- The Washington Times - Thursday, September 25, 2008

Failure to pass a substantial bailout package would risk “utter financial market chaos,” Congressional Budget Office Director Peter Orszag told the House Budget Committee on Wednesday.

The financial markets are expecting “a significant package” addressing the problems of liquidity and solvency, Mr. Orszag said. “If there’s no package whatsoever,” he told the committee, “it would be a very bad situation” that could produce a “a financial market meltdown, which would cause very severe economic dislocation, which may be on the order of magnitude of Great Depression-type effects.”

He warned of a “self-reinforcing negative spiral” that would damage the economy, intensify downward pressure on home prices, erode retirement savings and significantly raise the budget deficit.

Mr. Orszag’s comments echoed the dire warnings Federal Reserve Chairman Ben S. Bernanke privately conveyed to congressional leaders in an emergency meeting on Sept. 18, when he and Treasury Secretary Henry M. Paulson Jr. outlined the dimensions of the credit crisis. On Saturday, Mr. Paulson told Congress that the Treasury needed to borrow $700 billion to remove toxic debt from bank balance sheets and restore order to the financial system.

Mr. Orszag said the $700 billion would probably be fully spent over the next year purchasing mortgage-related securities and other troubled assets from financial institutions. However, the eventual cost to taxpayers of Mr. Paulson’s bailout proposal would likely be much lower than $700 billion because the government would ultimately sell the acquired assets and thus generate income that would offset much of the initial cost, the budget director said.

The federal budget should reflect the estimated net cost to the government of such purchases, but Mr. Orszag said CBO could not provide an estimate of the ultimate net cost of the proposal.

“Almost by definition, the intervention cannot solve solvency problems without shifting costs to the taxpayer,” he acknowledged.

While the government would likely pay a fair price when purchasing similar assets, such as mortgage-backed securities, from multiple institutions, Mr. Orszag said the government would likely overpay for individual mortgages. The more the government overpays for assets, the more the program would “provide a subsidy to specific financial institutions, in a manner that seems unlikely to be an efficient approach to addressing concerns about solvency,” he said.

An ultimate cost of $200 billion would translate into $1,700 per household.

James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities, agreed with the way Mr. Orszag planned to handle the $700 billion cost estimate. If policymakers believe that the ultimate cost of the bailout will be substantially below $700 billion, “it clearly is not right, conceptually, to count the $700 billion in asset purchases as a budget outlay” of that magnitude, he said.

There has been speculation that the bailout might be conducted off-budget. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, strongly opposed that idea.

“It is important for the bailout to go on the government’s books because what is happening is real and the impact on the government’s finances is real,” Ms. MacGuineas said.

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