Bernanke Urges GOP to ‘Deal With’ Debt

Wednesday, 13 Apr 2011 01:07 PM

 

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 Federal Reserve Chairman Ben S. Bernanke urged Republicans during a dinner meeting yesterday to find a way to “deal with” the rising U.S. national debt without endorsing a specific plan, lawmakers who attended said.

“He said we have to deal with the debt,” Representative Steve Pearce, a Republican from New Mexico, said in an interview after leaving the session with the central bank chief on Capitol Hill. “So far the market seems to be forgiving of the fact that we haven’t,” Pearce said, adding that Bernanke told lawmakers that “we need to deal with it.”

The comments extend Bernanke’s campaign for Congress to adopt a long-term plan to reduce a federal budget deficit that’s on course to rise to a record this year. Republicans, who took control of the House this year and narrowed Democrats’ Senate majority, are gearing up for fights over further spending cuts and raising the $14.3 trillion legal cap on government borrowing.

“He was fairly consistent with what he says in public,” Patrick McHenry, a North Carolina Republican, said in an interview after the meeting.

Another attendee, Pennsylvania Representative Michael Fitzpatrick, said in an interview that Bernanke “doesn’t endorse a plan one way or another” to reduce the debt.

The meeting with about 15 Republican members of the House Financial Services Committee, held in its hearing room, lasted two hours and was closed to the public and media. Several lawmakers declined to elaborate on Bernanke’s remarks, saying the session was “off the record.”

‘Big Decisions’

“It was an opportunity for members just to have interchange and get the chairman’s perspective on some of those issues,” Texas Representative Randy Neugebauer said in an interview afterward. “We’re all making some pretty big decisions right now, and it helps to have that communication.” Bernanke talked about the economy and debt; Neugebauer declined to elaborate on what he said.

Bond yields in the U.S. are lower now than when the government was running a budget surplus a decade ago, even though Treasury Department data show that the amount of marketable debt outstanding has risen to $9.13 trillion from $4.34 trillion in mid 2007.

The yield on the benchmark 10-year Treasury note was at 3.52 percent as of 11:11 a.m. today in New York, below the average of 7 percent since 1980 and compared with the average of 5.48 percent in the 1998 through 2001 period, according to Bloomberg Bond Trader prices.

Interest Expense

Low borrowing costs mean that the U.S. is spending less to service its debt as a percentage of gross domestic product. Interest expense was 2.7 percent of GDP in fiscal 2010 ended Sept. 30, down from 3.8 percent in 2001, the last time the U.S. had a budget surplus, according to data compiled by Bloomberg.

The White House and Congress last week reached agreement on a spending plan for the current fiscal year, which started Oct. 1. The deal averted a shutdown of government agencies. President Barack Obama is set to announce long-term proposals for cutting the federal deficit today. In May, the government may be forced to increase the $14.3 trillion federal debt ceiling to ensure the U.S. will meet its financial obligations.

Bernanke, in semiannual monetary-policy testimony last month, reiterated his call for Congress to adopt a long-term plan to reduce the budget deficit while saying that near-term spending cuts, a priority for Republicans, may harm U.S. growth and result in the loss of 200,000 jobs.

Republican Criticism

Republican lawmakers have criticized the Fed’s $600 billion of bond purchases, dubbed QE2 for the second round of so-called quantitative easing, since the central bank started the buying in November in an effort to stimulate growth. House Speaker John Boehner of Ohio, then the minority leader, and three other Republicans voiced “deep concerns” in a Nov. 17 letter to Bernanke about a policy that they said may undermine the dollar and create asset-price bubbles.

Bernanke “needs to build his bridges to Republicans and to both political parties,” said former Fed Governor Lyle Gramley, now senior economic adviser at Potomac Research Group in Washington. “He clearly in this kind of rather heated political environment doesn’t want to do anything that would be considered a misstep. The more he can explain clearly to them behind the scenes, get them to understand where the Fed is coming from, the better it will be.”

The U.S. government posted a monthly shortfall of $188.2 billion in March, wider than a year earlier, Treasury Department statistics showed yesterday.

The deficit is failing to drive foreign investors away from U.S. financial assets or the dollar.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010, according to the Treasury Department. Foreign investors owned $4.45 trillion of Treasuries as of January, up from $3.7 trillion a year earlier, according to the latest government data.

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