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Biggest Threat to U.S. Economy Is Congress, Bernanke Says

Congress is the main impediment to a more robust economy, Ben S. Bernanke told Congress today in what may well be his swan song on Capitol Hill.

What’s more, lawmakers are on course to make things worse before the end of the year, the custodian of monetary policy warned the caretakers of fiscal policy.

“The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy,” was the substantive opening line of his testimony to the House Financial Services Committee.

In the next breath, the chairman of the Federal Reserve worried that the House and Senate are contemplating additional austerity measures this year that would curb the expansion even more.

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he said.

Bernanke was pointing to one of the under-appreciated realities of the congressional budget discussion ever since Republicans took control of the House three years ago. The parameters of the debate don’t include any discussion of an expansionary fiscal policy — one in which large amounts of federal spending and low rates of taxation give the economy plenty to grow on.

That was Washington’s collective approach during the economic crisis of the previous decade, but now the opposite is the case. President Barack Obama, congressional Democrats and the Hill’s GOP are all unified in their calls for a contractionary approach — one that puts a premium on reducing the size of annual deficits and chipping away at the national debt.

Where the profound disagreement comes is over which way to accomplish the contraction. Republicans say the route should be entirely spending cuts, which would likely be felt most in two of the nation’s biggest economic engines, the health care and military hardware industries.

Democrats say higher taxes on the wealthy is the essential answer, even while conceding that such a move might crimp the pace of investment and thereby expansion.

Politically, the approaches are as opposite as policies get in Washington these days. But fiscally, the effect of taking either course would be about the same — a slowing of the economically stimulative machinery of government.

The Fed is also preparing to back away from the stimulative monetary policy it’s been pursuing since the financial crisis accelerated in 2007: spending billions to buy government bonds and mortgage-backed securities. Bernanke said the timetable for reducing those purchases was not on a “preset course” but would accelerate if the economy strengthens.

The Fed forecasts economic growth of 2.3 percent to 2.6 percent this year, based on an assumption that the first-quarter effects of the fiscal-cliff-averting tax hikes and the sequester cuts will wear off somewhat later in the year. Bernanke’s warnings were that keeping those deep cuts in place much longer would slow growth for longer than expected — or that another showdown over raising the Treasury’s  borrowing limit would spook the financial markets and make consumers anxious

Bernanke is on the Hill today and Thursday for his required biannual presentations to Congress on Fed monetary policies. Because he’s widely assumed to be stepping down when his second term as chairman ends in January, his appearances before the House Financial Services and Senate Banking committees are likely to be his last as a congressional witness.

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