The $1.2 trillion (8.3 percent of GDP) deficit projected by the Congressional Budget Office (CBO) has received considerable attention form the media. However it is important to note that approximately $400 billion of this deficit represents money to make up losses of the financial system through the bailouts of Fannie Mae and Freddie Mac and the TARP. While this money adds to the debt, it does not directly stimulate the economy. It simply ensures that private obligations (e.g. bank deposits) can be honored. There would be a loss of wealth if these obligations were not honored, but the government's guarantees do not directly lead to new demand. It is also inaccurate to imply that that the debt was incurred in 2009. If we assume that the government always would have bailed out Fannie and Freddie and the major banks, then the debt was actually incurred when Fannie, Freddie, and the major banks made their bad loans. While we are first recognizing this debt in 2009, the debt was actually incurred during the peak years of the housing bubble, from 2004-2006.
--Dean Baker
