Bernanke rejects alternatives to raising debt ceiling

July 14, 2011

Federal Reserve Chairman Ben S. Bernanke on Thursday rejected various alternatives to raising the country’s borrowing limit and urged Congress to come up with a “strong, credible plan” for doing so while cutting spending — or risk a making “self-inflicted wound” to the fragile economic recovery.

Bernanke’s remarks, delivered to the Senate Banking Committee, marked the latest warning of economic catastrophe if Congress doesn’t raise the federal government’s debt ceiling by Aug. 2. On Wednesday, Moody’s Investors Service, a major credit-rating agency, delivered a similar warning when it moved closer to downgrading the government’s top-notch credit rating.

With several plans on the table for dealing with the looming threat of default, senators used the hearing as an opportunity to quiz Bernanke on the attractiveness of the various approaches. Over a two-hour question-and-answer session, the Fed chairman calmly made clear that he found none of them too palatable.

Two Republican senators, Patrick J. Toomey (Pa.) and Mike Johanns (Neb.), pitched the idea that the government could avoid default simply by prioritizing debt payments over less important things, such as “a reimbursement to a vendor or failing to cut the grass at the monuments,” Toomey said.

“That would require us to stop paying almost half of our other bills,” Sen. Charles E. Schumer (D-N.Y.) said. “Isn’t that just default by another name?” he asked Bernanke, and then asked whether it would still result in a downgrade of the country’s credit.

“Yes,” the Fed chief answered. “I do not think this is a direction we want to go.”

Bernanke also expressed skepticism about plans to raise the debt ceiling without simultaneously agreeing on longer-term spending cuts. President Obama originally asked for a “clean” debt ceiling increase that would lift the government’s borrowing power by $2.4 trillion with no strings attached. But Republicans pushed to at least match the increase with an equivalent amount of cuts.

The debate, Bernanke said, “seems like an opportunity we haven’t had for a while to address longer-term fiscal issues,” and he added that a debt ceiling increase without spending cuts could still risk a credit downgrade.

“Better to do both than just one?” Schumer asked.

“That’s certainly the best outcome,” Bernanke said.

But Bernanke made clear that he is not willing to see Congress draw out the debt drama by agreeing to a short-term increase in borrowing authority while negotations continue on spending cuts. House Majority Leader Eric Cantor (R-Va.) had backed such a plan, but when Schumer pressed Bernanke to comment on it, the Fed chief said: “The risk is that you would lose credibility in the markets about your willingness to carry through.”

“Better to do a strong, credible plan,” Bernanke added. “The sooner, the better.”

Bernanke’s remarks at the hearing earned him accolades from Sen. Bob Corker (R-Tenn.), who said he appreciated the opportunity “to use you as a prop to make our own points . . . about the debt ceiling.”

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