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Bernanke Warns of Fiscal Cliff, Reminds of Debt Limit

NEW YORK ( TheStreet) -- Federal Reserve Chairman Ben Bernanke warned Tuesday that the stakes are high in finding solutions to the so-called fiscal cliff.

Bernanke, who spoke this afternoon at the Economic Club of New York, said he believes the "realization" of all of the automatic tax increases and spending cuts that would go into effect at the beginning of 2013 would pose a substantial threat to the slow recovery of the U.S. economy.

The Fed chairman also reminded the crowd that the United States needs to increase the federal debt limit again early in 2013. The debt ceiling became a big issue for investors in the summer of 2011 when political posturing before a deal was struck led Standard & Poor's to lower the U.S. credit rating to AA+ from AAA after prolonged disagreement in Congress.

"Early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation's Treasury securities and other obligations," Bernanke said in the speech. "A failure to reach a timely agreement this time around could impose even heavier economic and financial costs."

Obama and Boehner were joined last Friday by Senate Majority Leader Harry Reid, and the president told reporters that he was confident Congress would reach a balanced approach to deficit reduction.

But some analysts have suggested that fiscal cliff negotiations could go the way of Europe -- kicking the proverbial can down the road.

"You're going to get something that kicks this down the road into the new Congress next year," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "I don't think you're going to get anything comprehensive, but you may get some type of a temporary fix that kind of allows both sides to declare victory, and at that point address it next year."

However the discussions play out, Bernanke has reiterated time and again the importance for Congress to reach some sort of deal on the budget without allowing for the full fiscal cliff.

Bernanke said he believed the potential fallout is widely appreciated by legislators now, and he said a credible plan would eventually transition the economy to a stronger condition with full employment.

Below is the transcript of Bernanke's remarks on the fiscal cliff:

What are these looming challenges? First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law--the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery--indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession. Second, early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation's Treasury securities and other obligations. As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.