"We’re mortgaging the future of our children and grandchildren," says David Walker. "We’re in a situation where, for the first time in American history, a majority of Americans don’t believe that the life of their kids will be as good as theirs."
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WASHINGTON — David Walker, the outspoken former U.S. comptroller general, gives failing marks to both presidential candidates so far on their proposals to drag the country out of its economic abyss.
Before an intent crowd at the National Press Club, Walker, the no-nonsense one-time certified public accountant for the nation reviewed the various proposals of Sens. John McCain and Barack Obama and played them off the “numbers — you know, that’s the bottom line.”
Looking at the first of four parameters — what impact the plans would have on projected deficits — he concluded: “Both would make it worse, significantly worse as compared to current law. Primarily because both want to extend major portions of the Bush tax cuts and neither one of them want to pay for it.”
Second, Walker compared how each proposal would affect the bottom line. One would lose more money through tax cuts, both would lose money through tax cuts, and one would lose more money through spending increases, he said.
He added a qualification: “But when you look at the bottom line, which is a combination of the two, there is an insignificant difference between the two. If you look at year 2013 — so we give a little time for their policies to work, five years out — there is less than a one-tenth of 1 percent of GDP difference between the two.”
Third, both candidates’ proposals rely on lots of unspecified actions to pay for what they want to do, either through tax cuts or spending increases. “They both do, to the tunes of hundreds of billions of dollars a year . . . hundreds of billions of dollars a year,” Walker said.
Fourth, Walker asked rhetorically what progress the proposals would make toward addressing the nation’s $50-plus trillion, and deepening, financial hole.
“Zip. Zip,” said Walker, who was comptroller general under Presidents Clinton and George W. Bush.
“The candidates need to get the message,” he said. “We need to deal with the current situation, but we need to deal with the much bigger one because we’re mortgaging the future of our country. We’re mortgaging the future of our children and grandchildren. We’re in a situation where, for the first time in American history, a majority of Americans don’t believe that the life of their kids will be as good as theirs. I think they are wrong. I think that we can change that, but that is what they think. But candidly, on the path that we are on, that is where we are headed and that’s an unacceptable path.”
Fiscal Future Commission
The country needs presidential leadership, said Walker, president and CEO of the newly formed Peter G. Peterson Foundation.
“Whoever the American people decide to elect that’s fine, but we need to make sure that the next president makes this a priority and we sure need some type of fiscal future commission to get off to a fast start.”
Such a group would have to formulate a plan “so that, about a year after they come into office, there will be something that will be on the table that hopefully can be acted on . . . that will help us defuse and prevent a crisis . . . because it will be much worse than a recession if it hits.”
The group must be capable, credible and bipartisan and put everything on the table. It should convene hearings outside of Washington to recommend proposals with statutory budget controls, comprehensive Social Security reform, tax reform, and healthcare reform.
Those measures must have “limited amendments and would be guaranteed an up or down vote in the Congress,” he said.
‘Big and Bad Surprises’
A lot of people don’t acknowledge that the four factors that contributed to the crisis also exist in overall federal government finances. He noted a difference between the players who benefit from the policies and practices and those who bear the risk and pay the price.
“In the case of our mortgage-related challenge, the people who originated these mortgages made a lot of fees but didn’t hold the mortgages. They securitized them; they passed them off to somebody else,” he said.
Other sophisticated instruments created an atmosphere in which “a lot of people got a big and bad surprise because they didn’t get the fees on the front end,” he said. “But they got stuck with some subprime mortgages in their portfolio.”
The nature and the magnitude of the related risks involved were obscured, he said.
“Frankly, a lot of people didn’t even understand how they worked, and as a result, there are a lot of big and bad surprises. Now, the federal government has a similar problem.”
The problem is not the deficit, although it is bad and getting worse, he said. And it’s not the debt, although it probably will have doubled during this presidency by the time President Bush leaves office.
“The problem is where we are headed and the fact that we got over $40 trillion dollars in off- balance sheet obligations, primarily Medicare — over $34 trillion — and Social Security — about $7 trillion — and that’s the problem and we’re not doing anything about it.”
Addressing the mortgage situation, Walker said there was too much leverage and not enough focus on cash flow.
“Well, we all know what happened to Bear Sterns and what happened to several other players in this regard, and we all know that there were investors, institutional, individual investors that held . . . securitize arrangements that were rated Triple A one day and junk status not too long afterwards.”
Endless Borrowing Myth
The federal government is assuming that it can borrow as much money as it needs for as long as it wants at low interest rates from foreign lenders, Walker said.
“That’s not a prudent assumption,” he warned. “This new bailout package — call it what you want — will have to borrow that money from overseas because we don’t have it. America has a savings test.
“We also have seen that Medicare has already negative cash flow and Social Security will be negative cash flow within 10 years, and, yes, the United States currently has a Triple A credit rating, but the question is how much longer will we deserve a Triple A credit rating based upon our imprudent practices.”
Also contributing to the crisis was the fact that both private sector and government risk management mechanisms did not kick in, despite clear and compelling warning signals, Walker said.
“Both private sector and government regulatory agencies didn’t do anything until there was a crisis. That’s a little late,” he said. “People are talking about how there was so much leadership on this to put all of this together. I call it ‘lagship.’ Lagship is when you act when there is a crisis because you didn’t do the right thing to anticipate the problem and take preemptive steps to prevent a crisis to begin with. We need leadership, not lagship.”
Walker stressed the need to learn lessons from the crisis.
“We need to recognize that the four common denominators between the current mortgage-related subprime crisis relate to a much bigger potential super subprime crisis, and that’s the federal government’s finances.
“There are two big differences: the scale, tens of trillions, and secondly, nobody is going to bail out America. We’re going to have to solve our own problems, and it’s time that we started getting on and doing that.”
Disappointing Debates
One good sign was that questions related to some of the issues arose during the second presidential debate, he said.
“That’s progress because if we don’t people to at least start asking questions you can’t expect you are going to get any answers. The bad news is we still didn’t get great answers, but at least there’s one more presidential debate to go,” he said.
“Now, you can’t expect them to get into all of the details like here’s how I’m going to reform the tax code, here’s how I’m going to reform Social Security, here’s how I’m going to reform the healthcare system. They can give you some parameters, but they can’t get into all of the details. They do want to get elected after all.
“But what we can expect is for them to acknowledge the problem, state that they will make it a priority, and endorse a process that will get us to an acceptable result,” Walker said. “It’s time that we start making progress on fronts because the fuse is lit and we only have so much time. The regular order is broken.”
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