e c o n o m i c r e p o r t p r e s i d e n t

Chapter 5 describes the likely consequences of these projected deficitsover time and the importance of restoring fiscal discipline. It also discussesthe President’s plan for facing this challenge. A period of severe economicweakness is no time for a large fiscal contraction. Instead, the Nation musttackle the long-run deficit problem through actions that address the underlyingsources of the problem over time. The single most important step thatcan be taken to reduce future deficits is to adopt health care reform that slowsthe growth rate of costs without compromising the quality of care. In addition,the President’s fiscal 2011 budget includes other significant measures,such as allowing President Bush’s tax cuts for the highest-income earnersto expire, reforming international tax rules to discourage tax avoidance andencourage investment in the United States, and imposing a three-year freezein nonsecurity discretionary spending; alongside a proposal for a bipartisancommission process to address the long-run gap between revenues andexpenditures.Building a Safer Financial SystemRisky credit practices both encouraged some of the imprudent rise inconsumption and homebuilding in the previous decade and set the stage forthe financial crisis. Chapter 6 analyzes the role that financial intermediariesplay in the economy and diagnoses what went wrong during the meltdownof financial markets. The crisis showed that the Nation’s financial regulatorystructure, much of which had not been fundamentally changed sincethe 1930s, failed to keep up with the evolution of financial markets. Thecurrent system provided too little protection for the economy from actionsthat could threaten financial stability and too little protection for ordinaryAmericans in their dealings with sophisticated and powerful financial institutionsand other providers of credit. Strengthening our financial system isthus a key element of the rebalancing needed to assure stable, robust growth.Chapter 6 discusses financial regulatory modernization. What isneeded is a system where capital requirements and sensible rules are setin a way to control excessive risk-taking; where regulators can considerrisks to the system as a whole and not just to individual institutions; whereinstitutions cannot choose their regulators; where regulators no longer facethe unacceptable choice between the disorganized, catastrophic failure of afinancial institution and a taxpayer-funded bailout; and where a dedicatedagency has consumer protection as its central mandate. For this reason, thePresident put forward a comprehensive plan for financial regulatory reformlast June and is working with Congress to ensure passage of these criticalreforms this year.32 | Chapter 1