Default Would Cause Major Crisis, Says Bernanke

Chairman of the Federal Reserve Ben Bernanke warned members of Congress Wednesday that failing to raise the debt ceiling by the August 2nd deadline could lead to catastrophic economic fallout. 

He said that if government defaults on its debt, it would throw “shock waves through the entire financial system.”

Appearing before the House Financial Services Committee, Bernanke feels that the solution to our debt crisis is a combination of raising the debt ceiling and making significant spending cuts. However, he says that the problem of unsustainable government spending, such as with rising Medicare and Medicaid costs, are long term issues that “don’t have to be solved today or tomorrow.”

Bernanke said “we should look at our spending and tax code to see how it will effect us in the long run”, and warned that significant cuts should be balanced over ten to twelve years because steep initial cuts will slow economic recovery.

Bernanke acknowledged the problems that the economy faces in the upcoming weeks and said that the central bank is flexible in that it can either provide further stimulus, or pull back from intervening. 

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” said Bernanke.