Rethinking the crux of the financial markets crisis and its solutions, Treasury Secretary Henry Paulson announced today that the $700 billion Troubled Asset Relief Program (TARP), originally intended to take toxic financial assets off the books of lending institution

The Congressional Budget Office reported in its Monthly Budget Review for October that the federal budget deficit for that month will be $134 billion. But CBO predicts that when the Treasury Department releases the official deficit number later this month, it will be $232 billion.

The $98 billion gap is the product of differing interpretations on how purchases under the Troubled Asset Relief Program (TARP) should be scored. According to CBO:

...the stock investment and associated warrants should not be recorded on a cash basis but on a net present value basis, accounting for market risk, as specified in the Emergency Economic Stabilization Act. CBO's preliminary estimate of $17 billion for the present value cost is included in its estimate of $134 billion for the October deficit.

So far, Treasury has purchased $115 billion in bank stocks. Treasury says that this will increase the budget deficit by $155 billion, while CBO says it should increase the deficit by $17 billion.

This is an interesting development, as the potential impact on the budget deficit could be hundreds of billions of dollars, depending on whether Treasury follows the law, and uses a present value calculation -- the method employed in CBO's estimate, or if it continues to use a cash basis of accounting. There are a number of ramifications that could result from these accounting differences.

• A larger budget deficit figure may impose constraints on future fiscal policy
• Cash-basis accounting of these assets deviates from current practice. For example, a student loan is not counted as a cash expenditure, but as an asset, as the government expects to see the principal repaid
• The future sale of purchased bank stock would appear to decrease the budget deficit. This could open the door to manipulation by an administration seeking political gains to be had from decreasing the federal budget deficit.