This recession not ‘the big one,’ warns U.S. comptroller

The current recession could be only the beginning of economic strife if the U.S. government fails to get its house in order, former U.S. Comptroller General David Walker told fee-only financial planners today.

“This is not the big one. We will get through this. This is a recession; it is not a depression,” said Mr. Walker, who is president and chief executive of the Peter G. Peterson Foundation in New York.

He spoke to more than 500 financial planners attending the Arlington Heights, Ill.-based National Association of Personal Financial Advisors’ annual conference in National Harbor, Md.

“The real risk is the risk of a super subprime crisis is that [will] be associated with the loss of confidence in the ability of the federal government to get its financial house in order, a flight from U.S. government securities and the dollar by our foreign lenders, a dramatic decline in the dollar, a significant increase in interest rates and all the different adverse implications that would have on the budget, on the economy and for American families,” Mr. Walker said.

Government spending today consumes 25% of the economy and is rapidly headed to 30% with stimulus and bailout spending, said Mr. Walker, a certified public accountant and former investment adviser.

The biggest problem with the federal budget deficit, which is expected to balloon to $1.8 trillion in fiscal 2009, from $459 billion in fiscal 2008, is the unfunded obligations for Medicare and Social Security, he said.

Those obligations “grow faster than the economy, when the economy grows,” Mr. Walker said.

Liability for Social Security and Medicare are expected to be $62 trillion at the end of fiscal 2009, which ends in September, up from $20 trillion in fiscal 2000, he said.

“Today America owes more than Americans are worth, and the gap is growing,” Mr. Walker said.

Also, half of U.S. debt currently is held by foreign lenders, and 70% of new debt is being purchased by foreign lenders.

As a result, China and Japan were able to demand that the U.S. government guarantee the debt of mortgage backers Fannie Mae of Washington and Freddie Mac of McLean, Va., which were placed into conservatorship last year. The two countries held much of the obligations of the two government-sponsored enterprises.

“We’ve already been exposed to financial warfare,” Mr. Walker said.

Government officials are only thinking in terms of modest changes when what is needed is “dramatic and fundamental changes,” he said.

The U.S. is exercising “laggardship” rather than leadership, Mr. Walker said.

Americans are changing their personal behavior, with savings rising from negative rates a few years ago to 4.2% currently, he said.

Personal debt loads also are declining.

Future economic growth “will be more sustainable if the federal government puts its house in order,” Mr. Walker said. Taxes are likely to pay for the deficit, he predicted.

Stricter constraints on deficit spending need to be adopted, along with simplification of the tax system and health care reform, Mr. Walker said. Americans must put pressure on elected officials to make tough choices, he said.

Further, most Americans should plan to work longer, save and invest more, use credit prudently and plan for their own long-term health care and pensions, Mr. Walker said.

The American dream is not owning a house; it’s every individual having the opportunity to achieve their full, God-given ability, and each generation having the responsibility to leave the country better off and better-positioned than the next so that our children and grandchildren can have a better way of life than we have,” Mr. Walker said.

Related Topics: National Association Of Personal Financial Advisors (NAPFA)