Bernanke delivers blunt warning on U.S. debt

Discussion in 'Economics' started by WallStWhizKid, Feb 26, 2010.

  1. With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

    Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.

    "It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today."

    It was some of the toughest rhetoric to date about the nation's fiscal and budgetary woes from the Fed chief, who faces a second round of questioning Thursday before a Senate panel.

    Mr. Bernanke for the first time addressed concerns that the impasse in Congress over tough spending cuts and tax increases needed to bring down deficits will eventually force the Fed to accommodate deficits by printing money and buying Treasury bonds — effectively financing the deficit on behalf of Congress and spurring inflation in the process.

    Some economists at the International Monetary Fund and elsewhere have advocated this approach, suggesting running moderate inflation rates of 4 percent to 6 percent as a partial solution to the U.S. debt problem. But the move runs the risk of damaging the dollar's reputation and spawning much higher inflation that would be debilitating to the U.S. economy and living standards.

    Rep. Brad Sherman, California Democrat, asked Mr. Bernanke directly whether the Fed would consider such a strategy, especially since IMF officials endorsed it.

    "We're not going to monetize the debt," Mr. Bernanke declared flatly, stressing that Congress needs to start making plans to bring down the deficit to avoid such a dangerous dilemma for the Fed.

    "It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position."

    Separately, Mr. Bernanke's predecessor, Alan Greenspan, told Bloomberg News that "fiscal affairs are threatening the outlook" for recovery from recession as Congress and the White House have been unable for years to make tough decisions to raise taxes or cut spending.

    He said he is so concerned about a sudden sharp increase in interest rates that every day he checks the interest rate on 10-year Treasury notes and 30-year Treasury bonds, calling them the "critical Achilles' heel" of the economy.

    Despite his gloomy testimony, Mr. Bernanke dismissed concerns that the United States will lose its gold-plated AAA credit rating any time soon. Moody's Investors Service recently said that the U.S. rating would come "under pressure" at some point if Congress does not rein in the budget deficit.

    The Fed chairman said repeatedly that he understands how difficult it will be for Congress to tame deficits by curbing spending in popular programs like Social Security, Medicare and defense, while also considering tax hikes. But he said there would be an immediate payoff: lower interest rates.

    "It would be very helpful, even to the current recovery, to markets' confidence, if there were a sustainable, credible plan for a fiscal exit," he said.

    A plan that eases market worries by laying out how Congress will address the long-term insolvency of Social Security, Medicare and other entitlement programs also would give Congress more room to take the actions needed today to address the jobs crisis, Mr. Bernanke added.

    "There could be a bonus there," he said. "To the extent that we can achieve credible plans to reduce medium- to long-term deficits, we'll actually have more flexibility in the short term if we want to take other kinds of actions."

    Separately, the debate continued over whether Fannie Mae and Freddie Mac, the two mortgage financing giants, should be included in the federal budget books now that the Obama administration has taken the limits off aid the Treasury Department is prepared to give the companies to keep them solvent.

    Republicans, including Rep. Spencer Bachus of Alabama, the top Republican on the banking committee, have argued that the government is now effectively guaranteeing Fannie and Freddie's nearly $5 trillion of mortgage-backed securities and other debt, so their revenues and liabilities should be included in the federal budget as obligations of the government. Taking this step would greatly bloat the federal balance sheet.

    Mr. Bachus said he worries that keeping Fannie and Freddie's status off the federal books is "the same sort of financial shell game that has brought governments like Greece to a crisis point."

    But Treasury Secretary Timothy F. Geithner, who also testified on Capitol Hill on Wednesday, said the administration opposes including the quasi-government entities in the budget, although it lifted the limits on aid to Fannie and Freddie with the intent of assuring financial markets that the U.S. government stands behind their obligations.

    "We do not think it is necessary to consolidate the full obligations of Fannie and Freddie onto the nation's budget. But we do think it's very important … that we make it clear to investors around the world that we will make sure that we will take the actions necessary" to keep the two entities stable, he told the House Budget Committee.
  2. clacy


    Those are pretty pointed words from Bernake.
  3. He was reconfirmed. So he can finally speak the truth. Congress is up for election later this year, so I doubt they would cut spending and raise taxes. The key is whether the Fed's warning is too little too late...
  4. Also, kudos to the ET posters, like myself, who have been saying we were close to the day where debts and deficits "do matter" (sorry VP Cheney). It's hard to constantly debate people who believe the payback time for problems is always 5 to 10 years or more down the road.
  5. Don't pat yourself on the back, let someone else do it.
  6. Good for Bernanke. He speaks truthfully for a change. They will probably try to oust him now.
  7. schizo


    I say horse shit. Had Greenspan tighten the interest rate before it went out of control and created what is now known as the housing bubble, we wouldn't be in this mess and the government wouldn't need to go on a spending binge. Bernanke knows this and he wants to dodge his responsibility by shifting the blame on the bad fiscal policy.

  8. The Fed is partly to blame for sure schizo. But, the problems now need to be fixed, regardless of their origin. I think it's time for some good, old fashioned, Bill Clinton economics: cut spending, raise taxes, and let the chips fall where they may.
  9. ET99


    USA has already passed the point of no return.
    another financial crisis is inevitable; it is only a matter of time.
    when it happens, the rate of decline will shock even the most negative pessimist.
  10. schizo


    "Partly"? I say the Fed is responsible for at least 80% of the problem whenever recession strikes. They're ALWAYS two steps behind: one for raising the damn interest rate and another for lowering it. Truth be told, I'm all for responsible fiscal policy, but this cannot be done without first implementing a sound monetary policy.

    It's no wonder the stock market leads the economy by 6 months while the Fed lags behind the economy by 6 months!
    #10     Feb 26, 2010