White House Slashes Deficit Forecast for '09; Bank Bailouts Not So Costly

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Byline: Patrice Hill, THE WASHINGTON TIMES

The White House is reducing its forecast of this year's budget deficit to $1.58 trillion as a result of significantly lower than expected spending on bank bailouts, congressional sources say.

A report due Tuesday from the White House Office of Management and Budget will show that the deficit is lower because of $262 billion less in spending on bank bailouts by the U.S. Treasury and Federal Deposit Insurance Corp. (FDIC) than the administration expected earlier this year, according to a memo written Monday by former Congressional Budget Office Director Douglas Holtz-Eakin that was obtained by The Washington Times.

The administration earlier this year in the midst of the banking crisis expected to spend more than $1 trillion closing some failed banks, bailing out others and helping many financial institutions get rid of toxic loan portfolios.

While the outlook for the deficit in the current fiscal year ending Sept. 30 has improved significantly thanks to reduced spending on banks, it is still on track to rise to a record and to drive unprecedented levels of borrowing by the Treasury in the months ahead.

Spending on bank bailouts slowed abruptly after the Treasury and Federal Reserve announced the results of stress tests on the 19 largest banks in March, providing reassurance to financial markets that the losses those banks were experiencing on mortgages and other loans were manageable. Since that time, major rallies have taken hold in the U.S. stock and credit markets, led by improving sentiment about the stocks and finances of big banks such as JPMorgan Chase & Co. and Bank of America Corp.

The number of bank failures has increased sharply in recent months, but most involve small community banks where the FDIC's exposure to losses is small compared with the cost of bailouts of big banks, totaling more than $50 billion apiece last winter. The White House now expects the FDIC's losses from bank closures to be $78 billion lower than previously estimated, said Mr. …