Thank you, Mr. Chairman, for organizing this important hearing.
Before I begin, I want to welcome the newest Member of the House Budget Committee, Congressman Charles Djou from Hawaii. We look forward to working with you to help tackle our fiscal and economic challenges, and bring accountability to the Federal budget process.
Congratulations, Charles, on your recent swearing in as a Member of Congress and your appointment to this committee – and a special welcome to you and your family to our nation’s capital.
And welcome to you, Chairman Bernanke. It’s appropriate that you are coming before our committee today to talk about the state of the economy because the health of the U.S. and global economy is increasingly intertwined with budget and fiscal issues.
Over the past few months, we’ve watched as the sovereign debt crisis in Europe has boiled up to threaten that Continent’s economic recovery and even global financial stability in general.
In some ways, we are seeing a replay of a similar dynamic which impaired global financial markets in 2008. The fear then was systemic exposure to bad mortgage-related assets, but the fear now is driven by exposure to sovereign credit and the possibility of a debt-induced economic slump.
Ominously, interbank lending rates like LIBOR are on the rise and credit spreads have widened as investors have become much more risk averse. Volatility is up and the stock market is down.
What we are watching in real time is the rough justice of the marketplace and the severe economic turmoil that can be inflicted on profligate countries mired in debt.
At the moment, the U.S. is at the periphery of the European debt crisis and has even reaped some short term benefits, like lower long-term interest rates as a result of the renewed global flight to safety.
But Americans are left to wonder: Could we one day find ourselves at the epicenter of such a crisis? Could a European-style debt crisis one day happen here in the U.S.?
The answer is undoubtedly “yes.” And the sad truth is that inaction by policymakers to change our fiscal course is hastening this day of reckoning.
A brief look at the budget numbers shows that our current fiscal situation – and its trajectory going forward – is dire.
The budget deficit this year stands at $1.5 trillion, or just over 10 percent of GDP. Under the President’s Budget, the CBO tells us that the level of U.S. debt will triple by the end of the decade, meaning that in a few short years, the U.S. is poised to join that group of troubled countries whose public debt absorbs a large and growing share of their economic output.
A fiscal crisis here in the U.S. is no longer an economic hypothetical, but a clear-and-present risk to our economy, to society’s most vulnerable citizens, and America’s standing in the world.
As the example of Greece has shown, market forces and investor sentiment do not offer countries the luxury of time and delayed promises to get their fiscal house in order. Empty rhetoric is no substitute for results.
Foreigners now own roughly half of U.S. publicly held debt and their willingness to fund our borrowing at record-low interest rates will not continue forever. The size of our current and future funding needs makes us quite vulnerable to a shift in market sentiment and higher-than-expected interest rates.
The re-emergence of the bond vigilantes and exposure to the rough justice of the marketplace would certainly make our bad fiscal situation even worse.
The main point here is that there is a need for policymakers to re-assure credit markets that the U.S. is engaged in charting a clear course back to sustainable deficit and debt levels soon.
It’s clear to me that this means reining in government spending, not simply ramping up taxes. In particular, we need to reform our entitlement programs, which threaten to grow themselves into extinction, collapse our safety net, overwhelm the entire Federal budget, and sink the economy in the process.
The budding sovereign debt problems in other parts of the world provide us with a cautionary tale that it’s always best to take action to shore up budget deficits before market forces demand it.
The Majority’s failure to even offer a budget and its commitment to continue spending money we don’t have – creating brand new entitlements and plunging our nation deeper into debt – tell me, and tell the bond markets, that Washington still doesn’t recognize the severity of our fiscal and economic challenges.
I look forward to your testimony today, Chairman Bernanke, and remain hopeful that policymakers will heed your warnings and chart a sustainable course to avert the next crisis.