Bernanke: Debt limit hike is not optional

Federal Reserve Chairman Ben Bernanke on Tuesday reiterated his warning that the administration and Congress must avoid brinksmanship in talks to reduce the deficit and raise the debt ceiling. 

Bernanke spoke as Vice President Biden held the first of three meetings this week with congressional negotiators crafting a deal to raise the nation’s $14.3 trillion debt ceiling while reducing the deficit.

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“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,” Bernanke said at a Washington event.

Bernanke shot down suggestions by Sen. Pat Toomey (R-Pa.) that the Treasury Department could prioritize U.S. debt payments once the $14.3 trillion ceiling is reached to protect bondholders. He said delaying other government payments could still spook investors and hurt the economy.

“While debt-related payments might be met in this scenario, the fact that many other government payments would be delayed could still create serious concerns about the safety of Treasury securities among financial market participants,” he said.

Bernanke’s comments represent a shift. In February, he told the House Budget Committee that a GOP bill to prioritize payments if Congress decides not to raise the nation’s debt ceiling could be helpful, though at the time he stressed his preference for a deficit-reduction plan that raised the ceiling. 

On Tuesday, Bernanke said lawmakers should remember the Hippocratic Oath taken by doctors and first vow to do no harm.

“I am by no means recommending delay or inaction,” Bernanke said.

Lawmakers taking part in the Biden-led talks said Tuesday that they are making progress, but reported no major breakthroughs. 

“It went well. We’re getting into some of the tougher issues, and the fact is we’re still all friends and talking around the table,” Rep. Chris Van Hollen (D-Md.), one of the negotiators, told reporters after emerging from a two-hour meeting Monday. “So that’s good news.”

Van Hollen said the group discussed discretionary spending Tuesday, with proposals for spending caps and triggers on the agenda for Wednesday.

The group’s negotiations have taken on greater urgency as the Aug. 2 deadline the Treasury Department has set for raising the debt ceiling draws nearer. The House minority whip, Rep. Steny Hoyer (D-Md.), who is not in the Biden group, said Congress should vote on lifting the debt limit within the next 10 days to provide assurance to the markets.

Van Hollen said the group did not have a hard deadline for reaching consensus.

“We’re making progress every day, but I don’t think we should put an artificial deadline on it other than to say, we need to get this done sooner rather than later and we shouldn’t be getting anywhere close to the possibility of defaulting on the debt,” said Van Hollen, the ranking Democrat on the House Budget Committee.

Other participants said little after the meeting.

“We’re doing fine. I’m not going to tell you anything other than to tell you we’re making progress,” Sen. Jon Kyl (R-Ariz.) said.

National Economic Council Director Gene Sperling complimented Cantor and Kyl, saying they come to the meetings with a “sense of seriousness,” and that everyone is trying to find enough to agree on. 

At the same time, Sperling cautioned that the GOP cannot continue to say revenue is completely off the table because a sense of shared sacrifice is “very difficult” to achieve if that is the case.

Republicans have objected to including any tax increases as part of a deal to raise the debt ceiling. 

Bernanke said a debt-ceiling deal could include a down payment on deficit reduction along with an enforceable timetable for further decisions. It could also include triggers for spending cuts or tax increases that would have to be approved by Congress to establish credibility, Bernanke said.

“History makes clear that failure to put our fiscal house in order will erode the vitality of our economy, reduce the standard of living in the United States and increase the risk of economic and financial instability,” Bernanke said.

In supporting triggers, Bernanke appeared to side with an administration proposal to trigger spending cuts or tax increases if the ratio of debt to GDP is not declining. 

Instead of a debt trigger, the GOP has been arguing for a hard spending cap that would allow no more spending once a ceiling is reached.

House Budget Committee Chairman Paul Ryan (R-Wis.), who spoke at the same event as Bernanke, said it was important to reach a meaningful deal on reducing the deficit in the current talks since the debt-ceiling vote is the “only train leaving the station.” He noted that the Senate, which has not produced a budget this year, will have to vote on the debt ceiling. He also said a credible plan to cut the deficit must address healthcare entitlements.

Two Democratic senators, Mark Warner of Virginia and Michael Bennet of Colorado, said they believed a deal was achievable by Aug. 2, but that it would not be substantial enough to avoid more work on the deficit before the 2012 election.