Bush administration efforts to gain control over the federal
budget deficit, however, were more problematic. One source of
the difficulty was the savings and loan crisis. Savings banks –
formerly tightly regulated, low-interest safe havens for
ordinary people – had been deregulated, allowing these
institutions to compete more aggressively by paying higher
interest rates and by making riskier loans. Increases in the
government's deposit insurance guaranteed reduced consumer
incentive to shun less-sound institutions. Fraud, mismanagement,
and the choppy economy produced widespread insolvencies among
these thrifts (the umbrella term for consumer-oriented
institutions like savings and loan associations and savings
banks). By 1993, the total cost of selling and shuttering failed
thrifts was staggering, nearly $525,000-million.
In January 1990, President Bush presented his budget proposal to
Congress. Democrats argued that administration budget
projections were far too optimistic, and that meeting the
deficit-reduction law would require tax increases and sharper
cuts in defense spending. That June, after protracted
negotiations, the president agreed to a tax increase. All the
same, the combination of economic recession, losses from the
savings and loan industry rescue operation, and escalating
health care costs for Medicare and Medicaid offset all the
deficit-reduction measures and produced a shortfall in 1991 at
least as large as the previous year's.
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