FROM THE OFFICE OF PUBLIC AFFAIRS

May 18, 2005
JS-2454

Remarks of Greg Zerzan
Acting Assistant Secretary for Financial Institutions
before the Exchequer Club
Washington, DC

Thank you very much for inviting me to appear before you today. I am honored to be speaking before a group dedicated to discussing the important economic and financial policy questions of the day--a field which is always the source of lively debate, but rarely more so than today.

Back in 2003 I had been in my newly appointed position at Treasury for less than a month when I was tasked with going out on the road to discuss the President's tax cuts. It's something I was eager to do; long a believer in the power of keeping money in the hands of those who earned it, I looked forward to spreading the good news about the President's plan.

And in fact I did hear a tremendous amount of support; so much so that we were able to pass the legislation despite some vehement Congressional opposition. But what surprised me more was the fact that I heard any opposition at all. Yet there I was, in the middle of southern New Jersey, accosted by a group of men and women complaining that the budget for a government program they supported had been so curtailed that they were not able to get a grant for their local theater hall. How could the President being proposing tax cuts, they asked, when they couldn't even put on a performance of "Death of a Salesman"?

So here, staring me in the face, was the problem that afflicts all policy makers: for every program there is a constituency; for every jot and title of the law there is a group that feels dearly invested.

But the President proposed his successive rounds of tax cuts because he believed in something even more fundamental: leaving capital in the hands of private citizens to spend and invest as they see fit is more productive than having government redistribute it for them. It amazes that this idea remains controversial, but even now we face the looming prospect of further fights in Congress over whether to make the tax cuts permanent, and over what types of reforms to expect when the President's tax panel comes out with its recommendations later this summer. But let's look at the record in light of the President's tax cuts: for the first seven months of the current fiscal year, receipts total $1.217 trillion, up 14% from the same period in 2004. The government recorded a $57.71 billion budget surplus in April, up sharply from the $17.58 billion budget surplus in April 2004. Since May of 2003 over 3 million new jobs have been created. Simply put, the tax cuts have done exactly what they were designed to do: they have promoted economic growth and job creation, and played a large part in lifting our economy out of recession while at the same time helping to reduce deficits. As we move forward in the coming years let us hope that the lesson of the President's leadership in this area is not forgotten- tax cuts work.

Of course, tax issues are not the only dilemma which we are confronting. As you know, the President has called for fixing the broken Social Security system to ensure that the promises made to future generations will be kept. Currently, the Social Security trust fund is heading towards insolvency: by 2017 the system will begin to pay out more in benefits than it receives in contributions. By 2041, the trust fund will be broke.

Reforming Social Security is not a Republican or a Democrat issue; it is an American problem. Unfortunately, some seem willing to deny a problem even exists in the hope that they can score political points. The problem with this approach is self evident- eventually they will have to explain to the American people why the Social Security checks they were promised are not arriving in the mail. Some have claimed that voters have short memories, but that has not been my experience.

In order to fix a broken system the President has stated that one way to fix the system is for benefits to grow faster in the future for low-income workers than for those who are better off. Under a reform proposal, low-income workers should receive benefits that grow faster than inflation. In order to return the system to solvency, the benefit increases for wealthier seniors would grow no faster than the rate of inflation.

Additionally, younger workers should be allowed to have a nest-egg through personal accounts, and one option for such an account should be investing in Treasury securities.

In any event, workers 55 years and older will see no changes to the benefits they have been promised. The President wants to save Social Security in a responsible way that ensures the program exists for future generations. We could not avoid this upcoming debate about Social Security reform even if we wanted to- demographics and basic economics tell us the system is on the road to collapse. By acting now the President has sounded the clarion call to Congress, and those who would seek short term political advantage on this issue are doing a disservice to our children and grandchildren.

We are of course also in the midst of an historic debate about the role and regulation of the housing government sponsored enterprises. It is worth noting at the outset what a tremendous success our housing market has been- currently homeownership is at 69%, an all-time high, and housing starts continue to rise at a record pace. This Administration supports homeownership not only because of the important role the housing industry plays in our economy, but also because homeownership benefits society. Home owners tend to be involved in their communities, involved in the civic life where they live, and are both literally and figuratively invested in their neighborhoods, schools and towns.

And it is because homeownership is so highly regarded that the Administration has proposed comprehensive reform of the regulatory structure for the housing GSEs. The Administration has called for the creation of a single regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, one equipped with all the powers, tool and stature of our other financial regulators. This means that the new regulator should have the power to set the minimum and risk-based capital levels of the GSEs, approve the types of businesses a GSE can enter into, including those newly proposed and those which already exist, and the power to place an entity in receivership should that prove necessary.

These powers also include the ability to place limits on the retained portfolios of the GSEs. Retaining enormous portfolios of mortgages does little to further the mission of creating a liquid secondary market in mortgaged backed securities, but does present significant systemic risk. Any regulatory reform legislation passed by Congress should give the GSE regulator the power to limit retained portfolio holdings, and should provide the regulator with clear and explicit direction to do so.

These issues which I have shared with you today are of course not the only topics which occupy our time here in Washington, but certainly they are among the most pressing. In the weeks and months ahead we have the opportunity to promote change that can provide a firm foundation for the continued success and prosperity of our country. I thank you for allowing me to appear before you to advance these ideas, and I look forward to your continued participation in the public discussion of them.