Federal Reserve Chairman Ben S. Bernanke cautioned lawmakers against using the federal debt limit as a “bargaining chip” during budget talks, saying such moves could provoke market instability and harm the economy.
“I think using the debt limit as a bargaining chip is quite risky,” the Fed chief said today in testimony to the Senate Banking Committee in Washington. Failure to raise the debt limit would “at minimum” lead to “an increase in interest rates, which would actually worsen our deficit and would hurt all borrowers in the economy.”
Treasury Secretary Timothy F. Geithner has said lawmakers must raise the $14.3 trillion debt ceiling before Aug. 2 or risk a default. The Republican Study Committee, a group of self-described fiscal conservatives, is circulating a letter asking House Speaker John Boehner to back a plan that would cut the federal deficit in half in one year in exchange for a vote to approve in increase in the statutory debt limit. The measure would reduce spending by about $380 billion in fiscal 2012.
“It’s a risky approach” not to raise the debt limit “at a reasonable time,” Bernanke said.
“Even if the debt is paid, there’s the issue of market confidence and how the market would respond to the risk of default or even the default of non-debt obligations,” he said. “The worst outcome would be one in which the financial system would again destabilize,” he said, adding that such an occurrence “would have extremely dire consequences for the U.S. economy.”
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