The Potential Budget Impact of Government Intervention

The Proposed Financial System Rescue


The Bush administration’s latest proposal to shore up U.S. financial markets has led to confusion about the exact budget impact of such an action. Some have called it a “$700-billion bailout,” because the Treasury has requested authority to purchase up to that amount in mortgage-backed securities, a key component of the market turmoil. Others have suggested the government could make money off this authority, because the Treasury subsequently would sell, for a profit, the assets it had purchased.

The most likely outcome is somewhere in between.

The ultimate cost of the administration proposal is unlikely to reach $700 billion; but viewing the potential hazards associated with purchasing these assets, the government runs a risk of recouping significantly less than the price its pays for them. In addition, the government is likely to incur administrative and other costs associated with the program.

This paper briefly describes the administration’s proposals, reviews the potential budget implications, and provides some additional background.

Read the full report here.