Experts: Impact Of Rescue Plan On Deficit Too Early To Tell
from CongressDaily
September 22, 2008
by Humberto Sanchez
The way the federal government values the troubled mortgage assets it will buy will ultimately determine exactly how much the $700 billion bailout bill developed by Congress will affect the budget deficit, experts said today. "When we spend [federal money] to purchase these mortgage-related securities, we end up with an asset that is worth something," said Center on Budget and Policy Priorities' federal fiscal director Jim Horney. "The real question is how much are those things worth, and that is one of the reasons that the Treasury is proposing this purchase because right now the market is not functioning very well in determining what those assets are worth." Horney added that those assets will be worth "more than zero and eventually we will sell the assets and recover some portion, maybe some significant portion, maybe even all of what we spend in purchasing them," which could ultimately leave the budget deficit unaffected.
Earlier this month, CBO estimated that the federal budget deficit would total $407 billion for FY08, which ends Sept. 30, and $438 billion for FY09. On Friday, as details of the plan were emerging, an OMB spokesman said it was "too early to tell" how the Treasury's plan would affect the debt and deficit. Treasury's draft plan also calls for boosting the statutory debt limit to $11.3 trillion from the current $10.6 trillion limit. "We will implement an approach that balances the need to address problems with the market with the need to minimize the risk, exposure, [and] loss of taxpayer dollars," the OMB spokesman said, adding that the "potential exists" for the market to stabilize enough so that those funds are recovered. All Treasury transactions and those of any federal agency will be "fully transparent in the 2010 budget, the monthly treasury statement, and the financial statements of the U.S. government," he added.
Under the draft proposal, the Treasury will buy up to $700 billion of the assets -- which are backed, at least in part, by defaulted loans -- from banks and other entities, and eventually free up the credit markets. The assets have been on the books of many banks, which made them bad credit risk, and resulted in banks refusing loan money to other banks. Concord Coalition Executive Director Robert Bixby noted the draft proposal requires that the cost of the subsidy be added to the deficit, rather than just adding the spending directly, which will keep the cost of the plan below $700 billion. "If they go that route, the actual cash outlays wouldn't go on the deficit on a one-to-one basis," Bixby said. But he warned that using the proposed accounting method could shield the risk the government is taking on from the public. He said his preference would be to do it on a cash basis, "because it would be clearer to the public what was happening, and it would emphasize that this is really a huge undertaking."
by Humberto Sanchez
