Political India: Engaging America

Ben Bernanke, Chairman of the United States Federal Reserve, has issued his sternest warning to lawmakers yet, to keep negotiations over the U.S.’ debt ceiling separate from the debate on restructuring longer-term fiscal priorities.

His comments this week came even as the U.S. Congress and White House are locked in no-holds-barred negotiations on raising the debt limit from its already eye-wateringly high level of $14.29 trillion.

While Democrats, who control the White House and Senate, need Republican support to push through the extension of the debt limit when the deadline of August 2 is reached, Republicans have thus far been unwilling to yield ground unless their demands for public expenditure cutbacks are met.

In this backdrop Mr. Bernanke said during a conference here, “I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job.”

Cautioning lawmakers that failing to raise the debt ceiling in a timely way would be self-defeating, Mr. Bernanke added that budget dynamics at this point were “unsustainable,” given that a larger public debt implied higher interest costs and this in turn caused the deficit situation to worsen further.

Citing some of the deleterious effects of such a gargantuan debt, Mr. Bernanke said it crowds out private capital formation thus reducing productivity growth. Further, he said, when the debt is financed by borrowing from abroad, a greater share of future income has to be devoted to interest payments to foreign debt-holders. Finally massive debt also poses a danger to policy as it impairs policymakers’ ability to respond effectively to future economic shocks, he noted.

While the consequences of a debt default would have serious ramifications for the sovereign rating of U.S. debt, an issue of equal concern to lawmakers in recent times is that fiscal cutbacks may impede the ongoing economic recovery, with the prospect of a double-dip recession not entirely ruled out.

Mr. Bernanke’s words may be heeded by Congress, however, as in April the Standard & Poor's credit-rating agency revised its outlook on the safety of long-term U.S. debt to “negative” from “stable.” Earlier this month another agency, Moody’s, warned that the U.S. risked “losing its triple-A credit rating unless swift and significant progress is made over its debt ceiling,” according to reports.