Ben Bernanke Warns of Looming Economic Crisis
Friday 08 October 2010
by: Nadia Prupis, t r u t h o u t | Report
(Photo: TalkMediaNews / Flickr)
In a surprisingly candid speech at the annual Rhode Island Public Expenditure Council meeting Monday, Federal Reserve Chair Ben Bernanke warned of a potentially dangerous economic future for the country if government spending is not curbed within a few years.
"It is crucially important that we put US fiscal policy on a sustainable path," Bernanke said. "We should not underestimate these fiscal challenges. Failing to respond to them would endanger our economic future."
If budget deficits continue to rise at their current pace, Bernanke said, higher interest rates could slow formation of businesses, productivity and economic growth, while a large federal debt could hurt the amount of government funds available for future emergencies, from war to natural disasters.
"The threat to our economy is real and growing," Bernanke said.
Bernanke outlined a number of "fiscal rules" for Congress to consider implementing through legislation, including constraints on total government expenditure, deficits or debt. Today, Congress operates under a "pay-as-you-go" (PAYGO ) approach that requires tax cuts and spending increases to be offset within a ten-year budget time span, but may not be strong enough for the current economy. "The key question is whether the traditional PAYGO approach is sufficiently ambitious," Bernanke said. "At its best, PAYGO prevents new tax cuts and mandatory spending increases from making projected budget deficits worse; by construction, PAYGO does not require the Congress to reduce the ever-increasing deficits that are already built into current law."
Countries like Canada, Switzerland, Finland and the Netherlands have all seen marked improvements in their budgets since adopting fiscal rules that cap government spending. According to the International Monetary Fund, approximately 80 countries have implemented similar fiscal rules. "The weight of the evidence suggests that well-designed rules can help promote improved fiscal performance," Bernanke said.
If the nation's economic challenges are not addressed in the near future, Bernanke said, "projections by the CBO (Congressional Budget Office) and others show future budget deficits and debts rising indefinitely and at increasing rates ... unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit."
According to the World Bank's "Finding the Tipping Point - When Sovereign Debt Turns Bad," the level at which a country is no longer viable to receive lending is a 77 percent public debt-to-GDP ratio. "If the debt is above this threshold, each percentage point costs 0.017 percentage points of annual real growth."
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According to the International Monetary Fund, the 2009 debt-to-GDP ratio in the United States was 83.2 percent. James A. Bacon Jr. of the Washington Examiner states, "the US is experiencing a small growth penalty today: about one-tenth of a percentage point. By mid-decade, however, the growth penalty could swell to .56 percent yearly - more than a half percentage point."
The challenge of reducing deficit doesn't end with capping government spending. In fact, Bernanke said, "economic conditions provide little scope for reducing deficits significantly further over the next year or two ... premature fiscal tightening could put the recovery at risk." But at the same time, "if current policy settings are maintained and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace."
Congress faces several unpopular choices to cut the deficit. The CBO has projected that federal spending for Medicare and Medicaid could be double the national income over the next 25 years. Social Security is also threatened as the country's population ages and the number of workers paying taxes grows at a slower rate than the number of people receiving benefits. State and local budgets will also struggle to meet public pension and health care obligations for retired people. "Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009," Bernanke said, "[and] one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits."
"Herbert Stein, a wise economist, once said, 'If something cannot go on forever, it will stop.' One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point," Bernanke said. "The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities ... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis."
Although Bernanke did not plainly endorse any particular methods of reducing the deficit, his message was clear throughout the speech. "History makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability."
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Comments
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It is past time to reign in
Fri, 10/08/2010 - 12:34 — Anonymous (not verified)It is past time to reign in our addiction to military expansion, we simply can't afford it. We also don't need it, it doesn't serve us in any way. We currently spend more on our military than all other countries combined. We could probably cut that in half and still have an effective Armed Force.
Austerity measures, eh
Fri, 10/08/2010 - 12:34 — Plunder Me Once (not verified)Austerity measures, eh Gentle Ben? This guy should have been fired from his job last January, Thanks Prez, let's keep those wars humming along as the most expensive, and protected form of public squander.
So that means we can end
Fri, 10/08/2010 - 13:05 — Calvin Jones and the 13th Apostle (not verified)So that means we can end both wars? Or is "B-52" Ben just blowing more smoke again.
Apparently his bailout plan
Fri, 10/08/2010 - 13:05 — Anonymous (not verified)Apparently his bailout plan won't work now that the too big to fail banks won't be able to foreclosure people anymore.
But first these two expensive and useless wars must end, and then the US $ must be lowered by 20%.
Then will the industrial capacity have a chance to put the economy back to work.
Of course, the bloated
Fri, 10/08/2010 - 13:18 — FR Tothus (not verified)Of course, the bloated military budget remains unmentioned as the primary source for all of the borrowing that has been occurring, borrowing that demands interest payments, the totals of which are approaching the 50% of the discretionary budget that goes to the Pentagon and war. This interest service on the debt will soon surpass the billions the US spends on its military and its wars of empire and war against dissent and democracy, and then the establishment will seek further cuts in social programs, demand bailouts for wealthy bond-holders, and demand further and deeper cuts to social spending, the only legitimate use of taxpayer funds there is (and the one with the greatest return for the taxpayer). We must, in turn, demand deliberate and massive cuts to the Department of War, the military, and corporate welfare before considering any cuts to any social programs which directly benefit the poor. But most important of all, we must regain control of our own currency from the private bankers (Bernanke among them) of the FED.
they still haven't disclosed
Fri, 10/08/2010 - 13:54 — Anonymous (not verified)they still haven't disclosed where they sent the money,2 trillion bailout dollars, well ,where is it
"Ben Bernanke Warns of
Fri, 10/08/2010 - 13:56 — Scott ffolliott (not verified)"Ben Bernanke Warns of Looming Economic Crisis"
Looming?
Most of are already in an economic crisis.
The Undeserving
Fri, 10/08/2010 - 13:57 — Scott ffolliott (not verified)The Undeserving Rich
http://www.newleftproject.org/index.php/nlpblog/the_undeserving_rich/
Actual defense is 10% of
Fri, 10/08/2010 - 14:17 — Garrett Connelly (not verified)Actual defense is 10% of current US military expenditures.
Thank you Ben Bernanke for
Fri, 10/08/2010 - 15:30 — MG (not verified)Thank you Ben Bernanke for pointing out the obvious: the occupations of Iraq, Afghanistan, and wannabe occupation of Pakistan are an unsustainable (and immoral) use of US taxpayer dollars. That and the tax cuts for the rich. Look at the military budget in comparison to the domestic budget. Isn't it obvious? Tax cuts and the military accounted for over 70% of the budget deficit in 2008. Yet we hear almost nothing in the media about those two. Let's pass a law that takes Social Security off the table in any so-called "austerity" measures. Politicians and lobbyists waste too much time wringing hands about SS. It's the national investment program for American seniors, end of story.
Another example of people
Fri, 10/08/2010 - 15:32 — drosera (not verified)Another example of people serving the economic system rather than the economic system serving the people. We have resources and labor: how do we best use those things to produce the goods that are needed AND how do we enable every person to receive the necessities of life? That is the fundamental question. If our present economic system cannot provide for everyone, then we need to come up with a new system that does. And, while we are at it, throw out the present crappy system we have. It only serves to make the rich wealthy.
Our country is built on the
Fri, 10/08/2010 - 17:10 — OG (not verified)Our country is built on the military. The wild success of coke and pepsi and phillip morris and hollywood is all due to us having military and civilians spread about the globe at strategic locations. Obviously we have to cut social programs, all except healthcare.
Alternatively we could stop the social security beast and just use that money to pay back china.
To Garrett Connelly: Dear
Fri, 10/08/2010 - 17:18 — OG (not verified)To Garrett Connelly:
Dear Garrett, the US spends 66 to 75% of every tax dollar on defense. You are only counting the Pentagon's share in the annual budget. You must also consider veteran's programs and healthcare, emergency spending bills, intelligence agencies (of which there are 13 or 16), money funneled to covert operations through the IRI and NED, the nuclear weapon stockpile serviced under the Dept. of Energy budget (some 13,000 warheads), and last but not least the interest payments on past loans taken out to pay for all the above junk. Since they're being called up for war service, we may as well count the national guard in this too.
Your humble tax collector,
OG
.017%per % debt is a
Fri, 10/08/2010 - 17:36 — Anonymous (not verified).017%per % debt is a complete ly outrageous underestimate of the danger. this value pertains if the incremental debt is at 1.7% interest. but typically it is much higher than this, 3-8%. also, a runaway condition can occur as older debt is rolled over into the new higher interest rate.
especially dangerous for the USA. easier to predict for zaire.
You got to love it. Wall st
Fri, 10/08/2010 - 17:56 — Anonymous (not verified)You got to love it. Wall st & Corporate elites have been transferring wealth from the middle and lower classes for 40 years, and in the process they blow up the financial system with there greed. We bail there sorry incompetent asses out and run up a bunch of deficits doing it and what do we get??? A job, a little new infrastructure, maybe a new f--king idea, or maybe just a good f--king idea??? NO we get austerity after we get scolded for spending to much of the money they still want to suck out of us. You got ta love it. The hutzba is off the charts.
Bernanke, the same Bernanke
Fri, 10/08/2010 - 18:02 — Anonymous (not verified)Bernanke, the same Bernanke who fleeced us of eight hundred billion dollars Bernanke? The same bunghole who threatened us with total annihilation if we didn't bail out Goldman Sachs and AIG Bernanke? Hubris apparently knows no bounds. I hope he falls into a sinkhole in one of our pockmarked public thoroughfares never to be seen again. Perhaps he should pay us back his bloated salary, and all of the kickbacks his former employers no doubt have paid to him. It will never get the several trillion back that has been squandered on perpetual warfare, but hey, we have to start somewhere right?
I hear those austerity
Fri, 10/08/2010 - 18:15 — Anonymous (not verified)I hear those austerity drumbeats....once again. People are FINALLY waking up to the massive changes that we, not unlike what Europe is now undertaking. are going to implement because of what Larry Summers G20 austerity demands and promises were to his banker buddies worldwide!
Yes, this is basically a call for sans defense spending cuts. Yes, it's aimed right at all government services and programs, with a herculean effort towards cutting and the elimination of ALL unions in this country!
Sure, the country is hemorrhaging jobs already. So what, they say! Better to use this golden robber-barron opportunity to wipe out every single union, every single collective bargaining chip ANY worker has, ANYWHERE!
So, it's unpopular. So, people are/will be lividly angry. So what, they say! That's what diversions, like terrorist attacks or preemptive wars, are for! Bumpy, bumpy ride ahead kids!!!
Note they always place
Fri, 10/08/2010 - 18:33 — Anonymous (not verified)Note they always place Social Security and Medicare at the top of the list, never defense spending which is bloated to nearly equal the defense spending of the rest of the world combined. Also no speak concerning tax breaks to the rich which of course are the real culprits along with 30 odd years of dismantling the New Deal IE Wall Street regulations. Meanwhile here comes Foreclosuregate, an example of the outright fraud perpetuated daily by Wall Street brokers on the American taxpayer! Then to top it off we have the tea party who wants to even further deregulate these crooks!
http://www.democracynow.org/2010/10/8/ohio_secretary_of_state_jennifer_brunner
http://www.truth-out.org/foreclosuregate63953
I believe the 1st big step
Fri, 10/08/2010 - 18:36 — rob (not verified)I believe the 1st big step we must take is to eliminate the PRIVATELY-OWNED AND RUN Federal Reserve, which has likely been cheating us for the past almost 100 years, considering it has Never allowed an audit!! Have the government do its Constitutional duty and print our own money at 0% interest, backed by US! Andrew Jackson did it in the 1830s and became the Only president Ever to pay off the national debt!! Experts have estimated a time frame of about 2 to 5 years tops to pay off today's national debt and to be debt-free, if we printed our own currency! You see, even though it cost the same amount to print either a one dollar bill or a hundred dollar bill, the Fed charges a percentage of the "value" of the bill, so they make a hell of a lot more on a hundred dollar bill's interest than on the one dollar bill's interest!
what a smug POS
Fri, 10/08/2010 - 18:47 — Anonymous (not verified)what a smug POS
I agree with about all the
Fri, 10/08/2010 - 19:00 — Anonymous (not verified)I agree with about all the comments.
But don't worry. Bush told us long ago that the economy was fine. Iraq will pay us back from the oil that paid for the war. It's not to late to be a slam dunk. Anyway, major economic brains told us that the deficit didn't matter. And as long as we don't tax the upper 5% we'll all have jobs. And, if Repubs get in we won't have to pay for public education, or social security, or veterans administration, and those lazy unemployed.
And Americans need to lose weight so hunger is good.
Don't worry, be happy.
We are doomed to the
Fri, 10/08/2010 - 21:52 — Anonymous (not verified)We are doomed to the extremes of both political parties. There is no middle ground here. Wallstreet is licking its lips at thought of a gridlocked govt. Disaster capitalism is American capitalism. Too bad.
"Candid"? Give me a break! I
Fri, 10/08/2010 - 22:35 — forrest curo (not verified)"Candid"? Give me a break! I expected better from Truthout than uncritically-accepting propaganda for the continuing project of sacrificing the needs of the real economy to the insatiable appetites of the "investing" class.
There really is a science of economics; that is, there are people who really make an honest study of what the Priests of Economism worship.
Please read:
michael-hudson.com
NewEconomicPerspectives.blogspot.com
or any of a number of other well-known, respectable critics of the scams and scammers who've been riding the country raw these past several years.
Why is growth and
Fri, 10/08/2010 - 23:14 — nazani14 (not verified)Why is growth and productivity (producing more wealth while employing fewer people) always good? How about we STOP growing for a while? Stop having big families, stop building energy-inefficient McMansions on what used to be forest and farmland, demand products that last longer. the hardest part will be forcing CEOs to cut salaries. Why in the hell should anybody make more than $250k a year for any job?
Hey folks, If the economy
Sat, 10/09/2010 - 00:57 — Joe the Global Spirit Reserve Seer (not verified)Hey folks,
If the economy gets 'growing' again, everything will be alright. Alright.
As much as I agree with my fellow posters about the obscene Military waste, what the real issue to be discussed is what a sustainable, resource respecting economy would look like. How can we morph and change and thrive without the typical cancer like 'growth' we have celebrated as economic success over the last 100+ years?
Your thoughts?
Cheers,
Joe
This country's super rich
Sat, 10/09/2010 - 11:35 — Anonymous (not verified)This country's super rich must be as dumb as hell because for as much as they love money they don't know squat a out how to manage it and how to preserve its value. They have the most to lose. Hard to feel much sympathy for them.
Surely it's time for
Sat, 10/09/2010 - 11:40 — Anonymous (not verified)Surely it's time for Bernanke to resign. The "economic growth cancer" mentioned in a previous post will take a while to go into remission. But in the meantime we can undertake to get out of warfare and into health care, tax the obscene upper two per cent of wealthy corporations/shareholders.
It is truly strange that these big guys Always attack Social Security and Medicare First as being the largest drain on our resources when in fact they return far more on the investment over the long term.
Get ready to sacrifice
Sat, 10/09/2010 - 17:49 — Bob (not verified)Get ready to sacrifice another two years of your life to Goldman Sachs. How? Simple, it has been done once so there is precedent, yes Virginia, anyone under 60 will need to work to 67 for full SS benefits. Now another 2 years doesn't sound like much until you figure the years you have left after 67; probably less than 10 so 20% of your life & the best 20% will be going to Goldman Sachs & their ilk. Alternative; take the cap off FICA, currently at just over 100K; now you have lots of money for Medicare & SS & you could even continue robbing a little for the Imperial Army. In a Democracy that is what would happen but in our Kleptocratic Plutocracy you will be sacrificing two or more years out of your life. The recent unanimous vote in the Senate to protect the banks who fiddled the mortgages tells you all you need to know about whose side your government is on, no Filibuster here when the rich stand to lose through their own hyper greed. They actually tell you the richest country in the world can not afford basic pensions for its workers or medical care for it's elderly & what's worse, they have most of the people believing it. Things will change when millions take to the streets & I'm sorry to say, they may have to be armed, the rich will not give up a penny, they love the system as it is. The banks creating money for them by putting you in debt; it's a bigger scam than religion!
Ben should know, he's
Mon, 10/11/2010 - 20:27 — Anonymous (not verified)Ben should know, he's helping create it!