Monday, February 23, 2009

My Paper, by Peter Orszag

Hello Mr. Congressman, I have come up with this paper. I am not allowed to give opinions on legislation, so read nothing into my estimate that the federal government can likely take over Fannie Mae’s and Freddie Mac’s financial obligations at no cost to the taxpayer. So here we go:

On July 14, 2008, the Administration released a proposal that would temporarily authorize the Department of the Treasury to purchase obligations and securities of the government-sponsored enterprises (GSEs) that deal with housing finance—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks.

The Congressional Budget Office (CBO) estimates that there is a significant chance—probably better than 50 percent—that the proposed new Treasury authority would not be used before it expired at the end of December 2009. If the proposal is enacted, private markets might be sufficiently reassured to provide the GSEs with adequate capital to continue operations without any infusion of funds from the Treasury; during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten. Under that scenario, the temporary authority would not be used and thus would involve no budgetary cost.

So, you see Mr. Congressman, a betting man says that having the taxpayer take over Freddie-Fannie’s financial obligations will have…… NO COST!

In CBO’s view, however, that scenario is far from the only possible result. Indeed, many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets, and such continuing problems would increase the probability that this new authority would have to be used. Taking into account the probability of various possible outcomes, CBO estimates that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.

$25 billion over two years isn’t that much, Mr. Congressman. Have a heart, people are losing their houses. OK, now here are my weasel-words:

CBO’s estimate reflects the current budgetary treatment and existing scorekeeping conventions for federal credit assistance and equity purchases and does not necessarily measure the underlying change in the federal government’s financial condition as a result of this legislation. On the one hand, the acquisition of financial assets like equities is recorded as an outlay in the budget even though such purchases may not change the government’s underlying financial condition. On the other hand, even if enacting this legislation would not result in outlays over the near term, it might effectively strengthen the linkages between the GSEs and the federal government and thereby increase the government’s underlying exposure to the risks associated with the GSEs’ activities.

The results of CBO’s analysis and its methodology are described in the attachment. In keeping with the agency’s mandate to provide impartial analysis, this report makes no recommendations.

I hope that you find the analysis useful. If you have any questions about it, please contact me at (202) 226-2700.

Peter R. Orszag

p.s., just in case this thing costs $400 billion in the first six weeks of 2009, instead of the unlikely case of ‘up to $25 billion in two years’, don’t blame me, or even ask questions. Just promote me. Thanks- Pete

Peter Orszag was nominated by President Obama and unanimously confirmed by the Senate to Head the Office of Management and Budget on the 22nd of January.

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