Bernanke Warns Senators to Alter Fiscal Path

Bernanke tells Senators that government spending is on an unsustainable path.

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Making fiscal policy is not in Ben Bernanke's job description, but he has plenty of views on the subject. While the chairman of the Federal Reserve usually deals in interest rates and the money supply, today he spent a lot of time telling members of the Senate Budget Committee how continued high deficits could hurt the U.S. economy.

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Bernanke noted that the recovery remains "frustratingly slow," adding that even after the recovery takes hold, current budget policy will continue to threaten the nation: "Unfortunately, even after economic conditions have returned to normal, the nation will still face a sizable structural budget gap if current budget policies continue."

Government spending is topic number one on Capitol Hill, with President Obama set to release his budget next week, and Congress debating whether to extend the payroll tax cut and unemployment insurance extensions, which expire at the end of the month.

Failing to extend those two programs could have profound effects on the economy. As Mark Zandi of Moody's Analytics told Bloomberg, extending both could mean U.S. economic growth in 2012 of 2.6 percent. Letting both lapse would cut seven-tenths of a percent off that growth rate, he said.

But any discussion of the matter will likely bring more partisan wrangling, with potentially little to show for it, if recent history is any guide. Congress has, after all, not passed a formal budget since 2009, and last summer, gridlock over raising the debt ceiling led to the first downgrade of the U.S. credit rating in history.

Senators used Bernanke's appearance to vent their frustration at the current state of political discourse.Democratic Sen. Ron Wyden of Oregon, for example, asked Bernanke about the potential effects of "week after week of bickering and inability to get decisions."

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Republican Sen. Kelly Ayotte of New Hampshire asked Bernanke whether he thinks that members of Congress need "greater urgency" in dealing with fiscal matters. To illustrate how excessive spending could hurt the economy, Bernanke used Europe as an example. "As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy," he said.

However, spiraling public debt in the United States has not yet resulted in an increase in the nation's borrowing costs. In fact, interest rates are at historic low levels. Today, the rate on 10-year treasuries is just below 2 percent--in contrast, Italy's is at around 5.6 percent, and Greece's interest rate is at a whopping 34 percent.

But Bernanke warned that spikes can happen very quickly, with disastrous effects.

"Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point."

But while Bernanke and his audience appear to agree on the problem, it's unlikely that sentiment on Capitol Hill will yield agreement on the solution.