The chairman of the Senate Banking Committee, challenging his congressional colleagues to put up or shut up on the budget deficit, today proposed a gradual overhaul of entitlement programs as a primary means of reducing deficit spending and lowering interest rates.

Sen. Jake Garn (R-Utah), in an address to the D.C. Bankers Association, chided both Democrats and Republicans for blaming each other for deficits that have accumulated over three decades. Garn said he sees no useful purpose in such an exercise because it provides no solutions. The answer is a long-term structural change in federal entitlement programs, he suggested.

"We simply have provided more benefits over the years than taxes we have provided to pay for them," Garn said of the entitlement programs, which he cited as the primary budget problem.

It is unlikely that the budget can be balanced any time soon, "but you can start trimming the growth," Garn declared. "When you start taking some of those actions, then I think we will see a dramatic reduction of interest rates in a period of a few months."

Mindful that he might be accused of proposing solutions that could hurt the poor, the elderly and minorities, Garn quickly pointed out that it is not necessary to penalize those groups in order to accomplish his aim.

"You can't cut the military enough and you can't raise taxes enough to solve the problem of the deficits, because most of the increases are coming in these entitlement programs," the senator noted.

A review of federal Civil Service and Social Security and veterans pensions would not result in any dramatic changes, either, he added.

"The problem did not build up in a year or two and we won't hurt anybody if we will make changes that will take place over 30 to 40 years," said Garn. "If we would do that, the financial markets will say, 'Hey, those guys are finally matching their votes with their rhetoric.' "

Economic growth resulting from that kind of scenario would be "staggering," Garn predicted.

But so long as the budget and deficits continue their huge growth, it is unlikely that lenders will make long-term loans at reasonable interest rates, Garn observed.

"Why should lenders continue to borrow short and lend long when no president or Congress in my lifetime has ever kept their word?" he asked.

"There is no track record. There is no proof to the financial markets that Congress or presidents will do what they say they will do. They never have, and why should we believe this time--the 98th--why should we believe Ronald Reagan? Why should we believe any of them? I can't find any evidence that we should."

Garn projected a budget deficit of $300 billion to $400 billion at the end of this decade and as much as $500 billion in the 1990s if the current trend line continues. With that prospect, "There is no reason to have reasonable interest rates in a stable economy," he added.

Garn took sharp issue with critics of Federal Reserve Chairman Paul A. Volcker, declaring it unproductive to look for scapegoats for the serious economic problems faced by the country.

On another subject, Garn said bankers will have to face the realities of a changing marketplace. Interstate banking, for example, is already a reality, he said.

Garn cosponsored legislation that substantially deregulated financial institutions last year, and he has begun oversight hearings that could lead to further deregulation.

As if bankers needed any further reminder, Garn noted that while banks are still subject to certain limitations, there are no restrictions on Sears Roebuck & Co. and other nonbank financial competitors.

It is unlikely, nevertheless, that Congress will approve any further deregulation of financial institutions this year, Garn said.

In another address to the DCBA today, D.C. City Council Chairman David Clarke appealed to bankers to use their influence and expertise to strengthen the city.

Clarke said he was asking for an investment in the broadest sense and "in the spirit of enlightened self interest."

He urged bankers to support legislation calling for a new federal payment formula and a proposal seeking help from Congress in eliminating an accumulated deficit of $300 million.

Clarke also urged the DCBA to use its influence and expertise to help the city win a favorable bond rating. "I submit that, to the extent that we receive that favorable rating, you will benefit also," Clarke said.