Take Those CBO Numbers with a Grain of Salt
Conn Carroll /
There is tons of terrible stuff in the housing package currently working through Congress. But the Congressional Budget Office (CBO) scoring of the bill should be taken with a grain of salt. Remember:
- The $25 billion estimate is a best guess based on inadequate data and covering a period of great uncertainty. The estimate averages the costs of several possible outcomes based on CBO’s judgment as to the likelihood of each outcome. The $25 billion number is not hard and firm by any measure, and should only be treated with care.
- According to CBO, there is a “better than 50 percent” probability that the cost will be zero. There is about a 5 percent probability that the eventual cost will exceed $100 billion.
- The estimate is the potential cost of averting a massive crisis in the U.S. and global financial markets that could greatly affect the overall economy and damage the dollar. This is not the same as a new education program or expanding LHEAP.
- If the housing and financial markets continue to deteriorate, the probability that the Treasury plan would be used will increase. The greater the deterioration, the higher the likelihood of a higher cost. On the other hand, if housing and financial markets stabilize in time, then the likelihood of avoiding any costs increases. In either event, we have no sound basis for predicting the outcome.
- We should be concerned that we find ourselves in this position. This is the result of Congress and past administrations ignoring many warnings that Fannie and Freddie pose a significant danger to both the US and the global financial system. Now Congress must act to stabilize markets today, and then take steps over the longer term to ensure that this entirely avoidable predicament never recurs. The sooner Congress does act on these short term steps the more likely that the costs will be less.