CBO expects bailout to cost less than $700 billion

The cost of bailing out Wall Street will likely be “substantially less” than $700 billion, the director of the Congressional Budget Office told a House panel Wednesday.

CBO Director Peter Orszag said he expects the true, long-term costs of Treasury’s plan to buy up failing assets from troubled banks to cost less because Treasury plans to sell off the purchased assets, which could cut into the government’s losses or even result in a profit.

{mosads}“One would image that [the net cost] would be substantially less than $700 billion,” Orszag said, “unless you lose 100 percent of what you’re purchasing.”

Orszag said CBO would take this into account in estimating the program’s cost.

“The federal budget would not record the gross cash outlays associated with purchases of troubled assets but, instead, would reflect the estimated net cost to the government of such purchases,” Orszag told members of the House Budget Committee. He added that there were no guarantees that the plan would work as intended, or at all.

At the same time, Orszag told members it was impossible for him to determine the program’s cost because “we know virtually nothing about how this program is going to work.”

Orszag did tell the budget writers that a failure of the government to act in a significant way to unfreeze the market could lead to an economic “meltdown.”

Because the signal has already been sent to financial markets that help is on the way, the consequences of pulling back could be disastrous, he said.

Orszag was not brought before Congress to advocate the administration’s $700 billion plan to buy up illiquid assets and equity in troubled firms, but his testimony had the effect of supplementing the sense of urgency that administration officials have been conveying.

The plan’s cost is a top concern for both Democrats and Republicans on the committee, including those who are in agreement that major action is needed and those who still have serious doubts.

Orszag noted under questioning from Rep. Jeb Hensarling (R-Texas) — one of the foremost skeptics of the Treasury's plan — that “substantial increases in revenues,” perhaps even in tax increases, will be necessary in the short term to cover the initial infusion of hundreds of billions in borrowed dollars into the private sector, especially given the already record budget deficits and federal debt levels the government is currently running.

In response to a question from Rep. Jim Cooper (D-Tenn.), Orszag said that the combination of high budget deficits and record expenditures on bailouts — including the proposal now before Congress — has significantly hampered the government’s ability to respond further to any economic crises.

House Budget Committee Chairman John Spratt (D-S.C.) moved Orszag’s appearance up by two days as both the House and the Senate consider an emergency proposal from the administration to let the Treasury Department spend as much as $700 billion to purchase illiquid assets from Wall Street firms and unclog the financial markets.