Federal Reserve Chairman Ben Bernanke warned U.S. lawmakers today that they would deliver a “self-inflicted” wound to the nation’s economy by holding up efforts to raise the government’s borrowing limit. Republicans have resisted increasing the borrowing limit because of concerns about growing spending that has widened the federal deficit. Bernanke told a Senate panel that a default on the debt would lead to even greater federal deficits. Interest rates would rise, and the government would be forced to pay higher rates on its debt, he said. At the same time, higher rates would slow the economy and an already-weak job market. That would curtail tax revenue.
The government hit its $14.3 trillion borrowing limit in May. The Treasury Department said it will default on its debt if the limit is not raised by Aug. 2.
“I think it would be a calamitous outcome. It would create a severe financial shock,” Bernanke told the Senate Banking Committee during his second appearance before Congress this week. “Treasury securities are critical to the entire financial system. … A default on those securities would throw the financial system potentially into chaos.” Bernanke was on Capitol Hill today to deliver his semiannual economic report.
