Transcripts

Fed. Chairman Ben Bernanke Says Baby Boomer Spending Should Be A Capitol Concern

PAUL KANGAS: Federal Reserve Chairman Ben Bernanke raised a yellow caution flag on Capitol Hill today at a Senate hearing on the long-term outlook for the Federal budget. Bernanke is worried that entitlement spending could get out of control if something isn't done sooner rather than later. Washington bureau chief Darren Gersh reports.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ben Bernanke is not the first Fed chairman to warn the government's spending habits could damage the economy in the long run. But he may be the most blunt about it. Calling recent reductions in the deficit the calm before the storm, the Fed chairman warned interest payments on the national debt could triple as deficits rise to pay for entitlement programs supporting baby boomers in their retirement.

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: If early and meaningful action is not taken, the U.S. economy could be seriously weakened with future generations bearing much of the cost.

GERSH: We can't grow our way out of the problem, Bernanke said, because Social Security and Medicare spending increases with the size of the economy. Without reform, Bernanke warned the nation may find itself in a vicious cycle of rising deficits, higher interest payments and skyrocketing debt. Given the risks, New Hampshire Senator Judd Gregg asked why the bond market doesn't seem to be reacting.

SEN. JUDD GREGG (R) NEW HAMPSHIRE: If I was buying long term debt 10, 15, 20, 30 years out, I would sure want a much higher interest rate than what appears to be what the markets are demanding today. What are they assuming we're going to be doing that I'm not aware of?

GERSH: Alan Greenspan called that question the bond market conundrum. So why are long-term interest rates now about the same as those on a five- year bond?

BERNANKE: Either this is a trading phenomenon and holders of the bonds are not really thinking about the out-years in the future, but the other possibility which is that one way or another, the bond holders do expect that Congress will take whatever measures are needed to insure that the bonds are paid off and that it's done in the context of price stability.

GERSH: For his part, Bernanke says the Federal Reserve would not allow the government to inflate its way out of this problem by printing money, though he is unlikely to be Fed chairman 15 or 20 years from now when the big bills come due for the baby boomer retirement. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.