Bailout

A Super Subprimse Crisis Around the Corner?

By Admin

If you think the $700 Million Emergency Economic Stabilization Act’s TARP bill is high, former US Comptroller General, David Walker warns we haven’t seen anything yet.  For years Walker has been talking of the impending bankruptcy of Social Security, Medicaid, and Medicare to anyone that would listen.  He is now describing this impending doom as a “Super Subprime Crisis”.

In an editorial publisehd by Fortune magazine, Walker points out eery similiarities between the unfunded federal entitlement programs and the securitized mortgage vehicles that blew up the financial markets:

First [these] programs were launched without adequately thinking through who would bear the ultimate cost and related risk.  Just as originators of mortgages let themselves off the hook by unloading packages of dubious loans onto others, lawmakers have increased spending, expanded entitlement programs, and cut taxes while expecting future generations to pay the bill.

Second, just as a lack of transparency associated with mortgage-backed securities resulted in big surprises and large losses for investors, our nation’s huge off-balance-sheet obligations for Social Security and Medicare present a threat wrapped in camouflage. After all, the government’s “trust funds” don’t really provide much security since they don’t hold anything but more government debt.

Third, in the same way that private sector “risk management” executives failed to prevent the subprime mortgage crisis, overseers in Congress and the executive branch have turned a blind eye to costs associated with entitlement programs and tax cuts. While lax regulation of banks fed the current subprime crisis.

TARP and other bailout measures have already run up a $1.8 Trillion tab.  The size of the potential entitlement bailout if the federal government keeps acting like a homeowner who borrws against the value of their home in the belief property values would increase for eternity?  $41 trillion! $352,000 per U.S. household.  This figure represents the present-value shortfall between the cost of the government’s obligations to the entitlement programs and the payroll tax revenues intended to pay for them.

Walker believes the two votes needed to get the Emergency Economic Stabilization Act passed was horse play compared to the political difficulty of achieving the bipartisan consensus necessary to forestall a Super Subprime Crisis.  It’s time for Congress to appreciate the limits of GDP growth and refrain from making promises under the assumption the economy will always grow fast enough to fund them.

Full post as published by Bailout Report on November 03, 2008 (boomark / email).