US central bank chief Ben Bernanke warned Wednesday that a US debt default would trigger a “major crisis” in the global economy, as the White House and its Republican foes groped for a budget deal.
“Clearly, if we went so far as to default on the debt, it would be a major crisis,” that would “throw shockwaves through the entire global financial system,” the US Federal Reserve chief told a key congressional committee.
Bernanke sounded the alarm as US President Barack Obama was to welcome his political opponents and his fellow Democrats for a fourth straight day of seemingly stalled talks with an August 2 deadline just three weeks away.
The Fed chief told lawmakers that failure to reach a deal could “throw the financial system into enormous disarray and have major impacts on the global economy” if Washington halts debt payments.
Bernanke told the House Financial Services Committee that the United States could keep making payments on debt principal and interest absent an increase in the congressionally set debt ceiling — but at a crippling cost.
The cash-strapped US government would have to slash domestic spending by as much as 40 percent, which could bring fragile economic growth to a standstill at a time when unemployment stands at a historically high 9.2 percent.
Bernanke said that “fairly soon after” August 2, Washington would have to make “fairly significant cuts” to cherished programs like Medicare health insurance for the elderly and disabled, Social Security retirement payments, and possibly military pay.
And “it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us,” adding to the deficit and raising US debt payments, he cautioned.
His warnings came as the US Senate effectively killed a symbolic Democratic resolution urging tax increases on the rich, a step Republicans fiercely oppose maintaining it would smother investment and stifle job growth.
The measure, which said “any agreement to reduce the budget deficit should require that those earning $1,000,000 or more per year make a more meaningful contribution to the deficit reduction effort,” fell short of overcoming a procedural roadblock in the Democratic-led chamber.
Despite increasingly angry rhetoric in the stalled negotiations, key lawmakers continued to insist that a polarized Washington would agree on a deal to cut spending while increasing the congressionally set limit on borrowing.
“Our economy is already struggling to stay on the course to recovery,” said Democratic Senate Majority Leader Harry Reid. “We can’t afford to have our country crash.”
Republican Senate Minority Leader Mitch McConnell, who unveiled a surprise plan Tuesday that would effectively let Obama raise the debt ceiling with just Democratic support and without making cuts, renewed his call for a balanced budget amendment to the US Constitution.
“We’ve tried persuasion, we’ve tried negotiations, we’ve tried elections, nothing has worked,” he said. “The constitution must be amended to keep the government in check.”
Republicans have urged fiscal discipline since Obama took office, after years in which they backed massive tax cuts and rejected paying for wars in Afghanistan and Iraq or a costly increase in a popular health care program.
Leading Democrats greeted McConnell’s proposal carefully, but it was unclear whether the plan would rally enough Republican support to pass the divided US Congress.
Obama has called for daily talks to reach a deal to lift the US debt ceiling, now at $14.29 trillion, in the face of a budget deficit expected to hit $1.6 trillion this year.
The US hit the ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.
But by August 2, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors.