Bernanke: Default Would Be A "Calamity"

The Washington Post reports:

Federal Reserve Chairman Ben S. Bernanke warned Wednesday that failure to raise the nation’s debt ceiling could trigger “a huge financial calamity, ” but conservative House Republicans accused President Obama of “scare tactics” on the issue.

A day after moving to head off a U.S. default by offering Obama new authority to raise the federal debt limit, Senate Minority Leader Mitch McConnell (R-Ky.) said congressional Republicans are united in opposition to voting for such an increase. “I bet there won’t be a single Republican vote to raise the debt ceiling at the end of the day,” he told conservative commentator Laura Ingraham in a radio interview Wednesday morning. He also accused Obama of trying to “entice us to raise taxes.”

McConnell’s proposal of a “backup plan” for raising the debt ceiling if negotiations on broad debt-reduction fail would essentially shift the political burden of the move to Obama and his fellow Democrats, allowing the borrowing limit to be raised without any Republican votes.

In testimony before the House Financial Services Committee, Bernanke added his voice Wednesday to the chorus of public officials who have argued that raising the debt ceiling is vital for the health of the U.S. economy. He predicted dire consequences if either the U.S. government were to default on its debts or immediate, massive spending cuts were enacted.

Bernanke deflected efforts to secure his endorsement for specific debt-reduction proposals under discussion, but he was unambiguous in his warnings about what could happen if no deal is reached.

Should the government default on its debts, Bernanke said, “that would create a huge financial calamity which would affect everybody and would set job creation back significantly.”

He compared what might happen in that scenario to the aftermath of the failure of the Lehman Brothers investment bank in 2008, when economic activity fell at a 6 percent annual rate for two quarters.