Are We Facing a Super Subprime Crisis?

cake walkThe U. S. is facing a super subprime crisis that will make the current crisis seem like a cakewalk. That was the depressing news from David Walker, former Comptroller General of the United States and currently president and CEO of the Peter G. Peterson Foundation, when he spoke to financial advisors attending the national NAPFA convention in Washington, DC, in June.

It is well known that the current crisis was produced largely by consumers spending more than they made, funded by reckless borrowing. As a nation, however, we are doing the same thing. The problem, according to Walker, isn’t the doubling of our national debtDavid Walker from $5.8 trillion in 2008 to $11.2 trillion today. “The problem is the tens of trillions of unfunded obligations for Medicare and Social Security. These obligations grow faster than the economy or inflation.”

Walker, estimating all our obligations at over $62 trillion dollars, said, “America owes more than Americans are worth.”

He was somewhat optimistic about the response of average Americans to the crisis, especially increases in savings. He predicted this change in behavior would be sustained even when the economy turns around.

Despite the benefit of the recent fiscal policies in preventing the recent crisis from becoming a depression, Walker was not optimistic about the federal and most state governments. He warned, “We have an out of control fiscal and monetary policy. As a country, we are living beyond our means.”

Walker listed four factors that led to the current crisis and will lead to the coming super meltdown.

1. There is a disconnection between those who benefit from government fiscal policy and those who are affected by or pay for it.
2. There is a lack of transparency in communicating the risks being taken in our current fiscal policy.
3. We have created too much debt, not enough focus on cash flow, and too much reliance on credit rating agencies.
4. Government fails to act until there is a crisis. Instead of “leadership,” we get “lag-ership.”

One of the big problems is our national debt. During WWII, our national debt was 122% of GDP, but 100% of it was owed to Americans. Now, Walker said, 50% of our national debt is owed to foreign lenders.

The danger here is that other nations can pressure us into actions that are not in our best interest. This has already happened. Freddie Mac and Fannie Mae mortgages were not guaranteed by the government until this crisis. Then, Walker said, “Japan and China demanded” that the U. S. Government back their mortgages.

If we are to turn things around as a county, Walker says Americans must demand four things from their elected officials:

1. We must enact tough statutory budget controls.
2. We’ve got to reform Social Security.
3. We must reform Medicare and privatize medicine.
4. We must reform our tax system to raise revenue by becoming fairer and more business friendly.

Walker feels that of all of these, reforming Medicare will be the hardest. “Social Security reform is a layup. Medicare reform is a three-point shot made from under the opponent’s basket.”

Once we come out of the current recession, the outlook is for our economic growth to be significantly less than in past decades. Walker predicted taxes are going up and the longer we wait to restructure government, the higher they will go. “My grandchildren will not have as good a life as I’ve had. That’s un-American.”

spend lessHe concluded, “Americans, now more than ever, will have to work longer hours, learn how to budget, spend less, and save more for their future.”

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5 Responses to Are We Facing a Super Subprime Crisis?

  1. Will July 1, 2009 at 11:36 am #

    Typical fear policies of our last government. Everything is gloom and doom unless a Republican is doing it. Republicans got us in the mess. You can blame the last 8 years on Clinton or that the issues are just starting with Obama.

  2. Will July 1, 2009 at 11:39 am #

    Where was this guy when Bush was giving so much money to the Banking industry. How much money did the Republican pay for a privatized war that mostly Republican companies benefited from? Why is that money not an issue. Compare the costs of the war with other costs.

  3. Bobbie Munroe July 2, 2009 at 6:18 am #

    I just want to make it clear that in his current role at the Peterson Foundation, Mr. Walker is decidedly non-partisan. He spends little time on blame (there is enough to go around) and focuses on solution. For a good non-partisan take on the issue, go to

  4. Irene Tomkinson July 3, 2009 at 3:15 am #

    Hi Rick,
    Enjoy your newsletter.

    Just have one question. Why is it that when we talk about policies that will benefit average Americans such as health care (a public option) or Social Security benefits there is always a large cry from Republican economists that the country can not afford them. But when we talk about going to war – no Republican says we just simply can not affort it. For example where is the economic benefit to America because we have been in Iraq for all these years? I never hear any cry from the right about the fiscal damage to the US.

    Just wondering.

    Have a good 4th.
    Blessings Irene

    • Rick Kahler July 4, 2009 at 9:20 am #


      Thanks for your thoughtful response.

      The notion that health care or social security will actually benefit average Americans is not a forgone conclusion in conservative fiscal circles. On the face, it appears to be a no brainer that the “average” American will benefit. However, will they benefit in the long run? Being a frequent traveler to England, I would suggest that the average Amercian would be far better off with our current system. The care is better and the cost is less, especially when you consider the huge tax increases that will necessarily be born by all Americans to fund this. That point is not talked about much in the media, nor do they talk much about the 20% national sales taxes and the double income taxes paid by the average European to fund their system. They also don’t talk about the economic drag it is to the economy or creating jobs.

      Social security is no security at all……it’s also a disaster…smoke and mirrors.

      I probably run in a different fiscal conservative crowd than what you may be exposed to, but I don’t know one that would not quickly admit the Iraq war was very, very costly to the US. And, I suspect those that have the world view of a pending war being about bringing freedom to a repressed country (true or not, but the preception) would disregard the monetary cost in much the same way someone might disregard the cost of doing everything they could to pay for the legal expenses for a loved one they feel may be wrongly charged with a crime.

      Take care,