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Bernanke confronts Obama over debt

Feb 03 2011 22:49 Sapa

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Washington - Federal Reserve chairperson Ben Bernanke issued a direct plea on Thursday for President Barack Obama and US lawmakers to solve the country's long-term debt problems to avoid a major "fiscal crisis" down the road.

Bernanke's warning to US policymakers took him beyond the central bank's traditional purview of monetary policy and into the increasingly visible fiscal disputes between politicians in Washington.

Warning that the federal budget was on an "unsustainable" path, Bernanke said it was up to Obama and Congress to summon the "political will" to tackle long-term structural problems or risk investors losing confidence in the government's ability to pay its debts.

"One way or another, fiscal adjustments to stabilize the federal budget must occur at some point," Bernanke said in a speech to reporters in Washington.

"The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities ... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis."

The US budget deficit for 2011 has been estimated at a record $1.5 trillion, or about 9% of economic output, by Congress' research arm. The deficit topped 10% of economic output in both 2009 and 2010.

Bernanke said the US economic recovery "appears to have strengthened in recent months," though growth had yet to pick up enough to reduce unemployment from a "stubbornly" high rate of more than 9%.

While the deficit has been worsened by the 2008-09 recession and Obama's spending efforts to kick-start the recovery, Bernanke said the US could not rely on the recovery alone to grow its way out of the budget deficit. Bigger long-term challenges include an ageing population and rising costs for government-provided health care programmes.

"Right now, the markets seem to be behaving as if these problems will be addressed," Bernanke said. "The question will be, do we have the political capacity, the political will to do it."

US politicians have stepped up talk in recent months of the urgency of tackling the country's debt crisis, led by conservative Republicans who rode a call for spending cuts to victory in November's congressional elections.

The Republican election victories, which put the party back in control of the lower House of Representatives, have set up a critical battle with Obama and Democrats in the coming months over exactly how to reduce spending.

Conservative lawmakers have threatened to block Congress from raising the overall borrowing limit for the government if Obama does not agree to drastic cuts. The US Treasury has said it could reach that debt "ceiling" some time in March, as it continues to spend more than it takes in.

Bernanke warned that the consequences of reaching the debt ceiling could be "catastrophic" if it forced the government to default on its debts. He urged lawmakers not to use the borrowing limit as a "bargaining chip" in the debate over government spending.

"The debt limit itself is something where we need to be very careful that we don't create the impression that the United States is not going to pay its creditors," Bernanke said.

ben bernanke  |  barack obama  |  us economy
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