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Fed leader urges action to cut deficit

Put end to brinksmanship, Bernanke tells Congress

WASHINGTON — Ben Bernanke went to Congress yesterday with a message: Cut out the brinkmanship over tax and spending policy and slash budget deficits more than planned, but don't do it so rapidly that it undermines economic growth.

In making this unusually explicit push, the Federal Reserve chairman told the Joint Economic Committee that the increasingly likely scenario that they do nothing to put the nation's finances on a sound footing and let the nation lurch from crisis to crisis is not acceptable.

Congress and the Obama Administration are in stalemate over the government purse.

Republicans have rejected President Obama's $447 billion proposal to promote job creation but have shown openness to some elements of it. Meantime, a congressional "supercommittee" held a pair of hourlong sessions yesterday as part of its mission to produce a bipartisan plan for reducing the national debt. So far, that panel has shown no outward signs of progress.

Mr. Bernanke reinserted himself into the debate over the nation's fiscal policy at a time when he is under fire from some Republicans seeking their party's presidential nomination, among others, for overplaying his hand as Fed chairman. Some critics have faulted him and the Fed for taking steps to stimulate the recovery on the grounds that these steps could instead hurt the economy.

Mr. Bernanke warned that the recovery is "close to faltering," and he said the central bank has marked down its forecasts since they were last released publicly in June.

The Fed decided two weeks ago to shift the kind of Treasury bonds it buys from short-term instruments to long-term debt in a bid to lower longer-term interest rates and encourage economic growth. Although Mr. Bernanke did not signal that any further steps were imminent, he said the Fed is "prepared to take further action as appropriate" to encourage the recovery, suggesting that the central bank could act if growth slows further.

Financial markets have been exceptionally volatile.

The stock market was down sharply for most of the trading day yesterday.

But in the final minutes, a report that European Union leaders were considering a plan to strengthen European banks prompted a sharp rebound, with the Standard & Poor's 500 rising 4 percent from 3:15 p.m. to the 4 p.m. closing time, finishing up 2.25 percent for the day.

Wild swings on the stock market have been particularly common since late July. Mr. Bernanke attributed them in large part to political uncertainty, both in Europe and the United States. A bitter standoff this summer between Republicans and Democrats over whether to increase the government's borrowing limit raised the prospect of a national default.

"The brinksmanship of the summer and at least perception in the minds of some investors that the United States might actively consider defaulting on its debt … I think was a negative for the financial markets," Mr. Bernanke said. "It's no way to run a railroad."

Mr. Bernanke emphasized that the U.S. fiscal situation is "clearly not on a sustainable path at present" and added that the deficit reductions the supercommittee is charged with achieving, at least $1.2 trillion over the coming decade, would not alone make the government's finances sustainable.

Supercommittee member Rep. Chris Van Hollen (D., Md.), said Mr. Bernanke's warning "underscores the urgency of focusing on jobs and getting the economy moving again along with long-term deficit reduction."

Fresh stimulus "remains a priority for Democrats," Mr. Van Hollen said, "and we look forward to continuing the discussion."

Congressional action to stimulate the economy in the short term appears unlikely. Although lawmakers are poised to take action on three long-stalled trade bills that Mr. Obama finally sent to Congress on Monday, Democrats and Republicans are bickering over what else to do about the sluggish economy, with Republicans adamantly opposed to any fresh government spending.

House Majority Leader Eric Cantor (R., Va.) this week pronounced Mr. Obama's latest jobs package dead. And yesterday, Senate Minority Leader Mitch McConnell (R., Ky.) derided it as "Stimulus 2" and dared Senate Democrats to stage a vote on it.

Public opinion appears to be at the President's back on the plan. A new Washington Post-ABC News poll conducted Sept. 29 to Oct. 2 shows that 52 percent of Americans support the President's jobs plan, compared with 36 percent who oppose it. And some 64 percent of those surveyed favored reducing the budget deficit through a mix of spending cuts and tax increases, compared with 31 percent who preferred exclusively spending cuts and 3 percent who preferred exclusively tax increases.

"It's clear that we need a full debate on this," Senate Majority Leader Harry Reid (D., Nev.) said yesterday. "And that time will come very, very soon."

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