The Financial Crisis Led To Our Skyrocketing Debt. We Don’t Want To Repeat That.

The Financial Crisis and the National Debt

Over the past few years, the national political discussion has focused largely on deficits and spending as it relates to entitlements. While deficits and entitlement spending deserve attention, there is something more pressing:

We need to safeguard against another financial crisis and recession.

To illustrate the reason why safeguards deserve primary attention, we’ve included two charts here. The first one shows US revenues, spending, deficits, and debt stated in billions of dollars; the second shows the same areas as a percent of GDP.

The top line in the graphs (in red) shows the debt held by the public—including that which is held by domestic and foreign investors (see a fuller explanation here). The next two lines in the graphs show spending (outlays) and revenue. The last line (in purple) shows total deficits/surpluses by year.

It’s a lot of data, but we’re only focused on one small aspect of these graphs, which we highlight below.

Two Graphs Showing Federal Deficits and Spending 1972-2011

Chart attribution

Here’s the part we want to highlight:

What happened from 2007 to 2009 that caused a spike in the public debt?

Was there a sudden increase of Medicare patients? A new war? A boom of retirees getting Social Security benefits?

Nope.

While spending on war and entitlements did increase, much of the spike was either directly or indirectly related to the financial crisis and the recession.

The financial crisis and recession had two major affects on the US economy. On one front, they were partly responsible for the decrease in tax revenue (shown in the graphs above) as lending slowed and people lost their jobs. On the other front, the crisis and recession were tied to a portion of the increases in spending, with the bank bailouts, the buy-out of Fannie Mae and Freddie Mac, and the first round of stimulus spending. (There were also tax rebates and tax cuts meant to offset the slumped economy.)

So what?

The key here is that while the current deficit and entitlement spending levels are problematic, we should primarily safeguard against another crisis and recession. As long as the financial sector is concentrated and fragile, then the possibility of another crash is possible. And if another crash follows the recent crash too soon, we’ll see a second spike in the national deficit. At that point things may start to look worrisome.

TooBigHasFailed.org is a grassroots effort to get people to take a small action against “too big to fail” and the scandals that come with it. By no means is this a panacea for preventing future crises and recessions. But we believe there are good reasons to believe that as citizens become more informed about the crisis, the recession, the megabanks—and as they support local lenders—we will be closer to legitimate safeguards.

See also: the reasons to switch from Wall Street banks, the scandals page, or a list of comments about TBTF.