Deficit must fall to prevent economic crisis, Bernanke warns

By Neil Irwin
Washington Post Staff Writer
Friday, January 7, 2011

Federal Reserve Chairman Ben S. Bernanke laid out a dire scenario on Friday of what could happen to the U.S. economy if the government cannot develop a plan to bring down the budget deficit in the years ahead, even as he said that the economic recovery appears to be gaining momentum.

Bernanke began his testimony before the Senate Budget Committee just an hour after the Labor Department reported that the unemployment rate fell to 9.4 percent in December - its lowest level since May 2009 -- from the previous month's 9.8 percent. The surprising decrease was tempered by news from employers that showed weaker-than-expected job growth. Still the sharp drop in unemployment revealed a growing confidence in the nation's economic outlook.

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," Bernanke said, according to prepared testimony. "Overall, the pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010."

But Bernanke also offered his strongest warning yet over the nation's high deficit. If the United States does not set a fiscal course that is more sustainable, "the economic and financial effects would be severe," he said.

(More here.)

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