When $700 Billion Isn't $700 Billion

I have refrained from coming out for or against the "bailout" because the details have yet to be released. I tend to think that the financial situation is critical, and that effective legislation should be passed, and quickly. The following is some testimony from Peter Orszag, the head of the Congressional Budget Office, talking about the main gist of Paulson's proposal, its likely actual cost, and some alternative proposals. The key here: the $700 billion "bailout" is not likely to cost anywhere near $700 billion, assuming it even gets passed.

Paulson wants the government to purchase upwards of $700 billion of mortgage-backed assets that banks are unable to unload, because no market exists for these assets anymore. The mortgages themselves do have actual value, as the vast majority of them are likely to be paid off, but due to the situation in the financial markets (the causes of which I have discussed in previous posts), the market for these assets has shut down, which is equivalent to saying that these assets are being valued at nearly nothing. Paulson's plan calls for something probably like a reverse auction, which would determine the value of the mortgages and how much the government would pay for them, and then in theory the financial markets would stabilize, after which point the government would sell the assets back and recoup some, all, or more than all of the initial $700 billion.

Go here for the CBO testimony.