Fed’s Bernanke, at House budget hearing, cites dangers of not raising debt limit

February 9, 2011

Federal Reserve Chairman Ben S. Bernanke offered dire warnings Wednesday about the damage Congress could wreak if it refrains from raising the government’s debt limit this spring and forces the country to default on its debts.

Testifying before the House Budget Committee, Bernanke added his voice to a debate that could soon become a high-stakes contest of brinksmanship between Republicans and Democrats.

With the national debt hitting record levels, President Obama needs to reach agreement with Congress on increasing the legal cap on how much money the government can borrow, or the federal government will be unable to pay some of its debts. While Republicans in Congress have said they will vote to raise the cap only if Obama agrees to major spending cuts, administration officials have described that strategy as irresponsible.

Bernanke, in his first appearance before a committee of the newly Republican-led House, made clear where he comes down. “If the United States defaulted,” he said, “it would have extraordinarily bad consequences for our financial system and it would mean that we would face higher interest rates, essentially indefinitely, because creditors wouldn’t trust us to make our interest payments. It would be very destructive.”

While Bernanke was warning of those perils, Treasury Secretary Timothy F. Geithner was across town, expressing confidence that Congress ultimately will raise the debt limit.

“I can say this with complete confidence — that the U.S. will meet its obligations, that Congress will act as it always has to make sure we meet those obligations,” Geithner said in an interview at the Newseum. “There’s always a little political theater around this.”

As Bernanke often does when he wades into issues that are not his official responsibility, he walked a delicate line with the House committee, trying to use his credibility to steer policy without seeming overtly political. Both Republicans and Democrats tried to goad the Fed chairman into offering support for their positions.

“It would be reckless from an economic and financial perspective . . . to essentially default on our debts and question the creditworthiness and full faith and credit of the United States, correct?” asked Rep. Chris Van Hollen (D-Md.)

“Wouldn’t significant reductions or addressing the short-term spending aspect be good for the market and economy?” asked Rep. Scott Garrett (R-N.J.)

Some Republicans have suggested that the Treasury could keep the government running without increasing the debt limit, by continuing to make interest payments to the owners of U.S. government bonds while delaying payments on other obligations. These could include salaries of federal employees, payments to contractors, and Social Security checks. Bernanke explained to Congress the technical challenges that would arise in trying to differentiate among the obligations the government faces.

Later, in a conference call with tea party activists from across the country, Rep. Paul Ryan (R-Wis.) appeared to echo Bernanke’s sentiments, responding with a blunt “no” when one activist asked whether the GOP could refuse to lift the debt ceiling. “I know people don’t like it when I say that,” Ryan said, adding that leaving the limit in place would result in the government’s inability to buy even a tank for war.

In discussing the direction of the economy and monetary policy, Bernanke hewed closely to his comments in recent weeks, stating that he expects the recovery to strengthen in 2011 but for unemployment to come down gradually. He deflected concerns, raised by committee chairman Ryan and others on the panel, that Fed efforts to invigorate the economy through a massive program of bond purchases was a major cause of rising food and fuel prices in the developing world.

“Monetary policy can’t do anything about bad weather in Russia or increases in demand for oil in Brazil and China,” Bernanke said. “What we can do is try to get stable prices and growth here in the United States.”

irwinn@washpost.com

wallstenp@washpost.com

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