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Ben Bernanke: Deficit must be cut, but debt limit 'the wrong tool'

Fed chief Bernanke avoids taking a position on taxes while telling Congress it must act 'in a timely manner' to reduce the deficit. Failing to raise the debt limit, he says, would be a costly mistake.

By Ron SchererStaff writer / June 14, 2011

Chairman of the Federal Reserve Ben Bernanke speaks about fiscal sustainability at the Committee for a Responsible Federal Budget Annual Conference in Washington Tuesday.

Kevin Lamarque/Reuters

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New York

Federal Reserve Board chairman Ben Bernanke, in his toughest words yet, warned Congress Tuesday that it has to act “in a timely manner” to reduce the federal budget deficit.

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Mr. Bernanke, however, did not weigh-in on the most intractable part of the problem – whether to raise taxes or cut government programs. Republicans want to cut spending but not necessarily raise taxes. The Democrats want to raise taxes on the wealthy on top of some spending cuts.

With the parties embroiled in this impasse, the nation is quickly coming to a point – on or about Aug. 2 – where the government will not be able to fund its on-going operations or pay its debt.

Bernanke warned lawmakers that playing a game of chicken in the showdown over whether to cut programs or raise taxes by failing to increase the federal debt ceiling is a mistake that could cause “severe disruptions in financial markets and the payments system.”

In fact, Bernanke warned that if Congress failed to act, over the long term it could hurt the value of the US dollar and the trust other nations and investors have in US Treasury securities.

“Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might be a protracted period,” Bernanke said. He was addressing a combination of lawmakers and budget experts at the annual conference of the Committee for a Responsible Federal Budget in Washington.

'Difficult' policy decisions

Bernanke said he could understand using the deadline to force some “necessary and difficult” policy decisions. But, he added, “the debt limit is the wrong tool for that important job.”

The Fed chairman’s warnings follow announcements by most of the ratings agencies that they would be forced to downgrade the creditworthiness of the US government if Congress fails to raise the debt ceiling limit and rein in the deficit.

But Bernanke was more blunt than the rating agencies, pointing to the turmoil that has enveloped Greece, which is struggling to pay its debts. Because of concerns that investors will lose money on its debt, Greece is practically cut off from the financial markets and its debt is carrying interest rates of 17 percent. Comparable US government debt is paying 3 percent.

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