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July 13th, 2011

Is Bernanke Really That Stupid?

The Chairman of the Federal Reserve testified in Congress about the state of the economy, deficits, the debt ceiling, government finances, Fed policy, the dollar and some other topics. He was questioned about the negotiations between Obama and Congress about the need and importance of raising the debt ceiling.

Bernanke said that it would be like spending money and not paying the bill if Congress didn’t increase the debt ceiling. The analogy Bernanke gave was wrong. The debt ceiling is the equivalent of maxing out a credit card and asking a bank that issued the credit card for a higher maximum to borrow. If someone spent money when their credit card is at it’s maximum borrowing limit as Bernanke said, the credit card would be rejected and the person could not buy the merchandise they wanted. If someone did that in a restaurant they would be in trouble and possibly have to wash dishes to cover the bill or pawn their ring or watch. Someone that tries to pay with a credit card that is at it’s maximum borrowing limit is simply not watching their spending limit. It’s too late to request an increase in the maximum limit on a credit card when in a store. There is no assurance that a bank will increase in the limit on a credit card. If someone hits the maximum the bank will be concerned that the person is in financial trouble and may not pay. For many an increase in the limit would be rejected. When a credit card is maxed out it means the person can’t use that credit card and would be wise to start paying down the debt before requesting a spending limit increase.

Congress is being asked to raise the debt ceiling to borrow more money. If the debt ceiling is not increased the Federal government would have to spend only what it takes in, meaning a balanced budget. Some say it means the nation would default on it’s debt. That is simply not true. It’s a red herring, or a lie. Revenue to the Federal government is much more than interest expense. Interest payments can be made on the US debt as well as other important priorities such as Social Security and the military. Obama falsely said he wasn’t sure there was money for Social Security payments. That is simply not true. Many times the government was shut down and the Social Security payments were paid. There is enough money to send Granny her check.

While it would be very difficult to decide what bills to pay without borrowing more money a few important expenditures can be made. There would certainly be many government programs that can’t be paid and would have to be shut down but a few major priorities can be paid. Bernanke can’t be that stupid to think that not raising the debt ceiling is like buying something and not paying for it or maybe he is. Raising the debt ceiling is spending more than the Federal government has and borrowing to more.

Posted by admin in Economics, General, politics

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