CBO weighs in

Yesterday Peter Orzsag, Director of the Congressional Budget Office (CBO), testified before the House Budget Committee on the turmoil in financial markets. He identified two problems facing the markets: illiquidity triggered by market panic and the potential insolvency of many financial institutions.

After analyzing the Troubled Asset Relief Act of 2008 proposed by the Treasury, Orzsag presented an alternative approach to address insolvency concerns. That proposal would have the government "invest directly in financial institutions to strengthen their capital positions, without directly purchasing troubled assets. The injections could take the form of preferred stock, which would effectively lower the cost of new capital for the institutions." Orzsag stated that variations of this proposal have been offered, and he listed their pros and cons.

Federal Responses to Market Turmoil (pdf, 11pp/68kB), September 24, 2008

See also Director's 9.25.08 blog on this testimony.