Bernanke Warns of Fiscal Cliff Economic Impact

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

Federal Reserve Board Chairman Ben Bernanke urged Congress and the administration to protect the economy from the “full brunt” of a severe fiscal tightening at the beginning of next year—the so-called fiscal cliff—that would occur if a deal is not reached.

Speaking Nov. 20, 2012, at the New York Economic Club, Bernanke warned that a combination of automatic tax increases and spending cuts, absent offsetting changes, “would pose a substantial threat to the recovery.” Bernanke noted that “coming together to find fiscal solutions will not be easy, but the stakes are high.”

Bernanke also warned that failure to reach a timely agreement on an increase in the federal debt limit “could impose even heavier economic and financial costs” than those seen in the summer of 2011, when the threat of default fueled economic uncertainty and badly damaged confidence.

“Cooperation and creativity to deliver fiscal clarity—in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery—could help make the new year a very good one for the American economy,” Bernanke predicted.

Meanwhile, Bernanke noted that measures of the condition of U.S. financial markets and institutions “suggest gradual but significant progress has been achieved since the crisis.” But despite the improvement, “the harm inflicted by the financial crisis has yet to be fully repaired in important segments of the financial sector,” he said. Bernanke pointed to continued weakness in some categories of bank lending, which he attributed to banks’ “continued desire to guard against the risks of further economic weakness.”