“Last Thursday, Secretary Paulson, Chairman Bernanke, and SEC Chairman Cox came to the Capitol to brief the leadership on the financial crisis facing our country and to ask for a swift, robust response by Congress.  On Saturday, they followed up that meeting with a legislative proposal, or at least a skeletal outline, and a dire warning that time was of the essence.

“Since then, Congress has been poring over the Bush Administration’s proposal, making improvements to it, and trying to reach consensus.

“On the Budget Committee, we have a limited role in legislating the proposal before us, even though it has major repercussions for the budget.  Just two weeks ago, the Congressional Budget Office released its updated budget and economic forecast, and warned of large, unrelenting deficits ahead of us. Economic events since then have only worsened the outlook.

“The Bush Administration has requested an unprecedented sum, $700 billion, to shore up failing firms, stop panic in the financial markets, and keep the economy from back-sliding into a protracted recession. Our hearing today will examine the impact of the President’s request on the federal budget.  The President has called for Congress to act with dispatch; but we must also act with diligence and deliberation as we consider this request, and that is the purpose of today’s hearing.

“To that end, I decided yesterday, and Mr. Ryan graciously agreed, to move this hearing up from its scheduled time on Friday. Although the time for floor consideration has not been set, I was concerned that a hearing on Friday could come after the bill was considered on the floor.

“I want to commend the Budget Committee staff on both sides, particularly Tom Kahn and Austin Smythe, who have been working in a collegial, bi-partisan way to analyze the proposals that the Bush Administration has sent us. We were concerned that the proposal in its original form did not adequately account for risk and therefore understated cost. Our staff has been working with staff at OMB on the proposed scoring of this proposal, so that it better reflects the market risks involved.  Budget Committee staff has also helped add to the bill periodic requirements for reporting of funds disbursed, assets acquired, and the estimated recovery or repayment.

“Our witness today is Peter Orszag, Director of the Congressional Budget Office. I want to thank Dr. Orszag for re-arranging his schedule on short notice so that he could testify, and I want to thank his staff for all they have done to help us analyze this proposal. CBO has been working overtime on the written testimony, and our members probably have not had an opportunity to read it. I would encourage Dr. Orszag to take whatever time he needs to give us CBO’s analysis of how the requested funds will be reflected in the budget.

“Just by way of background, let me lay out the budget question that is mainly before us. There are two conventions for recording the President’s $700 billion request.

“Under traditional scoring, when the federal government purchases an asset, the purchase payment is shown in the budget as an outlay.  There is no corresponding entry for the value of the asset acquired—not at least until the asset is sold. When it is sold, the sale price is booked as an “offsetting receipt” or as a “negative outlay.” If CBO follows this method, it needs to know how much of the $700 billion will be drawn from the Treasury and paid out, and when the withdrawal will occur. To complete the transaction, CBO needs to know when the asset is sold and the receipts derived from the sale.

“If the government’s disbursement takes the form of a loan, the loan amount is not booked as an outlay, and the subsequent repayments are not booked as receipts.  Under the Credit Reform Act, if the loan is deemed likely to repay (on a present value basis) less than the original principal amount, because of losses, or subsidies, then CBO books the probable shortfall as an outlay in the year the loan is made.  OMB believes that the requested $700 billion should be scored in this manner, because many of the assets the government acquires will be mortgage loans, so it will be stepping into the shoes of the mortgagee.

“As you can see, the customary accounting conventions are not an easy fit for these circumstances, and the convention used can have a major impact on how the requested $700 billion is incorporated into the budget. Our purpose is to explore these and other budget process issues with Peter Orszag, and in that connection, let me remind all of our members that Dr. Orszag is not here to oppose or support the proposal before us. He and his staff are here as analysts, not advocates.

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