Excerpt from recent Federal Reserve speech
 

Richard W. Fisher, May 2008 see entire speech here:Storms on the Horizon - Richard Fisher Speeches - News & Events - FRB Dallas

"I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the “funded” entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well.

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.

Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending.

I hope that gives you some idea of just how large the problem is. And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?

If these possible solutions to the unfunded-liability problem seem draconian, it’s because they are draconian. But they do serve to give you a sense of the severity of the problem. To be sure, there are ways to lessen the reliance on any single policy and the burden borne by any particular set of citizens. Most proposals to address long-term entitlement debt, for example, rely on a combination of tax increases, benefit reductions and eligibility changes to find the trillions necessary to safeguard the system over the long term.

No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight."

"There are times, however, and this is one of them, when even being right feels wrong. What do you say, for instance, about a generation that has been taught that rain is poison and sex is death? If making love might be fatal and if a cool spring breeze on any summer afternoon can turn a crystal blue lake into a puddle of black poison right in front of your eyes, there is not much left except TV and relentless masturbation. It's a strange world. Some people get rich and others eat s... and die."
—Gonzo Papers, Vol. 2: Generation of Swine: Tales of Shame and Degradation in the '80s, 1988

"We are turning into a nation of whimpering slaves to Fear—fear of war, fear of poverty, fear of random terrorism, fear of getting down-sized or fired because of the plunging economy, fear of getting evicted for bad debts or suddenly getting locked up in a military detention camp on vague charges of being a Terrorist sympathizer."
—"Extreme Behavior in Aspen," February 3, 2003

Nice quotes, but the idea here is to see what is coming and deal with it, the more one knows about the situation, the less there is to fear and the easier it is to take positive action. Ideally, a complete restructure of an impossible cardboard shack that some insane people with no sense of accounting have tried to build with our money over decades of unsupervised activity.
The lesson is simple enough, never leave your checkbook on the street with every blank check signed and expect any good to come of it, because chances are some insane person will get ahold of it and start cashing those checks.

It is amazing to me that the government will throw someone in jail for counterfeiting because it undermines the value of the dollar, yet they counterfeit and call it "monetary policy". It is also amazing how many Americans will bash and blame the administration for the economy, yet not question the actions of the FRB.
Americans embrace the ideals of John Maynard Keyes even though history has proven time and again those ideals do not work.

If the government can't be trusted with our money, why should we trust it with our healthcare?

I think it is important to understand that the FRB is acting in a responsible way by pointing out the situation they have been forced to deal with and outlining the consequences of complete lack of control with regard to spending.
Monetary policy and fiscal policy are two entirely different animals, both must be handled well to prevent sudden surprise at the discovery of a very large empty bag.
This situation has been the subject of many warnings, but when the Fed starts to talk about it in terms of it's effect on monetary policy, action may be looming in the near future.
This makes the "credit crunch" look miniscule.

FRB acting responsible is almost an oxymoron, however I see your point. I would contend that it was monetary policy that gave license for such reckless fiscal policy. Perhaps the only answer now is to let the banks fail. We are at the point of no return, we have made decisions and we will need to pay for those consequences now rather than put them off.

Unfortunately we have a bad habit of putting things off until it becomes a crisis and I would expect this mentallity to continue due to our history in this country of not stepping up to the plate .