Bernanke says GOP debt bill could be helpful

Federal Reserve Chairman Ben Bernanke told the House Budget Committee Wednesday that a GOP bill to prioritize payments if Congress decides not to raise the nation’s debt ceiling could be helpful.

Bernanke stressed, however, that he would prefer Congress to enact a long-term deficit-reduction plan without threatening to preserve the $14.3 trillion limit.

That limit is set to be reached this spring, and Bernanke warned that under current law, not raising the limit risks defaulting on interest payments to Treasury bonds. That would lead to an immediate financial crisis, he said, and once the United States emerges from that, it would lead to years of higher interest payments that would balloon the size of the debt.

Sen. Pat Toomey (R-Pa.) and Rep. Tom McClintock (R-Calif.) have introduced legislation that would require the government to pay bondholders before other creditors once the limit is exceeded and the government can no longer borrow.

“Well, it would reduce the risk of the debt limit, that’s for sure,” Bernanke said of the bill.

He said that it would take “some time to put systems in place” to make the prioritization work.

“You need some notice to make that practical,” he said. The Fed acts as a payment service for the Treasury, and currently it does not have the computer systems in place to distinguish between bond interest payments and other payments.

Rep. John Yarmuth (D-Ky.) asked Bernanke if passing the bill would mean paying Chinese investors before troops fighting in Afghanistan, and Bernanke said it would.

He said it is up to Congress to decide whether cutting off Social Security payments and payments to troops is a useful thing to do.

Bernanke, under civil questioning from Tea Party-backed freshmen, agreed that cutting spending would help economic growth. He also said, however, that short-term cuts without a long-term plan could hurt the recovery more than it stimulates growth.

“I would just prefer that you put the debt limit issue aside and just address directly the long-term fiscal problems,” Bernanke said.

After the meeting, bill supporter Rep. Rob Woodall (R-Ga.) said Bernanke’s testimony shows that Congress should hurry up and pass the bill now so that the systems are in place when the debt ceiling is reached.

Republicans have said they want spending cuts and reforms in place before they raise the debt ceiling, while the administration has argued it would be dangerous to hold the credit rating of the United States hostage to budget demands.