December 5, 2023

Economy Hampers Deficit Panel, Budget Office Says

At the same time, the director, Douglas W. Elmendorf, told a powerful new Congressional committee on deficit reduction that the government’s growing debt would “lead to lower output and incomes” and could “increase the probability of a sudden fiscal crisis.”

As the 12-member panel began its race against a November deadline to recommend substantial federal savings, Mr. Elmendorf said its task had become more difficult because the outlook for the economy had worsened in the last month.

“We expect employment to expand very slowly during the rest of this year and next year, leaving the unemployment rate close to 9 percent through the end of 2012,” Mr. Elmendorf said.

The panel is supposed to recommend ways to reduce federal deficits by at least $1.2 trillion over 10 years, or else the government will make across-the-board cuts in many federal programs to achieve those savings.

Under the law, the committee must take a final vote by Nov. 23, but Mr. Elmendorf said his office would need a legislative proposal by early November to assess its impact on the deficit.

Republican members of the panel said growth in federal spending — for Medicare, Medicaid and Social Security, in particular — was the main factor in the nation’s fiscal problems. Mr. Elmendorf said spending for the big three benefit programs would account for 12.2 percent of the gross domestic product in 2021, compared with an average of 7.2 percent in the last 40 years.

The difference, 5 percent of the economy, “is a very big number,” Mr. Elmendorf said.

Democrats said higher revenues were essential. Federal revenues are equivalent to 15.3 percent of the G.D.P. this year, compared with an average of 18 percent over the last 40 years, the budget office said. Under current law, which provides for the expiration of Bush-era tax cuts in 2013, revenues will grow to nearly 21 percent of the economy by 2021, it said.

Representative Chris Van Hollen, Democrat of Maryland and a member of the committee, said that without higher revenues, “you are talking about dramatic cuts in health and retirement security for America’s seniors.”

But Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee, said, “Federal revenues have equaled or exceeded 20 percent of G.D.P. only three times: in 1944 and 1945, during World War II, and in 2000,” when the government ran a surplus.

Two Republicans on the deficit reduction committee, Senator Jon Kyl of Arizona and Representative Fred Upton of Michigan, said they believed that the government could save large amounts of money by rooting out fraud and waste in benefit programs.

Mr. Elmendorf told lawmakers that “there is no evidence” to suggest that such antifraud efforts could produce a large share of the $1.2 trillion in deficit reduction the panel is supposed to recommend.

The budget office director put a price tag on the cuts that would occur automatically if legislation originating in the committee did not become law by Jan. 15.

Military spending would be cut by $454 billion over 10 years, Medicare by $123 billion and other domestic programs by more than $300 billion, he said. With these cuts, the government would have less need to borrow, so debt-service costs would be reduced by nearly $170 billion over 10 years, he added.

Senator Rob Portman, Republican of Ohio and a member of the panel, said the goal of saving $1.2 trillion to $1.5 trillion was formidable but realistic in the larger context of federal spending. The budget office estimates that the federal government will spend $44 trillion in the coming decade.

One of the most difficult questions for the panel is how to reduce the budget deficit without threatening the fragile economic recovery.

Mr. Elmendorf said, “There is no inherent contradiction between using fiscal policy to support the economy today,” with tax cuts or additional spending, and “imposing fiscal restraint several years from now.”

However, Republicans were skeptical of that approach. Too often, they said, the additional spending, though labeled temporary, has become permanent, as with some provisions of the economic stimulus law adopted in 2009.

On one point lawmakers agreed on Tuesday.

“All problems are easier to solve with a strong, growing economy,” said Senator Patrick J. Toomey, Republican of Pennsylvania.

Senator John Kerry, Democrat of Massachusetts, said, “We need growth, not just revenue and not just cuts.”

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The Fed’s Crisis Lending: A Billion Here, a Thousand There

WASHINGTON — The Federal Reserve lent billions of dollars to the nation’s largest banks during the financial crisis in the fall of 2008. It also lent $400,000 to the Eudora Bank, a community lender with a single location in the center of Eudora, Ark.

Day after day in late October and early November, near the high-water mark of the Fed’s efforts to rescue Wall Street, the central bank also made dozens of similarly modest loans to small banks in communities across the country.

Some banks, like Howard Bank, a suburban lender with four offices outside Baltimore, borrowed as little as $1,000 — a fire drill in case things got worse.

Other borrowers already were facing dire problems. Several have since failed, including La Jolla Bank in Southern California, which took $6 million.

The Fed released a complete list Thursday of banks that borrowed during the crisis from its discount window, its oldest and broadest emergency lending program. The central bank already released similar information for its other lending programs.

As with those other programs, the discount window mostly served the giant banks like Bank of America, Citigroup and Washington Mutual, whose struggles to survive the consequences of reckless lending and investment have defined the narrative of the crisis.

But the discount window was unique because it was open to smaller banks, too. The other emergency programs were created during the crisis to support the trading and investment activities that are concentrated in New York. The discount window, which predates the crisis by almost a century, was created to help commercial banks weather cash squeezes.

The long list of banks that lined up at the window, which the Fed provided in the form of a daily loan register, shows a crisis stretching far beyond Wall Street.

On Wednesday, Oct. 29, 2008, for example, the Fed lent money to 60 different banks, in amounts ranging from $1,000 to $26.5 billion.

At least 10 of those banks have since failed.

Borrowing from the discount window is considered a sign of weakness, and banks historically have avoided it if they can. From 2003 through 2006, the Fed lent an average of less than $50 million each week.

By the summer of 2007, however, the central bank was increasingly concerned that a growing number of banks needed help but were unwilling to borrow. In August, the Fed slashed the cost of borrowing from the discount window by half a percentage point. Then it arranged for four of the nation’s largest banks, Bank of America, Citigroup, JPMorgan Chase and Wachovia, to take what were described as symbolic loans of $500 million.

By the peak of the crisis in late October and early November 2008, the volume of outstanding discount window loans reached above $100 billion.

The Fed has long treated its interactions with banks as confidential but a series of federal courts ruled that it had to provide information on its emergency lending programs in response to Freedom of Information Act requests filed more than two years ago by Bloomberg News and the Fox Business Network.

The Fed provided the data to reporters Thursday in the form of several hundred electronic images of the original documents, loaded on a compact disc, distributed by hand at 10 a.m. in the cramped security checkpoint outside its headquarters building.

By contrast, the Fed released data on its other emergency lending programs in December by creating a public, searchable Web site.

Bankers have expressed concerns about the release of the data, saying that the prospect of publicity will deter future borrowing.

“I think it will make it harder for people to use the discount window in the future,” Jamie Dimon, chief executive of JPMorgan Chase, said Wednesday.

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