Bernanke urges cut in budget deficits

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke yesterday urged Congress and the administration to cut record-high federal budget deficits, warning that they could erode investor confidence and endanger the economy's long-term health.

Bernanke's comments came as concerns grow at home and overseas about the United States' mounting red ink as it spends billions to rescue financial-services firms and to shake the economy out of the recession that is now in its 19th month.

"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this fiscal year. That would be more than four times last year's total, which was a record.

The recession has taken a bite out of tax revenue paid by people and companies. At the same time, the government's spending has risen, paying billions to shore up banks and help the unemployed and others hurt by the downturn, the longest since World War II.

Bernanke acknowledged that Congress and the administration faced "formidable near-term challenges" to stabilize the financial system, reduce home foreclosures, and spur banks to lend more freely. The success of these efforts will be crucial to turning the economy around.

However, he cautioned, "unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

German Chancellor Angela Merkel, in rare public criticism, on Tuesday took a swipe at actions by the Fed and central banks in Europe to fight the global recession. She fears that the moves could lead to problems in the future.

"I view with great skepticism the powers that the Fed has, for example, and how, in the European area, the Bank of England has developed its own little lines," she said.

Bernanke countered yesterday: "I respectfully disagree with her views."

"The U.S. and global economies, including Germany, have faced an extraordinary combination of a financial crisis . . . plus a very serious downturn. And in that context, I think strong action on both the fiscal and monetary sides is justified to try to avoid an even more severe outcome."