Comptroller general of the United States David M. Walker.

David M. Walker may seem like any other typical accountant, but there is nothing typical about his job or, more recently, about the way he's reaching out to his employers--the 300 million or so members of the tax-paying public.

As comptroller general of the United States, Walker has been

using his platform as the nation's chief accountability officer and head of the U.S. Government Accountability Office (GAO) to sound the alarm that the federal government is spending its way toward a $50 trillion bank-breaking deficit unless the next president and Congress start to enact reforms.

[ILLUSTRATION OMITTED]

Walker began his "Fiscal Wake-Up Tour" in September 2005, and has barnstormed the country in town-hall-style forums as well as taken his message to various media outlets from CBS' 60 Minutes to Comedy Central's Colbert Report and to his own video on You Tube.

Before his appointment to a 15-year term as comptroller general in November 1998, Walker had extensive executive-level experience in both the government and private industry. Between 1989 and 1998, he worked at Chicago-based Arthur Andersen LLP, where he was a partner and global managing director of the human capital services practice in Atlanta.

He was also a member of the board of Arthur Andersen Financial Advisors, a registered investment adviser. While a partner at Arthur Andersen, Walker served as a public trustee for Social Security and Medicare from 1990 to 1995. Before joining Arthur Andersen, he was assistant secretary of labor for pension and welfare benefit programs from 1987 to 1989, and in 1985 he was acting executive director of the Pension Benefit Guaranty Corporation, Washington, D.C.

Walker currently serves as chair of the U.S. Intergovernmental Audit Forum and as chair of the principals of the U.S. Joint Financial Management Improvement Program. He is also a founder and principal of the U.S. Joint Auditing Standards Coordinating Forum.

Walker is a certified public accountant (CPA). He has a bachelor of science degree in accounting from Florida-based Jacksonville University and a senior management in government certificate in public policy from the John F. Kennedy School of Government at Harvard University, Cambridge, Massachusetts.

Mortgage Banking recently interviewed Walker about his "Fiscal Wake-Up Tour" and his very sobering economic outlook.

Q: The upshot of your "Fiscal Wake-Up Tour" has been that the United States' current standard of living is unsustainable and, unless changes are made soon in the way government spends money and raises revenue, the country is headed for a catastrophic fiscal crisis within the next 30 years. Can you walk us through the economic ripple effects of what would transpire if we don't address America's debt problem?

A: First, what the "Fiscal Wake-Up Tour" is about is to help the American people understand that our financial condition is worse than advertised, and that we face large, growing, unprecedented and unsustainable deficits based upon our current path, and that we need to engage in fundamental reforms of entitlement programs, spending and tax policies--and the sooner, the better.

Q: What are some of the specific implications for the housing and mortgage markets, as well as for 10-year Treasury and other interest rates?

A: We could run deficits at the rate of about 2 percent of the economy without being too concerned for a long time. The problem is that we're headed for deficits that are unprecedented with regard to the percentage of the economy it forms. Now, what does that mean?

First, we're relying upon foreign investors to finance a significant portion of our debt. Therefore, that means that the debt service flows overseas, and they have more of an influence on our future, and we have less of an influence on their future.

If those foreign investors decide that they do not want to continue to buy our debt at the rates that they have, then we will have to pay higher interest rates in order to attract investors--and those higher interest rates will have an effect not just on the federal budget, but also on the broader economy and interest costs for other types of financial instruments.

Q: You've cited the entitlement programs--specifically Medicare and, to a lesser, extent Social Security and the promised payouts to the members of the baby boom generation--as the main culprit. When do you project the problem will morph into a full-blown crisis, and how much time do we have to address the problem before it's too late?

A: There are a number of risk factors that will come together in the first term of the next president. Therefore, it's important that steps be taken to make sure that the next president makes fiscal responsibility and intergenerational equity one of [his or her] top three priorities. If [the next president doesn't], the odds that we will face a crisis increase significantly.

Q: What do you think is the most likely worst-case scenario?

A: Let me tell you what I don't think. I don't think we're going to have a situation where people are going to dump our debt. I don't think we're going have a situation where people are going to absolutely quit buying our debt. But I think we are going to face a situation, in all likelihood, where unless we can demonstrate that we're going to get serious about our long-range structural imbalance, because of diversification and other reasons, their appetite for continuing to [buy our] debt is likely to be reduced over time.

So I think we're much more likely to face a gradual effect rather than a precipitous effect.

As I've said, in reality, we've been diagnosed with fiscal cancer. As a result, it is growing within us. If we treat it, we can avoid catastrophic consequences. But if we don't treat it, it will continue to erode and potentially reach the point where we face a major catastrophic event.

Q: You've noted that all options to solve the problem will be painful, and solutions will include entitlement reform, spending constraints and some "revenue enhancement"--which would seem to mean raising taxes. Can you quantify by a dollar amount or a percentage how much more in taxes would have to be collected?

A: I think we have to do four things. No. 1: We have to bring tough budget controls that are tougher than the ones we had in the 1990s, because we're in worse shape and we're closer to the baby boomers' retirement becoming a reality.

No. 2: We have to reform Social Security, Medicare and Medicaid. Social Security is easy, and we should do it all at once as soon as possible. Medicare and Medicaid are part of our broader health-care challenge. We will have to reform them and our entire health-care system in installments over a number of years.

No. 3: We have to review existing spending programs, reprioritize them, reengineer them and constrain future spending growth.

And [No. 4], we're going to have to engage in comprehensive tax reform that will not undercut economic growth while raising additional revenue. In my view, you're going to get the most money from entitlement reform, but you're also going to have to get some money from other spending constraints and from the revenue side.

The sooner we act, the less changes we have to make, the more transition time we'll have, the more advance notice people will have to be able to adjust and the less pressure there will be to increase taxes.

Q: You've noted on other occasions that this could morph into something that the economy just can't grow its way out of. Can you give a quantifiable sense of just how much additional revenue would need to be raised?

A: I will tell you this: Right now, we're taxing at about 18.3 percent of the economy, and that's what the historical level of taxation has been over about the last 40 years at the federal-government level. We are not going to solve our problem at 18.3 percent of the economy.

The key is, we want to keep taxes as low as possible in order to maximize economic growth, maximize disposable income and maintain our competitive advantage as compared to Europe.

But the real irony here, for conservatives, [is] they want to keep taxes low. For liberals, they want to be able to maintain as many social programs as possible. The path that we're on is a threat to both conservatives and liberals, and both sides need to understand that we're going to need to make changes on all those dimensions--the sooner, the better. Because there's no way we're going to grow our way out of this problem. The math doesn't come close to working. There's no way that we're going to be able to avoid major entitlement reforms--especially in the health-care area--and there's no way that we're going to be able to avoid spending constraints and tax reform.

Now, let me talk about the mortgage industry. I think one of the things that's going to have to happen is that government is going to have to analyze which spending programs and tax policies are working and which ones aren't.

Q: So everything would be on the table?

A: Everything would be on the table. In addition to that, one has to understand [not only] whether [the policies and programs are] working or not, but [also] who is benefiting from them. I think it means, among other things, that many of the existing tax preferences for things like employer-provided and paid health care and mortgage interest deduction [would need to be examined]. They will continue, but they're likely to be targeted to a greater extent than they are today.

In other words, what's likely to happen over the longer term is the tax base is likely to be broadened in order to maintain rates as low as possible, because low rates are important for economic growth.

Q: A recent Standard & Poor's report, Americans Are Still Piling on Debt, noted that consumers continue to rack up historic levels of debt, but yet for the most part consumers are keeping up with their monthly payments and are still borrowing. Given this, where does the American public's own negative savings rate, large average personal debt and general lack of financial literacy fit into this picture?

A: Too many Americans are following the bad example set by their federal government: They're spending more money than they make. They're charging it to their credit cards, running up compound interest and seeing the day in the not-too-distant future where they may not be able to make the minimum payments.

America has four deficits today--a budget deficit, a balance of payments deficit, a savings deficit and a leadership deficit. In many ways, these are inter-related.

We have a budget deficit, and that obviously hurts our savings rate. If you take last year, for example: The United States had an economy of about $12 trillion. We had net savings last year of about $10 billion.

Because the federal government ran large deficits, the states basically broke even. American families had a negative savings rate--the only thing that saved us was the corporate sector, but the net of all those was $10 billion out of $12 trillion. You can't run the engine of a superpower for long on that type of savings.

Q: With China and Japan and other foreign countries buying a substantial amount of U.S. government debt, how likely is the danger that China and/or Japan or other nations might become less prone to acquire or hold debt due to unforeseen economic reasons? How concerned should we be, and what are the potential interest-rate repercussions?

A: I think the biggest risk we face is that foreign investors will decide that they don't want to buy as much of our debt in the future, which will cause upward pressure on interest rates--which will have a ripple effect on the federal budget, on other interest rates and the economy as a whole. That is the most likely scenario.

Q: Is there any kind of historical parallel from which you could draw to compare what's happened in the past with what's happening now?

A: I'll draw three. The first is the Roman Republic. The Roman Republic is the longest-standing republic in the history of mankind. It lasted for over 500 years. The Roman Republic fell for many reasons, three of which resonate today.

No. 1: Decline in moral values and political civility at home. No. 2: Overconfident and overextended militarily around the world. No. 3: Fiscal irresponsibility by the central government.

I'll give you two more examples from more modern history. New Zealand came to the brink of bankruptcy in the late 1980s and early 1990s. They made dramatic and fundamental reforms in what their government did and they way they did business.

They not only stepped back from the brink of bankruptcy; they are now projected to have fiscal sustainability for 40-plus years. Now they have a lot higher taxes, but they did demonstrate that when one gets serious and is willing to make tough decisions that require some pain today but help to position the country and its citizens for a better future, if [you're] willing to do that, you can have dramatic results.

Another example is Argentina. They came to the brink of bankruptcy, didn't make those tough decisions and went bankrupt.

Q: So there's no magic formula to divine from these historical examples so much as having the political will to make the tough choices?

A: Well, I think we really suffer from three afflictions today: myopia or near-sightedness, tunnel vision and self-centeredness. One of the things we really need to understand: The problem today is not today's deficits.

Today's deficits are not a big problem--they're imprudently high, but they're not the problem, because they're not even as high as the deficits used to be as a percentage of the economy in the 1980s. The problem is not today; the problem is where we're headed--because we're headed for a tsunami of spending that could swamp the ship of state like nothing we've ever seen before.

Q: Former Federal Reserve Chairman Alan Greenspan raised eyebrows recently with his pronouncement that there's at least a 1-in-3 chance of recession in 2007. Does GAO have an outlook for the economy and the chances of recession in 2007-2008? How, if at all, would slower economic growth in the here and now impact your forward-looking, long-term scenario?

A: Part of the problem is that we're running very large deficits at a time where we have relatively strong economic growth. We haven't been in a recession since November of 2001.

Obviously, if one was to go [into] a recession--and I'm not predicting that--that's not the time you're going to cut back on government spending; that's not the time you're going to end up raising taxes.

As a result, these are the good times. Six years ago, we were running surpluses and we were projected to have fiscal sustainability for 40-plus years. Today, we're running deficits, and the model that does the long-range simulation crashes at about 40 years.

So our situation has deteriorated dramatically in recent years because all the budget controls have expired, we've expanded entitlement programs through Medicare prescription drugs [and] we haven't placed the spending controls on the other entitlement programs that were intended to be placed on Medicare, for example.

We've increased spending dramatically--a lot of which is not related to the global war on terrorism, but some is--and we've engaged in significant tax cuts. The combination of all of those have taken us from surpluses and fiscal sustainability for 40-plus years to deficits and clear fiscal unsustainably and increasing vulnerability as time passes.

Q: With your many lectures, town meetings, media interviews and your general outspokenness on this issue, you've said you hope to make it a presidential campaign issue and to raise public awareness in the hope of spurring corrective action. Do you sense that you are gaining traction?

A: Yes. Due to the efforts of myself and many others, there are hopeful signs that we're making some progress. Three years ago, the administration said "Deficits don't matter."

Now they say, "Deficits matter, we need to balance the budget within five years, we need to make a significant down payment on our $50 trillion imbalance and we need to figure out the way forward."

On Capitol Hill, there's increasing concern about our long-range fiscal outlook. A number of proposals [have been put forward] about potential commissions in order to try to set the table for some choices. Furthermore, there's more media interest in the issue.

Q: Given the audience that will be reading this interview, is there any specific action that you feel that lenders or the mortgage industry could be taking to help raise the public profile of this issue and/or to spur corrective action by leaders and policy-makers?

A: In the early 1990s, when we faced serious fiscal challenges, the business community was actively engaged in trying to help make sure that elected officials took steps to help deal with our large and growing fiscal challenge.

Unfortunately, the business community has largely been missing in action in recent years, and that has to change.

Charles Wisniowski is a correspondent for Mortgage Banking.