The government is not only spending trillions — it’s losing trillions

Published in The Hill with Paul Kupiec. Also in RealClear Markets.

Lately, no matter if the federal government is spending taxpayer dollars or losing them, it doesn’t mess around with small change.  

The government allocated $4.6 trillion just in COVID relief spending, tens of billions of which have been siphoned off by fraud. And when it comes to losing taxpayers’ hard-earned dollars, we’ve calculated that losses tallied at the Federal Reserve and Department of Education together will top $2 trillion. No telling how much it will cost when the government losses accumulate on the $370 billion green energy loan and loan guarantee programs included in the Inflation Reduction Act, but if Obama-era green energy loan guarantee costs are any guide, they will be large. 

Let’s start with Fed. By the end of May of this year, we estimated that the Fed’s mark-to-market loss on its huge portfolio of Treasury bonds and mortgage securities had grown to the staggering sum of $540 billion. The Fed’s losses have continued to build and today are, we now estimate, quickly approaching $1 trillion. Thus the Fed’s investing losses match the estimated loss the Department of Education is about to foist on U.S. taxpayers should President Biden’s student loan forgiveness plan survive legal challenges.

The government spends trillions of taxpayer dollars here and loses trillions more there, but it hardly seems to make the news. Congress has passed so many new giant spending bills in the past three years, much of it financed on the Fed’s balance sheet, that the public has become desensitized to the magnitude of the taxpayer dollars involved. 

Consider this: One million seconds is about 11.5 days; a billion seconds is about 32 years; a trillion seconds is 32,000 years!

In the footnotes of the Fed’s recently released financial statement of the combined Federal Reserve Banks for the second quarter of 2022, you can find this startling disclosure: The mark-to-market loss on the Fed’s system open market account portfolio on June 30 reached $720 billion, $180 billion more than our end-of-May estimate.

Since June 30, interest rates have continued rising and the market value of the Fed’s massive investment portfolio has shrunk even more. Using the interest rate sensitivity that the market value of the Fed’s portfolio displayed over the first six months of 2022, we estimate that the market value loss since June 30 has increased by $275 billion, bringing the Fed’s total investment portfolio mark-to-market loss to about $995 billion, which is 17 times the Federal Reserve System total capital. 

If interest rates continue to rise, as we expect they will, Fed market value losses will easily exceed $1 trillion. The irony, of course, is that the Fed was buying heavily to build its $8.8 trillion portfolio at top-of-the-market prices the Fed itself created with its extended near zero-interest rate monetary policy. In addition, the Fed is moving toward generating large operating losses, even if it never sells any of its underwater bonds and mortgage securities, because it must finance its long-term fixed rate assets with floating rate liabilities at ever-higher interest rates. The federal budget deficit will be bigger still, and possibly for a very long time because it will be short the billions of dollars of revenue the Treasury has been receiving from the Federal Reserve System’s remitted profits.

In the very same eventful quarter that Fed losses reached almost $1 trillion, President Biden issued an executive order (of dubious legality) that ordered the government to fully forgive, at taxpayer expense, hundreds of billions of dollars of defaulted student loans it had made, and to partially forgive over time billions more in unpaid student loan balances at taxpayer expense. Estimates of the cost to the taxpayer of writing off these loans run up to $1 trillion. 

Considered as a lending program, as it was enacted to be, the federal student loan program is nothing if not an utter and egregious failure. The loss is especially ironic since a decade ago it was claimed that student loans would be a big source of profits for the government and help to offset the cost of Obamacare subsidies.

According to a Congressional Budget Office report in March 2010, the federal government takeover of the student loan program would save $68 billion. These savings, it was claimed, would provide funding for an additional $39 billion of grants and make available the remainder to theoretically pay for Obamacare subsidies. A dozen years after the CBO produced this wildly overoptimistic estimate, the federal government student loan program is costing taxpayers $1 trillion, not generating $68 billion in additional revenues.

Considering the federal government’s propensity for producing unreliable forecasts, simultaneously authorizing trillions in new spending, and losing trillions of taxpayer dollars in off-budget government loans and investments, it certainly makes one doubt the acumen of the federal government as a financial manager.