Yesterday, the Senate Budget Committee held a hearing to discuss the federal response to the housing and financial markets crisis and possible future options for government response.  

The only witness at the hearing was Dr. Douglas Elmendorf, Director of the Congressional Budget Office. Dr. Elmendorf is new to his position as Director of the Congressional Budget Office and today’s hearing served not only as a discussion of the financial markets crisis, but also as Elmendorf’s introduction to the Committee.

Dr. Elmendorf emphasized to Committee members that his role as Director of the CBO requires him to provide analytical advice to Congress, rather than policy advice. As such, his testimony consisted largely of describing numerous possible legislative responses and explaining the positive and negative consequences associated with each. He stated that most economists believe that an effective response to the current market crisis will require a multifaceted approach, possibly including:  

  • additional equity injections into financial institutions;
  • government purchase or guarantee of troubled assets;
  • increased government lending to households and businesses (such as through government purchase of mortgage-backed securities) 
  • government subsidization of mortgage modifications; and
  • bankruptcy reform.  

Dr. Elmendorf also stated that any effective solution would likely be expensive for the federal government, but that timely, comprehensive responses have generally cost countries in economic turmoil less in the long run than slow, gradual responses. Committee members seemed to be receptive of Dr. Elmendorf’s insights, and stated that they looked forward to working with him and the CBO in the future.