June 25, 2017

WASHINGTON BUDGET REPORT: Budget Effects of the Financial Crisis -- October 21, 2008

WASHINGTON BUDGET REPORT: Budget Effects of the Financial Crisis -- October 21, 2008
Fiscal Impact of Financial and Housing Rescue Measures Bernanke Endorses 2d Stimulus Measure Summary of FY 2009 Fiscal Stop-Gap Measure


The Concord Coalition Washington Budget Report is written and edited by Charles Konigsberg, Chief Budget Counsel of The Concord Coalition. 

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Budget Process: Step-by-Step


July 30, 2008: President signs housing recovery legislation

Sept. 7, 2008: Fannie Mae and Freddie Mac seized by federal government

Sept. 19: 2008: Treasury Dept. announces it will provide guarantees for money market mutual funds

Sept. 20, 2008: Bush Administration proposes $700 billion financial rescue package

Sept. 29, 2008: House defeats $700 billion financial rescue legislation

Sept. 30, 2008: President signs stopgap funding measure (HR 2638) that includes full-year appropriations for the Departments of Defense, Homeland Security, and Veterans Affairs; continues funding for other programs at last year's levels through March 6, 2009; and includes a $25 billion loan to the auto industry.

Oct. 1: Senate passes revised financial rescue legislation including increase in FDIC insurance, renewable energy incentives, AMT relief, tax extenders, and disaster relief (HR1424)  JCT   CBO

Oct. 3: House passes and President signs financial rescue package

Oct. 14:  Treasury announces it will use $250 billion (of the appropriated $700 billion) to purchase stock in major banks AND Treasury releases final deficit figure for FY 2008: $455 billion

Oct. 20:  Fed Chairman Bernanke endorses, in principle, enactment of a second economic stimulus bill

Fiscal Impact of Financial and Housing Rescue Measures

Click here for an overview and timeline of: the July 30th housing rescue legislation; the September 7th seizure of Fannie Mae and Freddie Mac; the October 3rd passage of the $700 billion financial rescue package; and the October 14th Treasury announcement of Federal plans to buy equity in America's major banks.

The Concord Coalition's overview of the crisis also addresses the budget impact of the recent measures. While there is no way at this juncture to make an accurate projection of the FY 2009 deficit, it is fair to say that it will exceed $750 billion--as estimated by CBO Director Orszag--and could go higher than $1 trillion.

Adding to the complexity, OMB and CBO may score various actions differently.  For example, CBO will incorporate the financial activities of Fannie Mae and Freddie Mac in the FY 2009 Federal Budget, whereas the current OMB Director, Jim Nussle, has said OMB will not do so (although this could change under the new Administration).

Regardless of how the FY 2009 and 2010 annual deficits are calculated, the real impact on the U.S. economy can best be measured by examining increases in the federal debt--the amount of money the Federal government has to borrow to finance Fannie and Freddie, and the financial rescue plan.

Bernanke Endorses 2d Stimulus Measure

Federal Reserve Chairman Ben Bernanke told the House Budget Committee at an October 20, 2008 hearing it is "appropriate" for Congress to consider a second stimulus measure to boost the economy. 

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke told the Committee.

Other Highlights of Bernanke's Testimony:

--"Even before the recent intensification of the financial crisis, economic activity had shown considerable signs of weakening.  In the labor market, private employers shed 168,000 jobs in September, bringing the total job loss in the private sector since January to nearly 900,000.  Meanwhile, the unemployment rate, at 6.1 percent in September, has risen 1.2 percentage points since January.  Incoming data on consumer spending, housing, and business investment have all showed significant slowing over the past few months, and some key determinants of spending have worsened:  Equity and house prices have fallen, foreign economic growth has slowed, and credit conditions have tightened."  

--"Should the Congress choose to undertake fiscal action, certain design principles may be helpful....Any fiscal package should be well-targeted....Any program should be designed, to the extent possible, to limit longer-term effects on the federal government's structural budget deficit....If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses, and other borrowers.  Such actions might be particularly effective at promoting economic growth and job creation."

[Background: The first economic stimulus bill this year was signed into law on February 13, 2008 and cost $152 billion (HR 5140). The bipartisan package provided tax rebates for individuals and business incentives. 

The House of Representatives passed a second $61 billion economic stimulus bill (HR 7110) in late September. However, a similar bill (S. 3604) failed in the Senate when proponents fell 8 votes short of the 60 votes needed to shut down a Republican filibuster. The President had threatened to veto both the House and Senate bills.   Veto threat: House Bill   Veto Threat: Senate bill

Both stimulus bills would have extended unemployment benefits, and provided funding for infrastructure projects, state Medicaid programs, and food stamps.]

It is also likely that proponents of a new stimulus bill will seek aid for the States.

Bernanke October 20 Testimony

Summary of FY 2009 Fiscal Stop-Gap Measure

On September 30th, President Bush signed into law a funding measure (HR 2638) to keep the government operating into the new fiscal year -- FY 2009 -- which began October 1st.  

The measure is actually a hybrid of an "omnibus" appropriations bill and a "continuing resolution":

--it includes detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs; and

--it includes stopgap funding through March 6, 2009 for Health and Human Services (HHS), and all other departments and agencies of government, at FY 2008 levels.

The stopgap provision does not provide inflation adjustments for the covered agencies.However, some specific programs did receive increases: the low income home energy assistance program (LIHEAP) received a $2.5 billion increase over '08; Pell Grants for higher education received $2.5 billion over '08; and the WIC program received $1 billion over '08 to assist with nutrition for new mothers and their children.

The bill includes a part-year extension of the Federal flood insurance program, which has been caught in a battle over whether to forgive the program's $17.5 billion debt without offsetting the costs, as required under PAYGO.

While there was no formal passage or House-Senate conference on the three full-year bills, the House and Senate Appropriations Committees informally "pre-conferenced" the measures.

In addition, the bill also includes $23 billion for disaster relief, and authorizes $25 billion in loans to the auto industry to retool and develop more fuel efficient vehicles.

This year's appropriations process was one of the worst on record in terms of following the regular order, Only one of twelve appropriations bill made it to the House Floor during the 2008 session.  There are two reasons for the disruptions in the regular process:

First, President Bush threatened to veto any appropriations bills that exceed his request, and Democrats--as reflected in the Budget Resolution--called for nearly $25 billion more than the President requested. From Democrats' perspective, if they wait until after the presidential election to make FY '09 funding decisions, they may be working with a Democratic President. As reported by Congressional Quarterly, Senate Majority Leader Harry Reid (D-NV) said recently, "I hope we would do a continuing resolution until after Sen. Obama becomes President."

Second, House Republicans were attempting to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats. On June 26, House Appropriations Chairman David Obey (D-WI) suspended markup of the Labor-HHS-Education appropriations bill when Republicans attempted to substitute drilling language for the labor, health, and education provisions.  However, in the end Democrats yielded on the drilling issue and let an annual ban on offshore drilling expire as of September 30, 2008.


Summary: Continuing Resolution

Summary: Disaster Relief Package

Summary: Defense Appropriations

Summary: Homeland Security Appropriations

Summary: Military Construction and Veterans Affairs Appropriations

Bill Text and Explanatory Statement