Are We Facing a Super Subprime Crisis?

by | Jun 29, 2009 | In The News, Weekly Column | 5 comments

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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