    Dr. Van de Water. I see no objection to providing 
additional information of that sort.
    Senator Cotton. It sort of sounds like we are all in 
agreement, it is worthwhile and should inform our policymaking.
    Okay. Thank you all. Thank you.
    Senator Lee. I want to thank our Committee members, and I 
want to thank our witnesses especially for coming and providing 
the insightful testimony.
    Your testimony has been very helpful. The hearing record 
will remain open for three business days for those members who 
may wish to submit questions for the record.
    We will be adjourned.
    (Whereupon, at 11:20 a.m., Wednesday, June 17, 2015, the 
hearing was adjourned.)

                       SUBMISSIONS FOR THE RECORD

    Prepared Statement of Hon. Dan Coats, Chairman, Joint Economic 
                               Committee
    The committee will come to order.
    The committee today will examine the economic exposure of federal 
credit programs. I'd like to thank our witnesses for being here.
    Today, we will examine why accounting for our federal assets 
matters, and why inaccurate monitoring could bring harm to:

      Borrowers who pay higher interest rates to cover the 
defaults of others;
      Private lenders who are frozen out of markets they seek 
to serve; and,
      Taxpayers, who may be exposed to unquantified losses.

    During my prior service in the Senate, I was one of the ``Nay'' 
votes for the Omnibus Budget Reconciliation Act of 1990. Twenty-five 
years later, I never imagined that I would be chairing a hearing to 
debate the impact of accounting rules passed back then. This situation 
reminds me of an old Yogi Berra quote, ``The future ain't what it used 
to be.''
    The 1990 reconciliation law included the Federal Credit Reform Act, 
accounting rules crafted in reaction to the rocky credit history of the 
1980s. The Resolution Trust Corporation held the assets of failed 
savings & loans and put the federal government in the ``loan workout'' 
business. Sadly, fraudulent student loans made during the decade led to 
a 20% student loan default rate and a loss equal to almost 10% of 
outstanding loans. Cash accounting for all these asset changes within a 
budget year presented a volatile picture of the federal budget that 
properly represents spending trends.
    Since then, the federal government has followed the rules of FCRA, 
recording an annual present-value adjusted ``subsidy cost'' to account 
for losses it may incur in the future charged against loans it has made 
directly, as well as guarantees it provided for loans made by others. 
It took 10 years to refine the complicated net present value 
calculations used for FCRA, but by 2002, government accountants 
calculated that the federal portfolio of $1.3-1.4 trillion in loans and 
guarantees generated annual subsidy costs in the range of $5 to $12 
billion, no small chunk of change.
    This brings us to the financial crisis of 2008, which ballooned the 
government's loan assets. FCRA's accounting rules converted loan 
subsidy costs into deficit reducers. Since 2008, government accountants 
have booked nearly $200 billion in annual subsidy gains while the 
amount of federal loans and guarantees has more than doubled. As a 
result, it is clear that the more credit market exposure the government 
takes on, the more that expectations of future revenue rise under 
current accounting rules, without equal accounting for higher risk.
    At the end of September 2014, loans made or fully guaranteed by the 
federal government totaled over $2.9 trillion. This includes $1.1 
trillion in student loans. Additionally, the Federal Reserve reported 
that nonmortgage consumer debt totaled $3.3 trillion as of September 
30, 2014, giving the federal government a one-third share of the U.S. 
consumer loan market.
    Add to that the 70 percent of the mortgage market that the federal 
government holds through direct loans, guarantees, and Fannie Mae and 
Freddie Mac, and the federal government is the largest consumer lender 
in the United States.
    A lot has changed in twenty-five years. So today, we must ask 
ourselves, do accounting rules passed twenty-five years ago reflect the 
complexity of today's financial world?
    I'd now like to recognize Ranking Member Maloney for her opening 
statement.
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 Prepared Statement of Hon. Carolyn B. Maloney, Ranking Member, Joint 
                           Economic Committee
    Thank you Chairman Coats for holding today's hearing.
    In this morning's hearing, we will compare two systems for 
budgeting federal credit programs.
    The first, the Federal Credit Reform Act of 1990 (FCRA), was signed 
into law by George H.W. Bush in 1990. It has proven a reliable tool for 
budgeting federal credit programs.
    The second, so-called ``fair value'' accounting, is a program 
supported by some of my colleagues in the Republican Party that will 
make federal credit programs seem more expensive. If implemented, this 
system will necessitate cutting loan programs or raising interest 
rates.
    In my mind, there is nothing fair about ``fair value'' accounting.
    At its root, today's hearing is about two vastly different 
philosophical approaches to government.
    My Republican friends believe that the federal government--in this 
case federal lending programs--should operate just like the private 
sector.
    But the federal government is not the private sector.
    The principal motivation of the private sector is to maximize 
profit.
    The principal goal of government is to provide services that the 
private sector cannot or will not provide.
    These differences are especially clear in federal lending programs. 
Private institutions make loans that they think will be the most 
profitable.
    But the United States government sees thing differently.
    For example, it lends to a group of individuals with little or no 
income and no credit history. They are known as ``college students,'' 
and there are more than 20 million of them in the United States today. 
The vast majority of student loans are issued by or guaranteed by the 
government.
    Why does the government take on this risk? Because it helps 
millions of Americans go to college who might otherwise not be able to 
afford to go. It also benefits the rest of us by creating a more 
educated workforce. A better workforce will make our country more 
competitive and our economy stronger.
    This is a social good not recognized by private lenders.
    I want to turn to the specific question of how we measure the costs 
of federal government loan programs.
    How these programs are accounted for--and how their budget impact 
is assessed--will affect the broader deficit outlook and choices we 
make as policymakers.
    The current procedure under the Federal Credit Reform Act 
appropriately calculates the lifetime cost of federal credit programs 
reflecting both the risk of default and the government's cost of 
borrowing.
    FCRA has been very accurate. OMB found that since in the more than 
20 years FCRA has been in place, the initial cost estimates of all 
credit programs differed from their actual cost by less than one 
percent.
    As they say--if it ain't broke, don't fix it.
    But today we're apparently trying to ``fix'' a system that already 
works well.
    It is part of a broader ideological initiative.
    In tax policy, Republicans are trying to change the rules of the 
game by instituting so-called ``dynamic scoring.'' This would make tax 
cuts seem less expensive than they really are.
    In federal credit policy, Republicans are trying to change the 
rules of the game using an accounting system that will make programs 
like student loans look more expensive.
    The result of this so-called ``fair value'' accounting will be cuts 
in federal loans programs--for example, less money available for 
students at higher rates.
    Under ``fair value'' accounting, the cost of federal credit 
programs, which are funded by the purchase of low-interest Treasury 
securities, would be evaluated as if these governments were forced to 
borrow with an additional ``risk premium'' demanded by the private 
market.
    As the Center on Budget and Policy Priorities put it, fair value 
budgeting requires that the budget ``reflect amounts that the Treasury 
would never actually pay anyone.''
    It will make federal lending programs appear more costly than they 
really are.
    Millions of Americans have something to lose if proponents of this 
accounting system have their way. I regret that we don't have any of 
their representatives on this panel today.
    However, Chairman Coats and I have received letters from a number 
of organizations strongly opposed to ``fair value'' accounting.
    A letter from the National Education Association states that, 
quote: ``NEA opposes the use of fair value accounting in federal credit 
programs, especially student loan programs, because it would 
artificially raise their costs and make them appear to be more 
expensive to the federal government than they really are.''
    I ask unanimous consent to enter this letter into the record.
    A letter from the National Association of Homebuilders states that 
``fair value accounting'' would artificially raise the rates on home 
loans. I also would like to enter that letter into the record.
    Other noted organizations also oppose using ``fair value 
accounting'' for budgeting purposes:

      The National Association of Realtors
      The National Association of Independent Colleges and 
Universities
      The Retired Enlisted Association
      The National Rural Electric Cooperative Association
      The Student Aid Alliance
      The National Multifamily Housing Council
      And many others . . .

    I would like to place letters from several of these organizations 
into the record.
    In conclusion, I ask that we listen to both sides of the debate 
today--but that, ultimately, we not let ideology trump reality.
    Fair value budgeting would distort the budget process, undercut 
federal credit programs, and, ultimately, deprive millions of Americans 
of the financial support they need to get an education, buy a home, or 
start or operate a small business.
    I look forward to our discussion this morning and thank each of the 
witnesses for appearing before the Committee.
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