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2-24-10, Bernanke Warns Of Unsustainable Debt Path |
February 24, 2010
WASHINGTON -In response to questions from Financial Services Committee Ranking Member Spencer Bachus on whether federal deficit levels are unsustainable, Federal Reserve Chairman Ben Bernanke said that "given the numbers that the CBO or the OMB have projected, that's right." Federal Reserve Chairman Bernanke warned that "I do think that it's very important that we begin to look at the path, the trajectory, of the deficit as it goes forward." In response to a Bachus question on whether it was critical to have a long-term plan to reduce the debt, Bernanke said that "it would be very helpful, even to the current recovery, to market confidence, if there were a sustainable credible plan for a fiscal exit." BERNANKE: Congressman, when you ask about sustainability, you're talking about the medium-term structural deficit that remains even after the economy has returned close to more normal levels of activity. Estimates of the structural deficit range from 4 percent by the OMB to up to 7 percent of GDP in some scenarios run by the CBO. Those numbers are above a sustainable level. I think in order to maintain a stable ratio of debt to GDP, you need to have a deficit that's 2.5 percent, 3 percent at the most. So I think, yes, under current projections we have a deficit and a debt that will continue to grow. Interest rate costs that will continue to grow. So I do think that it's very important that we begin to look at the path, the trajectory, of the deficit as it goes forward. And there could be a bonus there. To the extent that we can achieve credible plans to reduce medium- to long-term deficits, we'll actually have more flexibility in the short term if we want to take other kinds of action. BACHUS: Right. So the current budget path is not sustainable, is it? BERNANKE: Given the numbers that the CBO or the OMB have projected, that's right. BACHUS: And it might be upon us sooner than we think. Is that a good analogy that I've used, of walking on thin ice?
BERNANKE: Yes, sir, that's true. It's not necessarily just a long-term issue because it is possible that bond markets will become worried about the sustainability and we may find ourselves facing higher interest rates, even today, given that concern. |