–Debt Ceiling ‘Wrong Tool’ for Achieving Important Fiscal Gains
–Even Short Suspension of Payments Would Cause Significant Disruptions
–Need Good Faith Action on Near-Term Plan for Long-Term Fiscal Imbals
By Heather Scott
WASHINGTON (MNI) – Federal Reserve Chair Ben Bernanke Tuesday
warned that inaction on the U.S. debt and deficit problem is no longer
an option, and a response can either be planned carefully or forced by a
looming crisis, but using the debt ceiling as lever is wrong and
potentially harmful to the U.S. economy.
He called for good faith action by the White House and Congress on
a credible plan in the near-term to address the long-term fiscal
situation, and to stabilize the growing debt-to-GDP ratio.
“I fully understand the desire to use the debt limit deadline to
force some necessary and difficult fiscal policy adjustments, but the
debt limit is the wrong tool for that important job,” Bernanke said in a
speech to the annual conference of the Committee for a Responsible
Federal Budget.
“Failing to raise the debt ceiling in a timely way would be
self-defeating if the objective is to chart a course toward a better
fiscal situation for our nation,” Bernanke said, adding that it would
lead to higher interest rates, and therefore higher debt costs, while
slowing economic growth.
He stressed that the borrowing needs subject to the debt ceiling
reflect spending already approved by previous Congresses and
administrations.
And — contrary to what some in Congress have argued — “even a
short suspension of payments on principal or interest on the Treasury’s
debt obligations could cause severe disruptions in financial markets and
the payments system, induce ratings downgrades of U.S. government debt,
create fundamental doubts about the creditworthiness of the United
States, and damage the special role of the dollar and Treasury
securities in global markets in the longer term,” Bernanke warned.
“The Hippocratic oath holds that, first, we should do no harm. In
debating critical fiscal issues, we should avoid unnecessary actions or
threats that risk shaking the confidence of investors in the ability and
willingness of the U.S. government to pay its bills.”
However, he said his position on the debt ceiling in no way
indicates he would recommend a delay in addressing fiscal issues.
“I urge the Congress and the Administration to work in good faith
to quickly develop and implement a credible plan to achieve long-term
sustainability,” he said, calling for balancing the primary budget, and
reducing the debt ratio, with the goal of putting it on a downward
trajectory.
“Perhaps the most important thing for people to understand about
the federal budget is that maintaining the status quo is not an option,”
he said.
“History makes clear that failure to put our fiscal house in order
will erode the vitality of our economy, reduce the standard of living in
the United States, and increase the risk of economic and financial
instability.”
And Bernanke cautioned that “one way or the other, fiscal
adjustments sufficient to stabilize the federal budget must occur at
some point. These adjustments could take place through a careful and
deliberative process that weighs priorities and gives individuals and
firms adequate time to adjust to changes in government programs and tax
policies. Or the needed fiscal adjustments could come as a rapid and
much more painful response to a looming or actual fiscal crisis in an
environment of rising interest rates, collapsing confidence and asset
values, and a slowing economy. The choice is ours to make.”
He noted that the federal budget deficit has rising “appreciably”
to 9% of GDP since the start of the recession in December 20007, and
“has mostly reflected the automatic cyclical response of revenues and
spending to a weak economy as well as the fiscal actions taken to ease
the recession and aid the recovery.”
And while the deficit should narrow as the economy continues to
expand, “We cannot reasonably expect to grow our way out of our fiscal
imbalances.”
The fiscal challenge is a long term one, but by planning in the
near term “policymakers can avoid a sudden fiscal contraction that might
put the still-fragile recovery at risk,” Bernanke said.
In addition, there are near-term gains to be had.
He said “acting now to put in place a credible plan for reducing
future deficits would not only enhance economic performance in the long
run, but could also yield near-term benefits by leading to lower
long-term interest rates and increased consumer and business
confidence.”
Still, Bernanke also cited the need to take care in designing the
budget changes, saying, “our fiscal policies should also reflect the
nation’s priorities by providing the conditions to support ongoing gains
in living standards and by striving to be fair both to current and
future generations.
“In addressing our long-term fiscal challenges, we should reform
the government’s tax policies and spending priorities so that they not
only reduce the deficit, but also enhance the long-term growth potential
of our economy.”
Examples, he said, include “increasing incentives to work and to
save, by encouraging investment in the skills of our workforce, by
stimulating private capital formation, by promoting research and
development, and by providing necessary public infrastructure.”
** Market News International Washington Bureau: 202-371-2121 **
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