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Posted at 03:59 PM ET, 06/14/2011

Bernanke to Congress: Don’t allow the U.S. to default


(TAMI CHAPPELL - REUTERS)
Federal Reserve Chairman Ben Bernanke said Tuesday that “maintaining the status quo is not an option” when it comes to the debate over addressing the country’s soaring debt. But he also warned Congress that a failure to raise the debt ceiling this summer is also not an option.

“I fully understand the desire to use the debt limit to force a necessary and difficult fiscal policy adjustment, but the debt limit is the wrong tool for that important job,” Bernanke said at a summit on lowering the U.S. budget deficit hosted by the Committee for a Responsible Federal Budget and the New America Foundation.

“Failing to raise the debt ceiling in a timely way will be self-defeating if the objective is to chart a course for the better fiscal situation for our nation.”

Bernanke delivered the opening remarks at the event featuring more than a dozen lawmakers and economic luminaries, including House Budget Committee Chairman Paul Ryan (R-Wis.), Sen. Michael Bennet (D-Colo.) and former Sen. Alan Simpson (R-Wyo.). The Fed chief admonished lawmakers who have argued that failing to raise the $14.3 trillion debt ceiling wouldn’t necessarily cause the country to default on its obligations.

“Failure to raise the debt limit would require the federal government to delay or renege on payments for obligations already entered into,” Bernanke said. “In particular, even a short suspension of payments on principal or interest on the Treasury’s debt obligations would cause severe disruptions in financial markets and the payment system, induce rating downgrades of the U.S. government debt, create fundamental doubts about the creditworthiness of the United States and damage the special role of the dollar and of Treasury securities in global markets in the longer term.”

Even the prospect of the country defaulting on its debt has dangers, Bernanke said, including a greater chance of “a sudden fiscal crisis.”

As Bernanke was speaking at the event, Vice President Biden was holding his sixth meeting at the Capitol with a group of lawmakers who are trying to forge a deficit-reduction plan in exchange for a vote to raise the debt ceiling. The bipartisan group of senators and House members is aiming for an outline by the end of the month. The U.S. Treasury has set an Aug. 2 deadline for raising the country’s borrowing limit.

While warning of the pitfalls of allowing the country to default on its debt, Bernanke also stressed what he said were the benefits of negotiating a credible deficit-reduction plan: lower interest rates, higher consumer confidence and greater sustainability.

He urged that any budget deal should “be fair to both current and future generations” and should “reform the government’s tax policies and spending priorities so they not only reduce deficit but also enhance the long-term growth potential of our economy.”

“We cannot reasonably expect to grow our way out of our fiscal imbalances, but a more productive economy will ease the trade-offs that we face,” Bernanke said.

Sen. Pat Toomey (R-Pa.), who has been the leading proponent of the argument that the government can avoid default by prioritizing its debt payments, responded to Bernanke in a statement Tuesday night.

“As I’ve said from the start, it is clear that the Treasury Department can prioritize debt service and still fund principal and interest payments on our debt obligations after we hit the debt limit,” Toomey said. “Absolutely nothing in Chairman Bernanke’s comments today refutes this important point. In fact, he acknowledges this possibility. I therefore hope he would also speak out publicly and assure the markets about this certainty, rather than just emphasizing the potentially disruptive effects if the Treasury has to delay payments for other parts of the government.”

By  |  03:59 PM ET, 06/14/2011

 
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