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Bernanke: Crisis coming if debt ceiling is not lifted

By PEDRO NICOLACI da COSTA
June 15, 2011

Chairman of the Federal Reserve Ben Bernanke speaks about fiscal sustainability at the Committee for a Responsible Federal Budget Annual Conference in Washington June 14, 2011. REUTERS/Kevin Lamarque

Federal Reserve Chairman Ben Bernanke warned on Tuesday that a failure to lift the government’s $14.3 trillion debt ceiling risks a potentially disastrous loss of confidence in America’s creditworthiness.

In comments that could give fresh impetus to talks on raising the legal limit on the nation’s debt, Bernanke said the United States could lose its prized AAA credit rating and the U.S. dollar’s special status as a reserve currency might be damaged if Congress fails to act soon.

“Even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets and the payments system,” he told a budget conference.

Inaction could also “create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the long term,” Bernanke added.

Investors worldwide view U.S. Treasury bonds as so safe as to be a near-equivalent of cash. That confidence helps keep U.S. borrowing costs low. The dollar, which has long been used as a reserve currency by many countries, is also seen as a good store of value.

Vice President Joe Biden and top lawmakers resumed budget negotiations on Tuesday in an effort to find trillions of dollars in savings that would give Congress the political cover to raise the debt ceiling before the government runs out of money.

The Treasury Department has warned that the government will begin defaulting on its obligations — whether debt payments or other bills coming due — if Congress does not increase the limit by August 2.

“The longer-term (budget) problem is the aging population, and that’s the thing that really needs to be tackled,” said Lou Brien, market strategist with DRW Trading Group in Chicago. “To conduct that debate by using the debt limit as a bargaining chip is kind of a dangerous game to play.”

Bernanke repeated his calls for a long-term budget plan, but made clear he did not want to see the rise in the debt limit held hostage to a deficit-cutting plan.

“I hope … that such a plan can be achieved in the near term without resorting to brinkmanship,” the Fed chief said.

He also renewed a warning that he had made a week ago that cutting the budget too sharply in the near-term could endanger the economy’s recovery.

“An advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk,” Bernanke said.

The U.S. budget deficit is forecast to hit $1.4 trillion this year — on par with a record reached in 2009.

Bernanke said a considerable portion of recent fiscal deficits was due to fallout from the recession, which led to lower tax revenues and higher stimulus spending.

Still, he warned large “structural” budget issues remained.

Developing a plan now for how to reduce that debt load over time could bolster economic activity today by keeping borrowing costs down and boosting confidence, Bernanke argued.

“Maintaining the status quo is not an option,” he said.

Copyright © 2011 Reuters

One Response to Bernanke: Crisis coming if debt ceiling is not lifted

  1. Carl Nemo

    June 15, 2011 at 10:26 pm

    Why should this guy care…? Bernanke along with his associate Geithner in Treasury have been intentionally destroying the USD via their legalized counterfeiting scam of printing trillions of dollars that aren’t backed a healthy economy, low inflation, low unemployment etc. Instead they are trying to inflate their way out of debt along with the Federal Reserve purchasing our debt. It’s as if our nation in its death throes is devouring itself tail first, onward to the head in voracious, bite sized chunks.

    The Chinese have been net sellers of US Treasuries for the past five months and soon plan on ceasing the purchase of our debt…period! When they balance risk vs. reward, we’re now classed a deadbeat nation. A recent Weiss report rating sovereign debt of about 48 nations, the US was lower than Bulgaria and near the bottom with on Greece and a few others below us…ouch!

    The phony stock market ramp up we’ve witnessed during the past several years is a function of the largest companies having gone global while depending on an ever-cheapened dollar to plump their bottomline.

    Now with Greece dying like a slug in the noonday sun is causing tremors within the Euro based community. Investors are fleeing the Euro and foolishly moving their assets into USD and Treasury debt little realizing they are being headed into a box canyon to their imminent financial destruction. When our credit rating is downgraded from AAA, existing bonds will lose their value due to the necessity of having to pay higher interest on new issues, virtually sticking current bond holders with huge losses.

    It’s truly a ‘sick paradigm’ when our markets depend on a cheap, almost worthless dollar in order to show a profit. This demonstrates that their ‘free trade’ scam, not based on “fair trade” principles is finally blowing up in their collective faces.

    We truly have a bunch of greedy, short-sighted fools at the helm of the USS America. They’re still steaming at flank speed through a known iceberg field of impending financial destruction. Rest assured they have lifeboats for themselves, but sold the rest to some short-fingered boat trader in the last port of call all for a few dollars, euros or shekels more. / : |

    Carl Nemo **==