Federal Reserve Chairman Ben Bernanke reiterated Wednesday his belief that Congress should continue to prop up the sputtering economy, casting aside concerns that the federal budget deficit should trump the economy's need for additional stimulus.
In other words, Congress should spend now and worry about deficits later.
"At the current moment the large deficits, as unattractive as they are, are important for supporting economic activity," the nation's central banker told a Senate panel, citing "weak" private spending and a "great deal of excess capacity."
Bernanke added that he'd be "reluctant to withdraw that support too precipitously in the near term." His comments strongly echoed remarks he made in June.
The debate over budget deficits versus stimulus spending has gripped the nation's capital as the economy, though technically in recovery, continues to exhibit negative trends. For one, the national unemployment rate is essentially unchanged from June 2009. At 9.5 percent, it's fluctuated in the intervening year, rising to 10.1 percent in October before dropping back down last month. About half of the nation's unemployed workers have been jobless for at least six months.
In addition, foreclosures continue to mount. Consumers continue to hold back on spending. Credit is tight. And banks and corporations are sitting on record amounts of cash, worried about expansion during a time of such great uncertainty.
Left-leaning Democrats in Congress want to keep their foot on the pedal, pumping money into the economy to make up for the lack of private demand. Moderates and Republicans are more cautious, warning about unsustainable budget deficits and the mounting national debt. The total outstanding pubic debt was $13.2 trillion as of Tuesday, Treasury Department data show.
President Barack Obama's 2011 budget forecasts a $1.6 trillion hole, or about 10.6 percent of the nation's total output, a post-World War II high.
Bernanke said there's a time to worry about that -- but it's not now. Policymakers must "maintain some fiscal support for the economy in the near term," he said.
Over the "medium term," though, policymakers must present "credible" plans and pay "serious attention to addressing fiscal issues" in order to maintain the confidence of the financial markets.
When the U.S. government spends more than it generates, it generally has to sell debt (though the Fed could also just print more money). Buyers of that debt expect a rate of return.
Investors were demanding 2.99 percent interest from the U.S. government in order to buy 10-year Treasury bonds as of Monday, a level near historic lows, Treasury data show. Ten years ago, investors demanded double that rate.
But, key to keeping the government's borrowing costs low is maintaining the confidence of the markets.
Bernanke warned Wednesday that if policymakers don't get serious about reducing the annual budget deficit, they'd risk a "loss of confidence."
It's "very important to demonstrate as best we can we are serious about addressing long-term issues," Bernanke said in response to a question by Alabama Senator Richard Shelby, the Banking Committee's top Republican. The nation's fiscal path is "unsustainable," Bernanke warned, and that view is "widely shared."
A loss of confidence in America's fiscal well-being could lead investors to demand higher rates of return in order to buy Treasuries, which would drive up the government's borrowing costs. Funds for government programs would instead be diverted to bondholders. Social programs, military spending and the like would suffer.
WATCH Bernanke here:
*This story was updated at 7:20 p.m. ET to include video.
*************************
Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news.