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Financial Planning > College Planning > Student Loan Debt

Bernanke Tells Senate, Failure to Raise Debt Limit Is 'Risky'; Dodd-Frank Repeal Debated

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Federal Reserve Board Chairman Ben Bernanke told members of the Senate Banking Committee on Thursday that failure by Congress to raise the debt ceiling was a “risky approach” that, at a minimum, would result in an “increase in interest rates that would worsen” the nation’s economy. The “worst outcome,” he added, would be that the nation’s financial system becomes “destabilized” again.

The Senate committee also delved into the implementation of the Dodd-Frank Act and efforts by Republicans to repeal the law.

Regarding the debt ceiling, Bernanke said that while he “fully supports” all efforts by the Congress to bring the nation’s long-term fiscal situation into balance, “using the debit limit as a bargaining chip is quite risky.”

Assistant Treasury Secretary Neal Wolin agreed during the Senate Banking Committee hearing that not raising the debt limit would result in a “wide range of complications,” and would make the nation’s fiscal situation “worse” not better. Americans, he continued, would “experience higher interest rates” on everything from mortgage and car loans to credit cards.

tomothy geithnerTreasury Secretary Timothy Geithner (left) has said the nation’s debt limit will be reached on May 16 and has given Congress until August 2 to decide whether to raise it.

As Geithner has stated: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations–an unprecedented event in American history.” Not raising the debit limit, “would precipitate another financial crisis and threaten the jobs and savings of everyday Americans–putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.” Congress, Geithner continued, “has always acted when called upon to raise the debt limit.”

But as House Majority Leader Rep. Eric Cantor, R-Va., stated in a May 11 question and answer session regarding Vice President Joe Biden’s Debt Commission negotiations, of which he is involved, “Republicans are not interested in increasing the credit limit without big spending cuts, in the trillions not billions, as well as enacting reforms that we can be assured in the out years that we’re getting this deficit under control.”

Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, held the Thursday hearing entitled, "Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting Financial Stability."

Johnsosenator tim johnsonn (left) asked the nation’s top regulators what they thought of efforts by Republicans to “repeal Dodd-Frank.” Wolin replied: “I think there is no alternative but to move forward with Dodd-Frank as enacted.” Bernanke said that “it was painfully clear that the [nation’s] regulatory system during the [financial] crisis” was insufficient. “I would reiterate the importance of 'too big to fail'" under Dodd-Frank.

Shelia Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), stated in response to Johnson’s question that “I think it would be very harmful to repeal Dodd-Frank.”

Sen. Richard Shelby, R-Ala., ranking member on the Senate Banking Committee, stated that members of the Financial Stability Oversight Council (FSOC), created under Dodd-Frank—which included all the regulators testifying at the Thursday hearing—“appear to be divided on what the final rules should look like and what entities should be designated as systemically significant financial institutions.”

Shelby said there is “a great deal of confusion about how the Council will proceed with its rulemaking. This has created uncertainty in our markets as firms are unsure which types of activities will cause them to be subject to systemic risk regulation.”

All of the FSOC members—which also includes Securities and Exchange Commission Chairman Mary Schapiro and Gary Gensler, chairman of the Commodities Futures Trading Commission–told the Senate Banking Committee that FSOC would extend its comment period on determining which criteria should be used in designating those firms that are systemically important.


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