WASHINGTON — With $85 billion in mandated budget cuts only two days away unless Congress acts, Federal Reserve Chairman Ben Bernanke Wednesday suggested swapping the sequestration, as the cuts are called, for a long-term economic policy.
“I think a good policy that would be good for the economy, and probably good for the markets, would be one that takes a long-term perspective and takes some significant steps to address our longer-term fiscal imbalances while facing more slowly some of the changes occurring at the present time,” Bernanke told the house Financial Services Committee.
The sequester would significantly impact the economy down the road, Bernanke said, particularly the ratio between the debt and Gross Domestic Product. With an aging population and rising health care costs, the ratio between the debt and the GDP is already expected to rise later this decade. The sequester, if allowed to stand, would add to that problem, he said.
Many congressmen on the committee expressed concerns about the effects of the sequester, and Bernanke repeated he believed that gradual cuts with the future in mind would be a better approach that the automatic cuts set for March 1.
In addition to answering questions on sequestration, the Fed chief explained his decision-making since the beginning of the economic crisis.
Interest rate levels have remained low since the crisis began more than four years ago. Bernanke conceded that an extended period of low interest rates “could encourage excessive risk-taking.” But he said maintaining low borrowing rates is worth the risk. ”We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.”
Bernanke cited a weak job market and the effects of Hurricane Sandy as two factors that stalled the economic recovery in the last quarter of 2012.
The housing market continues to improve and will encourage economic growth in other sectors, Bernanke said. A post-Freddie Mac and Fannie Mae world would be ideal, but the market is still too vulnerable to replace the two mortgage giants with “a more acceptable set of institutions.”
“We’re still far from where we’d like to be but the evidence is that the housing market is strengthening and that mortgage rates are one reason for that strengthening” Bernanke said. “The increases in house prices and the increases in general economic activity benefit other industries as well.”
He also said a big part of solving the country’s economic problems will require dealing with entitlement and health care spending.
“You need to be looking at the long run where problems are the most serious,” Bernanke said. “This is a critically important issue because one of the main sources of our long-term budget problems is the fact health care costs have gone up a lot faster than other costs over the last 40 years or so.”
In addition to offering his advice on solving the problems plaguing the American economy, Bernanke spoke highly a potential energy-driven economy.
“Energy is one of the bright spots in our economy,” Bernanke said. “The last couple of years we’ve seen tremendous increases in the production of natural gas, increasing oil reduction, and there’s talk of coming close at least to energy independence in the next few years.”
On Tuesday, Bernanke spoke to the Senate Banking Committee where he said it is crucial to reduce the federal debt and not just “stabilize it.”