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Debt limit may backfire, Bernanke says

Fed chief warns GOP against cuts

BEN BERNANKE The fed chief is urging both parties to develop a credible long-term plan to lower the deficit. BEN BERNANKE
The fed chief is urging both parties to develop a credible long-term plan to lower the deficit.
By Martin Crutsinger
Associated Press / June 15, 2011

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WASHINGTON — Federal Reserve chairman Ben Bernanke urged Republicans yesterday to support raising the nation’s borrowing limit, saying that threats to block the increase to gain deeper federal spending cuts could backfire and worsen the economy.

Even a short delay in making payments on the nation’s debt would cause severe disruptions in financial markets, damage the dollar, and raise serious doubts about the nation’s creditworthiness, Bernanke said.

It was not Bernanke’s first warning to Republicans, who are vowing to block an increase that does not include a deal to slash government spending by the same amount. But it was his most explicit in terms of the consequences.

The nation reached its $14.3 trillion borrowing limit in May. Treasury Secretary Timothy Geithner has said that the United States could default on its debt if it does not raise the limit by Aug. 2. The debt limit is the amount the government can borrow to help finance its operations.

“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 in a speech to a conference sponsored by the Committee for a Responsible Federal Budget.

Bernanke called on Democrats and Republicans to develop a credible long-range plan to rein in the nation’s soaring budget deficit. The deficit is on track to top $1 trillion for a third straight year.

Budget negotiators resumed talks yesterday led by Vice President Joe Biden. They are trying to reach an agreement that would tie spending cuts to an increase in the debt limit.

An increase of $2.5 trillion in the debt ceiling would allow the government to operate until early 2013, getting policymakers past the November 2012 elections.

Some GOP lawmakers have questioned the Aug. 2 deadline. They say the government could avoid a default by selectively paying some bills with government tax revenues including making payments on the debt as they come due.

Bernanke challenged that argument.

“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.