Bernanke Warns of Dire Fiscal Cliff Fallout & Unsustainable Deficits

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Federal Reserve chairman Ben Bernanke is speaking at the New York Economic Club today in New York City. While Bernanke is promising to keep rates and policy easy for quite some time, Bernanke is again saying that Fed policy is not the cure-all. He said that the pace of the recovery has been slow but also said that the easing measures are offsetting economic headwinds.

Bernanke talks about the risks coming from fiscal issues and from Europe, and his big warning is that the fiscal cliff is can be both be averted and act to add to the economy if averted. He is also saying that the U.S. needs a path to correct unsustainable deficit levels. Bernanke talked about two looming challenges:

First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law–the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery–indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession.

Second, early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation’s Treasury securities and other obligations. As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.

FULL BERNANKE SPEECH

JON C. OGG

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