i-rant

Bailout Plan Gains Key Support – WSJ.com

Thank goodness!

Lets get this done and move on.   Further:Real Time Economics : Believe It or Not, Bailout Won’t Substantially Expand the Deficit

In congressional testimony earlier this week, Peter Orszag, director of the nonpartisan Congressional Budget Office, told lawmakers that the program should be treated on net-expected-cost basis. The cost wouldn’t be recorded as gross outlays, but as “the purchase cost minus the expected value of any estimated future earnings from holding those assets and the proceeds from the eventual sale of them.” Since the value of the assets will be set by what the government pays, the program should at least be budget neutral in the near term. That approach would be similar to the current budgetary treatment of other programs such as student loans or lending to farmers.

The program does still have to be funded, and that likely means debt issuance from the Treasury. The government will have to borrow to buy the assets, but it’s no different than borrowing to buy anything else. Once the purchase is done, the buyer owns something that has value and can liquidated. Of course, right now those assets don’t have a market, but Treasury SecretaryHenry Paulson and Fed Chairman Ben Bernanke expect that to change.

The program could even mean less issuance of government debt over the long term. “The TARP is being used to purchase assets which are intended to be sold or held to maturity,” said Michael Feroli of J.P. Morgan Chase. “As these assets are sold or mature in 2010 and following years, they will reduce the need for Treasury issuance, as funding inflows from running down the TARP portfolio defray other funding needs.”

But all that is based on the assets at least holding the value the government pays for them, which is far from certain. Feroli, though, thinks the risks are small. “Taking the years 2009 onward as a whole, the TARP will likely have little direct effect on the long-run fiscal position. If one wants to worry about fiscal matters, the demographically-fueled entitlement problem will make the mortgage mess look like small beer,” he said. –Phil Izzo

Update: The CBO responded to this post to make it clear that Director Orszag didn’t suggest that the Treasury plan would have zero impact on the deficit. The CBO post said there are too many unknown factors to quantify the impact on the deficit, adding that it “depends on three factors: (a) the degree to which the transactions result in a gain or loss to the government; (b) the administrative costs of running the program; and (c) any interactive effects with other government programs.” The office concludes that “although the lack of specificity in the bill means that CBO cannot currently quantify its net budgetary impact, and although there is some possibility that the government could realize a net gain on the transactions authorized under the bill, it seems more likely that enacting the bill would result in an increase in the federal deficit. In other words, the net budgetary cost (including administrative costs) is very likely to be substantially smaller than $700 billion, but it seems likely to be greater than zero.”