America must pay its debts

At the hearing, Bernanke said that “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.” The press and the markets appeared to take this statement that the Federal Reserve may be willing to enact another round of quantitative easing in which the central bank purchases U.S. Treasuries and possibly agency bonds to ease interest rates and reduce borrowing costs for consumers and businesses. I was reassured that the chairman was retaining this option as a weapon in his arsenal.

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But the Fed’s actions are not a panacea for the economy, and there are limits to what monetary policy can achieve alone. Congress must also fulfill its role in creating jobs. This will involve investment in areas that have strong multiplier effects, such as infrastructure — building roads, bridges, tunnels, subways and rail — that put Americans back to work while rebuilding our country’s transportation network. I am confident that a combination of prudent and necessary fiscal policy combined with monetary policy can have a powerful effect in revitalizing our economy.

While Mr. Bernanke was invited to discuss monetary policy, one of the main focuses of the hearing revolved around the Washington’s topic du jour, the debt ceiling.

The message from Chairman Bernanke was clear: America must pay its debts.

The consequences of a default are frightening to imagine. Chairman Bernanke mentioned the impact of America not paying its obligations could parallel the terrifying days and months after the Lehman Brothers failure. Interest rates are likely to rise, directly impacting the rates that homeowners pay when they take out a mortgage to buy a home, and entrepreneurs borrow at when starting a small business.  A one percent increase in Treasury yields, Bernanke testified, could translate into a 0.8 percent decrease in GDP. That is not an inconsequential – last quarter’s GDP was 1.8 percent, compared with a historical average of over 3 percent. To put that in context, the U.S. economy needs to expand at a rate of at least 2 percent just to keep up with population growth.

Most frighteningly, Bernanke said, “Fairly soon after [Aug. 2] there would have to be significant cuts in Social Security, Medicare, military pay.” Just as the Fed’s monetary policy is not the end-all solution for creating jobs and propping up the economy, it cannot insulate Congress from its responsibility to deal with the debt ceiling.

Some in Congress have proposed enacting draconian cuts as a perquisite to a debt ceiling deal. America should bring its spending under control, but it should not do so in a way that jeopardizes our recovery. I believe we need only examine what is happening overseas to learn the dangers of a plan that focuses only on cutting the budget.

In the 111th Congress, I chaired the subcommittee on International Monetary Policy and Trade, which, among other things, looked at some of sovereign debt crises in Europe. In order to curb their deficits and stave off bond-market vigilantes, European nations have taken several paths when attempting to put their fiscal houses in order. I believe we should heed some of the lessons of the British, who have allowed the pendulum to swing so far in favor of austerity measures, that the U.K. now faces an economy that is contracting, and possibly a double-dip recession.

At the end of the hearing, I found myself agreeing with Chairman Bernanke’s sentiment that the burden of raising the debt ceiling is a responsibility of Congress. Bringing our fiscal house in order should be done in a reasonable manner, via a plan that does not balance the budget on the backs of our country’s middle class, seniors and most vulnerable individuals. It should also not result in a situation where the economy and our economic recovery are jeopardized.