Bernanke: Deficits Threat 'Real and Growing'

Federal Reserve Chairman Ben Bernanke speaks during a question-and-answer hour with invited students from various Rhode Island colleges and universities in Providence, R.I., Monday, Oct. 4, 2010. (AP Photo/Stephan Savoia) AP Photo/Stephan Savoia

The economy could be hurt if Congress and the White House fail to come up with a plan to curb the nation's huge budget deficits in the coming years, Federal Reserve Chairman Ben Bernanke warned Monday.

Bernanke, in a speech prepared for delivery, reiterated his belief that the government shouldn't raise taxes or slash spending now because the economic recovery is still too fragile.

But failing to bring the deficits under control could endanger the economy later on, he said. Exploding budget deficits can lead to higher interest rates for people buying homes and cars, and for businesses buying equipment or expanding operations. That could crimp Americans' spending and slow economic growth.

"The threat to our economy is real and growing," Bernanke said. "The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes."

The federal government is on track to produce its second-highest deficit ever - $1.3 trillion - for the budget year that ended Sept. 30. That would be slightly below last year's record $1.4 trillion in red ink.

President Barack Obama assembled a commission to tackle the soaring deficit. Its goal: come up with a plan to cut the deficit so that it is no bigger $550 billion by 2015, an amount equal to about 3 percent of the total U.S. economy.

The options for slicing the deficit - cutting spending on popular entitlement programs like Social Security and Medicare and raising taxes - will be difficult for the White House and Congress to sell to the American public.

Bernanke steered clear of making recommendations on the best way to reduce the deficits, saying those tough decisions are best left to the nation's elected officials.

Rapidly rising health-care costs and the aging of the U.S. population are among the major forces putting pressure on the deficits in the years ahead, Bernanke said.

"We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future," Bernanke said in remarks to the annual meeting of the Rhode Island Public Expenditure Council.

At another event earlier in the day, Bernanke defended the government's decision in 2008 to bail out banks, even though the action was unpopular with the American public.

"For what it's worth, it's worked," Bernanke said in a town-hall style meeting with college students in Rhode Island. "It's stabilized the system. The financial system is now much healthier than it was. It's no longer in crisis, and moreover, the money that went into these financial firms is coming back to the taxpayers with interest. So it turns out to have been not only a successful program, but for the most part, a pretty good investment for taxpayers."
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