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So Is It $700 Billion--or Is It More?

Earlier today, an economist I know pointed out this passage in Treasury Secretary Henry Paulson's proposal:

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Note those words in bold. A fair reading of that passage, the economist suggested, is that the magical $700 billion figure we keep hearing is a limit not on total federal outlays, but only on the outlays at one time. Under that interpretation, there would be nothing to prevent the the government from spending $700 billion on bad assets, selling them at a loss, then spending another $700 billion on new assets, selling those at a loss, and then repeating the cycle several times.

Could that be right? I spent the rest of the day trying to track down a definitive answer. One Capitol Hill staffer suggested to me that, yes, such a reading would be correct, although he didn't seem particularly worried about it. Later, I contacted another economist, James Galbraith from the University of Texas-Austin. Here was his take: 

In my view, it's contradictory. "Authority to purchase...shall be limited to $700,000,000,000" seems clearly intended to be a limitation on the authority to purchase. But then "outstanding at any one time" clearly changes that to a maximum held "at any one time."

So, yes, he could buy and sell under this language.

But then it would be unclear what the $700b refers to. Surely it represents total cash outlays, rather than the face value of the debt; the whole idea is to buy more than $700b worth of securities at some discount. So if he bought dear and sold cheap, could he could write down the bonds sold from their purchase price to their sale price, deduct that from the value of the portfolio, and then buy another bunch at a higher price? That seems a stretch to me.

Of course, if it's unreviewable (Section 8), they can make the language mean anything they want. But this looks like very bad legislative drafting to me. My bet: two different lawyers contributed to that sentence.

Guess it's a good thing the Senators grilling Paulson today were so skeptical.

--Jonathan Cohn