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From: FUBHO2/29/2012 8:16:41 PM
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Bernanke warns lawmakers nation headed for 'massive fiscal cliff'

By Peter Schroeder - 02/29/12 01:26 PM ET

Federal Reserve Chairman Ben Bernanke warned Congress Wednesday it risked taking the nation over a "massive fiscal cliff" at the end of the year.

The central bank’s boss warned expiring tax cuts and spending cuts set to be triggered at the end of the year could hurt the economic recovery.

“Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases,” Bernanke told the House Financial Services Committee. "I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

The Bush-era tax cuts and the payroll tax cut are set to expire at the end of 2012, just as $1.2 trillion in spending cuts are scheduled to be triggered. Bernanke said that combination could throw the recovery off-kilter.

"All those things are hitting on the same day, basically," said Bernanke. "It's quite a big event."

Bernanke, who has long said policymakers should rein in the deficit, reiterated his call Wednesday for a “credible plan” to reassure markets that the nation is getting its finances in order.

Failure to do so could lead to another financial crisis, or steep interest rate spikes similar to what is currently happening in Europe, he said.

This year’s lame-duck session of Congress is expected to be one of the busiest in history given the expiring tax cuts and the spending cuts, which were triggered by the supercommittee’s failure last year to agree to a deficit-cutting plan. Congress will also need to raise the debt ceiling quickly after Election Day.

Bernanke warned that cutting off funds to the economy all at once by allowing tax cuts to expire and trimming spending could slow economic growth.

"You ... have to protect the recovery in the near term," he warned.

President Obama wants to extend the individual tax rates for families with annual incomes below $250,000 and individuals below $200,000, while allowing tax rates on higher incomes to rise. Republicans want to extend all of the Bush-era tax rates.

More and more congressional Democrats are embracing $1 million in annual income as a threshold for the tax cuts, with those making more than $1 million hit with higher taxes.

While the economy has shown signs of improvement in recent months, Bernanke warned that several unemployment reports have exceeded expectations and that the labor market is still "far from normal."

"The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high," he said.

In particular, a "very worrisome problem" is the number of long-term unemployed, as those people have a much harder time getting back into the job market as their skills and contacts deteriorate, he said.

The underlying data on the economy suggests its expansion is "uneven and modest by historical standards," and the continued threat posed by Europe's debt woes remains a persistent threat to the U.S. recovery, he said.

In response to these challenges, the Fed lowered interest rates to effectively zero, and has vowed to keep them there through the end of 2014. While he said those efforts have contributed to the recovery, Bernanke admitted that the job of restoring the economy to full health is now largely out of his hands.

"Monetary policy is not a panacea," he said. "The long-term health of the economy depends mostly on decisions taken by Congress and the administration."

Despite the difficulties in getting anything done in this Congress, Bernanke maintained a note of optimism, citing the fact that the two parties came tantalizingly close on reaching broad deficit deals in the summer and suggesting there still could be future opportunities.

But at the same time, he acknowledged that it is one thing for him to press for something, and another for Congress to get it done.

"These criticisms are easy for me to make," he said. "I don't have to deal with the politics."

Given his status as a politically independent regulator, Bernanke steered clear of recommending a specific deficit reduction path for Congress. However, he acknowledged that it is "very important" to address rising healthcare costs and said that the economy would benefit from a clear plan for reforming the housing market from Congress.
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