From the  CBO Director’s Blog we get this insightful analysis. He was attempting to clarify an article in the Washington Post about his testimony. This bill is pretty ambiguous to the average person. We know about how much this bill is going to cost and that it is going to pass quickly without a lot of outside review. My gut feeling is that the average person is pretty scared that this bill will result in a severe recession. That means unemployment for some people so they are mad and scared. This is a very dangerous time for politicians seeking re-electon. The paragraph that I include below from his post explains how we could stabilize some of the non-functioning mortgage markets and how a government investment may provide an incentive for the remaining participants to work out a solution. Of course no one is talking about the problems facing the home owners and how we are going to avoid repeating this problem in the future. It sounds like an awfully big Band-Aid.

Finally, it seems worth emphasizing again a key point from yesterday’s testimony ”” that the financial markets face two distinct, but related, problems. One problem is that the markets for some types of assets and transactions have essentially stopped functioning. To address that problem, the government could conceivably intervene as a “market maker,” by offering to purchase assets through a competitive process and thereby provide a price signal to other market participants. That type of intervention, if designed carefully to keep the government from overpaying, might not involve any significant subsidy from the government to financial institutions. The second problem involves the potential insolvency of specific financial institutions. Restoring solvency to insolvent institutions requires additional capital injections, and one possible source of such capital is the federal government. Although the problems of illiquidity and insolvency are interrelated, they are at least conceptually distinct. Indeed, some policy proposals appear to be aimed primarily at the illiquidity of particular asset markets, and others appear to be aimed primarily at the potential insolvency of specific financial institutions. The Treasury proposal appears to be motivated primarily by concerns about illiquid markets. The more the government overpays for assets purchased under that act, however, the more the proposed program would instead provide a subsidy to specific financial institutions, in a manner that seems unlikely to be an efficient approach to addressing concerns about insolvency.

Troubled Asset Relief Act and insolvencies
Peter Orszag
Thu, 25 Sep 2008 16:45:56 GMT