The Times West Virginian

Headline News

November 21, 2012

Bernanke warns Congress to avoid ‘fiscal cliff’

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year.

Without a deal, the measures known as the “fiscal cliff” will take effect in January.

Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasurys debt. Failure to do so would impose heavy costs on the economy, he said. Bernanke said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability.

Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York.

Resolving the fiscal crisis would prevent a sudden and severe shock to the economy, help reduce unemployment and strengthen growth, he said. That could make the new year “a very good one for the American economy,” he said.

“A stronger economy will, in turn, reduce the deficit and contribute to achieving long-term fiscal sustainability,” Bernanke told the group.

When asked during a question and answer session after the speech whether the Fed could soften the impact of the fiscal cliff, Bernanke was firm in his warning.

“In the worst-case scenario where the economy goes off the broad fiscal cliff ... I don’t think the Fed has the tools to offset that,” Bernanke said.

Bernanke also said the severity of the Great Recession may have reduced the U.S. economy’s potential growth rate. He didn’t say by how much or how long slower-than-normal growth might persist.

Over the long run, the U.S. economy has grown an average of about 2.5 percent each year. Economists predict growth in the July-September quarter will be revised up to an annual rate of around 3 percent, above the government’s initial 2 percent estimate. But they think the economy is slowing to an annual growth rate below 2 percent in the October-December quarter — too slow to make much of a dent in unemployment.

Bernanke said several factors have weighed on growth: Long-term unemployment has eroded many workers’ skills and led some who have lost jobs to stop looking for one.

Companies have spent less on machinery, computers and other goods, reducing their production capacity. Stricter lending rules and uncertainty about the economy may have discouraged would-be entrepreneurs from starting more companies, the Fed chairman said.

Even assuming the economy’s potential growth has declined, Bernanke said that unemployment, now at 7.9 percent, is abnormally high. He suggested, though, that the drags on economic growth should fade as the economy heals.

By the end of December, just as the fiscal cliff nears, the federal government is expected to hit its borrowing limit. Treasury Secretary Timothy Geithner has said he will resort to the same maneuvers he used during the last debt standoff in 2011 to prevent the government from defaulting on its debt.

But these maneuvers would buy only a few weeks’ time, until late February or early March, before the government would face the prospect of a first-ever debt default.

After the last debt standoff in the summer of 2011, Standard & Poor’s downgraded the government’s credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first ever downgrade of U.S. government debt.

After the presidential election, Fitch Ratings said Obama would need to quickly reach a budget agreement with Congress over the fiscal cliff or risk losing Fitch’s AAA rating on U.S. debt.

It’s unclear what, if anything, the Fed could do to cushion the economy from the fiscal cliff beyond the bond purchases it’s already making to try to lower long-term borrowing rates and stimulate spending.

The minutes of the Fed’s last policy meeting suggest that it will likely unveil a bond buying program in December to try to drive down long-term rates. The new purchases would replace a bond-buying program that expires at year’s end.

Most analysts said Bernanke’s comments suggest that is likely.

A new bond buying program would come on top of a program the Fed launched in September to buy $40 billion a month in mortgage bonds to try to reduce long-term interest rates and make home buying more affordable. That program represented the Fed’s third round of major bond purchases to expand its holdings.

Fed officials also announced at the September meeting that they planned to keep the Fed’s benchmark short-term interest rate near zero through mid-2015. This rate for overnight loans has been at a record low since December 2008.

1
Text Only
Headline News
  • House approves bill to boost child tax credit for some

    More families with higher incomes could claim the popular child tax credit under a bill that won approval Friday in the House. But in a dispute that divides Republicans and Democrats, millions of the poorest low-income families would still lose the credit in 2018, when enhancements championed by President Barack Obama are set to expire.

    July 26, 2014

  • U.S.: Russia firing across border into Ukraine

    Russia is launching artillery attacks from its soil on Ukrainian troops and preparing to move heavier weaponry across the border, the U.S. and Ukraine charged Friday in what appeared to be an ominous escalation of the crisis.
    Russia accused Washington of lying and charged Ukraine with firing across the border on a Russian village. It also toughened its economic measures against Ukraine by banning dairy imports.

    July 26, 2014

  • U.N. school in Gaza in cross-fire; 15 killed

    A U.N. school in Gaza crowded with hundreds of Palestinians seeking refuge from fierce fighting came under fire Thursday, killing at least 15 civilians and leaving a sad tableau of blood-spattered pillows, blankets and children’s clothing scattered in the courtyard.

    July 25, 2014

  • Jet with 116 on board crashes in Mali

    An Air Algerie jetliner carrying 116 people crashed Thursday in a rainstorm over restive Mali, and its wreckage was found near the border of neighboring Burkina Faso — the third major international aviation disaster in a week.

    July 25, 2014

  • Two more planes with Ukraine bodies arrive in Netherlands

    Two more military aircraft carrying remains of victims from the Malaysian plane disaster arrived in the Netherlands on Thursday, while Australian and Dutch diplomats joined to promote a plan for a U.N. team to secure the crash site which has been controlled by pro-Russian rebels.

    July 25, 2014

  • Obama demands ‘economic patriotism’

    Staking out a populist stand ahead of the midterm elections, President Barack Obama on Thursday demanded “economic patriotism” from U.S. corporations that use legal means to avoid U.S. taxes through overseas mergers.
    “I don’t care if it’s legal,” Obama declared. “It’s wrong.”

    July 24, 2014

  • Airline disasters come in a cluster

    Nearly 300 passengers perish when their plane is shot out of the sky. Airlines suspend flights to Israel’s largest airport after rocket attacks. Two airliners crash during storms. Aviation has suffered one of its worst weeks in memory, a cluster of disasters spanning three continents.

    July 24, 2014

  • Opponents: Evidence against lethal injection

    The nation’s third botched execution in six months offers more evidence for the courts that lethal injection carries too many risks and amounts to cruel and unusual punishment, death-row lawyers and other opponents said Thursday.

    July 24, 2014

  • Ancient Animal Dig.jpg Wyoming cave with fossil secrets to be excavated

    For the first time in three decades, scientists are about to revisit one of North America’s most remarkable troves of ancient fossils: the bones of tens of thousands of animals piled at least 30 feet deep at the bottom of a sinkhole-type cave.

    July 24, 2014 1 Photo

  • Bodies of Malaysian jet victims solemnly returned to Dutch soil

    Victims of the Malaysian jetliner shot down over Ukraine returned at last Wednesday to Dutch soil in 40 wooden coffins, solemnly and gently carried to 40 identical hearses, flags at half-staff flapping in the wind.

    July 24, 2014

House Ads
Featured Ads