Bloomberg News

Bernanke May Need to Stay ‘Above Politics’ in Debt Standoff

July 27, 2011

(Updates Treasury yield in 17th paragraph.)

July 27 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke has steered clear of the political brawl over raising the U.S. debt limit. Lawmakers say he should keep his distance.

The central banker would risk angering politicians and roiling markets should he get involved in talks, recommend a specific tax and spending plan or repeat the force of his 2008 pleas for a financial rescue, members of Congress from both parties said. “If you’re the Fed chairman, you’ve got to be above politics,” said Jon Kyl, the No. 2 Senate Republican.

Staying above the debt-limit fray may give Bernanke and his colleagues a freer hand to inject monetary stimulus into a sputtering U.S. economy, or remove it later. The Fed’s $600 billion in bond purchases from November to June sparked a political backlash from Republicans who took control of the House of Representatives in last year’s elections.

“If he were to appear at all partisan, it’s just going to create ammunition for the opposing side,” said Jim Kochan, who helps manage $228 billion as chief fixed-income strategist at Wells Fargo Fund Management LLC in Menomonee Falls, Wisconsin.

Bernanke, 57, this year has publicly urged Congress to raise the U.S. debt ceiling and adopt a long-term plan to reduce the budget deficit without damaging a stalling U.S. recovery. He’s stopped short of telling lawmakers exactly how they should do that.

Bernanke’s Warnings

Three years ago, Bernanke’s warnings of imminent disaster helped spur passage of the $700 billion Troubled Asset Relief Program after the collapse of Lehman Brothers Holdings Inc. He told lawmakers in a closed-door meeting of a possible second Great Depression unless Congress approved a bailout of the banking system.

Today, while the Fed should be “obviously getting ready” to consider emergency measures in case of market turmoil, Bernanke’s public approach so far has been “appropriate,” said Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee who was in the 2008 meeting with Bernanke.

“We do not have an immediate crisis,” Frank, 71, said in an interview. “I don’t think he ought to be scaring people.”

David Skidmore, a Fed spokesman, didn’t respond to an emailed request for comment.

President Barack Obama’s administration and Democrats and Republicans in Congress have been locked in a standoff for months over what kind of deficit-cutting measures to tie to an increase in the nation’s $14.3 trillion debt ceiling. The Treasury Department has said the U.S. exhausts its borrowing authority on Aug. 2 and risks going into default.

Dueling Visions

Obama and House Speaker John Boehner on July 25 made back- to-back televised speeches on their dueling visions. Senate and House leaders are pushing proposals that diverge over whether to force another showdown early next year.

Bernanke testified before senators July 14 that failing to raise the debt limit and triggering a cut in the nation’s credit rating would be tantamount to causing a “self-inflicted wound.”

“Loss of investor confidence could potentially raise interest rates quite significantly,” making it harder to reduce the deficit, Bernanke said in a semiannual hearing at the Senate Banking Committee.

Bernanke has since shied away from commenting or meeting lawmakers. “The right people are taking the right roles in the debate,” said Indiana Representative Mike Pence, a Republican who advocates eliminating the Fed’s legislative mandate for maximum employment to concentrate only on stable prices.

“The Federal Reserve should focus on monetary policy that protects the dollar and leave other issues to people that are elected,” Pence said in an interview.

Fed Standing Suffers

The Fed’s standing with the public suffered after it helped bail out the financial system in 2008 and last year started a second round of bond-buying that Republicans, including Kyl and Boehner, then House minority leader, said risked inflation. Bernanke’s approval rating fell to its lowest level last month in almost two years of Bloomberg polling on the issue. He faced the most opposition in history in his Senate confirmation vote for a second term in 2010.

Investors are betting against a U.S. debt default. Yields on 10-year Treasuries declined to 2.96 percent as of 10:43 a.m. in New York today from 3.74 percent in February. That compares with Greece, where 10-year government-bond yields have traded above 13 percent for three months as European officials work to avert a default by the nation.

‘Strong Statements’

Bernanke has “made strong statements about the importance of raising the debt limit and also the importance of dealing with our fiscal problems,” New Mexico Senator Jeff Bingaman, a Democrat who serves on the Finance Committee, said in an interview.

Asked if Bernanke should be more forceful in pushing lawmakers toward a deal, Bingaman said, “I don’t think that’s his job. I think his job is to give his view when questioned by the Congress but not to be lobbying the Congress.”

There’s a chance that tougher words to Congress may roil financial markets, former Fed Vice Chairman Alan Blinder said. “But to me it’s a chance worth taking,” said Blinder, a professor at Princeton University in New Jersey, where Bernanke formerly chaired the economics department. Bernanke’s 2008 warning “scared the bejesus” out of politicians, Blinder said. “Maybe he needs to do it again.”

Such tactics may backfire, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington research group. “That would be so potentially destabilizing to the very markets we’re trying to find a way to reassure,” she said.

Political Deadlock

Bernanke’s predecessor once took the initiative to pressure lawmakers to raise the debt limit. Alan Greenspan was credited with helping break a political deadlock in January 1996 when he requested a private meeting with then-House Republican Leader Richard Armey to discuss the issue after Armey indicated Republicans could push the U.S. into default. Republicans later backed down.

That may not be the best strategy for Bernanke.

“Sometimes the Fed chairman has to be careful that he isn’t too involved in the political process,” Arizona’s Kyl, 69, said in an interview. “He needs that credibility with everybody. And there’s not much he could say or do here that wouldn’t be perceived by one side or the other as unhelpful. I think he’s smart to stay on the sidelines.”

--Editors: Gail DeGeorge, Christopher Wellisz

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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