Have You Checked Your Risk Level Lately?

Federal obligations and guarantees have ballooned since 2009. Taxpayers are on the hook for trillions.

If you asked most Americans how much loan risk they’ve undertaken over the last decade, they would probably look puzzled. Few are in the lending business.

But how about the risk Americans have taken on collectively, through the lending and loan guarantees of the federal government? The exposure of taxpayers to delinquencies and defaults on federal loans and guarantees has ballooned since 2009. Add that to the soaring national debt and the excessive obligations of federal entitlement programs and you have what some might call an “existential” issue.

“Stimulus” programs have more than doubled the national debt—while providing little stimulus—since Barack Obama took office. The budgetary cost of servicing that debt will double over the next decade, even if the Federal Reserve manages to keep interest rates at current low levels. It’s also widely understood that without serious reforms there is no way the government can fulfill the promises made to oldsters and the disabled by Social Security and other safety-net programs.

Less attention has been paid to the degree to which Washington has socialized lending risk. That too was part of the program when Mr. Obama was elected and “progressives” took full control of government in 2009-10. What they accomplished in two years of revolutionary zeal still affects the U.S. today, a mounting potential liability bigger than most taxpayers are aware of.

Yes, the student-loan fiasco has gotten a lot of attention. Since the 2010 federal takeover of lending to college students, loans outstanding have soared 64% to over $1.3 trillion. About one-fifth of these loans are in arrears and that is an understatement, as the Journal has reported, because it doesn’t take account of forbearance and deferments.

But in the popular press, this is usually looked upon as a problem for the students, which of course it is. Those who are paying off big loans but whose degrees aren’t earning them big paychecks have to defer other wants, like homeownership or new cars. Yet if defaults become epidemic or the government broadens loan forgiveness, it will become a problem for taxpayers as well. More taxes or more borrowing will be needed to cover some very large federal-budget costs.

The student-loan fiasco and the failing ObamaCare health-insurance takeover will have to be reformed to avoid very large taxpayer bailouts. But there are also the risks the progressives have loaded onto taxpayers on behalf of the powerful housing and banking lobbies. For all practical purposes, home-mortgage finance has been nationalized. Fannie Mae and Freddie Mac, the two onetime “government-sponsored” secondary finance giants went bust in 2008 when their toxic mortgage-backed securities played a central role in the 2008 market crash. George W. Bush’s government extended them a $200 billion line of credit and put them in “conservatorship,” meaning effective government control.

That’s where they have remained under President Obama, except that whereas they once had implicit government backing, it is now explicit. With the aid of Moody’sAnalytics, the Economist magazine recently estimated that in another housing crisis the U.S. taxpayers’ exposure would run between $300 billion to $600 billion. Even without a crisis, the Economist estimates that the taxpayer subsidy for housing debt is $150 billion a year.

The Fed and other regulators insist that mortgage originators are more careful than they were in the days of “liar loans” a decade ago. They also assert that America’s banks are better capitalized than in 2008, thanks to stricter regulatory oversight. They seldom mention that one reason for the better-looking balance sheets is that banks have loaded up on taxpayer-guaranteed securities.

According to the latest Federal Deposit Insurance Corp. bank condition statement, ownership of government securities (including state and local) by the 5,289 Federal Reserve member banks now represents 14% of their portfolios, almost double the share five years ago. The latest number far exceeds outstanding commercial and industrial loans and loans to individuals, (e.g., credit cards).

The Fed provides a big helping hand. Securities purchases under its “quantitative easing” program included a large volume of mortgage-backed securities along with Treasury bonds. Because the Fed’s portfolio is so huge, $4.4 trillion, its rollovers of maturing securities with new purchases help keep interest rates low on both Treasurys and mortgage-backed securities.

Some taxpayers might see some reason for concern about how all this might play out in the event of another market crisis. Apparently those worriers don’t include America’s two leading presidential candidates. Hillary Clinton wants to make college “free” and plunge the country deeper into the socialized-risk pit her fellow Democrats created. As for Donald Trump, he boasts of being the “king of debt.”

Here’s a question for their first debate, scheduled for Sept. 26: Please talk about the federal government and the hundreds of billions in lending risk it has exposed taxpayers to: Is it too big to fail?

Mr. Melloan is a former deputy editor of the Journal editorial page. His book “When the New Deal Came to Town” will be published by Simon & Schuster in November.



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