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Bailout Could Deepen Crisis, CBO Chief Says
Even as the financial markets rallied Thursday and Friday, Orszag said, the credit situation was so dire that "short-term lending was virtually shut down."
He said that the Treasury was acting as a go-between in short-term lending between banks. Instead of Bank A lending directly to Bank B, as is customary, Bank A no longer had confidence that Bank B could repay the loan.
So Bank A would give the money to the Treasury, which issued a security that was put into the Federal Reserve, which then issued the cash to Bank B.
If the government is forced to intermediate such ordinary transactions, commerce slows, credit confidence remains low, and operational strain is placed on the Treasury and the Fed.
"You don't want them in the middle of every short-term financial transaction," Orszag said.
During questioning before the Joint Economic Committee earlier yesterday, Bernanke acknowledged concerns about the bailout's effect on the budget.
"I think those concerns are very serious," he said. "But it's really a question of alternatives."