WASHINGTON -- Federal Reserve Chairman Ben S. Bernanke on Monday warned Congress that it needed to raise the debt limit so the U.S. could pay its bills and not face default, which he said would be “very, very costly to our economy.”
Speaking just a few hours after President Obama chided Republican lawmakers for threatening to refuse to lift the debt ceiling without spending cuts, Bernanke sounded very much like the president in suggesting that the issue of the impending debt limit should not be conflated with policies of government spending and revenues.
Raising the debt ceiling, Bernanke said at a forum at the University of Michigan in Ann Arbor, “gives the government the ability to pay its existing bills -- it doesn’t create new spending.”
To drive home his point, Bernanke said that failing to lift the nation’s $16.4-trillion debt limit, expected to be reached between mid-February and March, would be like a family deciding not to pay its credit card bills because it was spending too much. Obama, in a news conference earlier in the day, used a similar analogy of a family eating out and then deciding not to pay its check.
Top Republican lawmakers responded to Obama’s remarks by saying they would stick to their plans to use the debt-limit negotiations to rein in spending and reduce deficits. "The American people do not support raising the debt ceiling without reducing government spending at the same time," said House Speaker John Boehner (R-Ohio).
Bernanke, a registered Republican who was first appointed as Fed chairman by President George W. Bush in 2006, has been careful not to lecture Congress about fiscal policies or appear to take sides in the highly partisan and rancorous budget debate between Obama and congressional Republicans. At the same time, Bernanke has frequently urged lawmakers to come up with a credible budget plan that would bring down the nation’s deficits to a sustainable level over time without impeding the fragile recovery.
Bernanke noted that policymakers face “difficult and contentious decisions” about spending and tax policies that need to be addressed, but suggested that didn’t need to happen “in the context of the debt ceiling.”
The Fed chairman said the government’s 11th-hour action to avert most of the so-called fiscal cliff of tax hikes and spending cuts made “a bit of progress” in getting the federal budget under control, but with the debt-ceiling problem and automatic spending cuts postponed until March, he said that “we’re not out of the woods.”
In a wide-ranging forum that included questions from the audience and those sent in by Twitter, Bernanke spoke about defending the Fed's independence and the central bank's recent move to link short-term interest rate policy specifically to the unemployment rate.
Bernanke said he remained unsatisfied about the high unemployment rate, currently 7.8%, but noted there were some positive developments in the economy that could make 2013 a better year. He cited the recovering housing market, the improvement in state and local government finances and the nation’s strong energy industry.
“I do think things are moving, not as fast as we like, but in the right direction,” he said.
Bernanke gave only a brief response to a question about the idea of the government issuing a $1-trillion platinum coin to avoid the debt ceiling and pay its bills.
Over the weekend, the Treasury Department and the Fed both ruled out the idea, saying it wasn’t the right way to go.
“I’m not going to give that any oxygen,” he said.