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Bernanke: Threat from Huge Deficits 'Real and Growing'

Tuesday, 05 October 2010 07:03 AM

Federal Reserve Chairman Ben S. Bernanke said adopting rules that limit federal spending or debt can help put the U.S. on a more sustainable fiscal path, urging lawmakers to consider their enactment.

“Well-designed rules can help promote improved fiscal performance,” Bernanke said yesterday in a speech in Providence, Rhode Island. A rule “could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence,” he said.

Bernanke provided one of his most detailed prescriptions yet for reducing the record federal budget deficit. He said in congressional testimony in June that unless the U.S. makes a “strong commitment to fiscal responsibility,” the country in the long run will have neither economic growth nor fiscal stability.

“It is crucially important that we put U.S. fiscal policy on a sustainable path,” Bernanke said at the Rhode Island Public Expenditure Council’s annual dinner, where he was invited to speak by Senator Jack Reed, a Democrat from Rhode Island and member of the banking committee.

“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Bernanke said.

Bernanke cited Switzerland, Sweden, Finland, the Netherlands, Canada and Chile as countries that improved their budgetary performance by using fiscal rules. He didn’t elaborate on what kinds of spending, deficit or debt limits would be best.

Presenting Plan

The White House Office of Management and Budget in July projected the deficit for fiscal 2010, which ended Sept. 30, at $1.47 trillion and the gap for fiscal 2011 at $1.42 trillion. President Barack Obama formed a commission in February charged with presenting a plan by Dec. 1 on how to reduce deficits over the next decade.

The U.S. budget gap has “stabilized” and should narrow relative to national income in the next few years, Bernanke said.

“Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk.” The situation is “quite different” in the longer term, he said.

The Fed chief didn’t elaborate on the near-term outlook for the economy and monetary policy, and he didn’t take audience questions.

Tax Cuts

In July, Bernanke told lawmakers that extending at least some of the tax cuts set to expire this year would help strengthen a U.S. economy still in need of stimulus and urged offsetting the move with increased revenue or lower spending. He didn’t discuss the tax cuts in yesterday’s speech.

“It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy,” Bernanke said. “What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policy makers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.”

Separately, in a forum with college students yesterday in Providence, Bernanke said the central bank’s first round of large-scale asset purchases that ended in March improved the economy and that further buying is likely to help more.

More Purchases

“I do think that the additional purchases — although we don’t have precise numbers for how big the effects are — I do think they have the ability to ease financial conditions,” Bernanke told the students.

The Fed chief and other officials have signaled over the past two weeks that the central bank may purchase more Treasuries at its next policy meeting Nov. 2-3 in an effort to boost economic growth and reduce an unemployment rate persisting at 9.5 percent or higher for the past year.

While he hasn’t given a detailed economic outlook since Aug. 27, Bernanke said Sept. 24 that the Fed’s actions haven’t “produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment.” He said Sept. 30 that “we need to do our part to help the economy recover” and ensure job growth in the U.S.

Brian Sack, the New York Fed official in charge of carrying out FOMC decisions, said yesterday that a further expansion of the central bank’s balance sheet would help stimulate an economic recovery that is forecast to be “relatively tepid.” Smaller steps of purchases may be warranted in contrast to the last round, Sack said in Newport Beach, California.

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Federal Reserve Chairman Ben S. Bernanke said adopting rules that limit federal spending or debt can help put the U.S. on a more sustainable fiscal path, urging lawmakers to consider their enactment. Well-designed rules can help promote improved fiscal performance, ...
Tuesday, 05 October 2010 07:03 AM
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