CBO Director's Blog

It's amazing what you can find on the internet these days. Would you guess that the Director of the Congressional Budget Office (CBO), blogs?

Well, he does.

Dr. Peter Orszag, the young director who strikingly resembles the kid you'd expect was bullied by the Varsity team, is a modern day "econo-pimp" (pardon the colloquial) that puts out tons of useful information direct from the CBO. I check in with his blog frequently for updates on economic issues. In particular, updates to past testimonies and analysis on housing. I've watched him testify before Congress, and he's quite the intellect you'd expect, with a bit of a humourous side, too.

Below is an April 11^th update on previous analysis of various policy options for the housing mess. Check out the graph below...

Housing policy options

This morning, CBO released a new study on policy options for the housing and mortgage markets. The paper discusses the potential for federal intervention to ameliorate the situation, by encouraging and removing impediments to private mortgage restructuring or by providing federal financial support. (It does not, however, address the question of what regulatory changes might be warranted over the longer term, either to address the problems that led to the current situation or to support any wider federal role in the financial markets.) CBO finds that:

• The current economic situation is quite fragile, largely as a result of the difficulties in mortgage markets and other financial markets. Much of that fragility arises from falling house prices, which affect consumers through their housing wealth and lenders through their loss of collateral. It is exacerbated by the growing complexity of financial instruments and entities, which may make it difficult for participants to know what risks they are assuming, and by the leverage of both borrowers and financial market intermediaries, which means that it is difficult to prevent liquidity and solvency problems from spreading throughout the financial markets.   
  
  
  
• Foreclosures are an expensive way to resolve delinquencies. A large number of foreclosures is also likely to reduce the demand for houses, as potential purchasers conclude it would be better to wait until prices stop falling. Thus, excessive foreclosures could trigger a downward spiral of house prices that could take them below what would be justified on the basis of normal relationships to income and production costs. Such a downward spiral would exacerbate the problems in the financial markets, and...
  
  
  (Click Chart to Continue)