The Federal Reserve Board Chairman had a stern warning today for Congress: "Taxmaggedon" is real, it's coming and only lawmakers can save the nation from falling off this rapidly approaching "fiscal cliff."
"What is particularly striking here is that this is all pre-programmed," Fed Chairman Ben Bernanke said. "If you all go on vacation, it's still going to happen, so it's important to be thinking about that and working with your colleagues to see how you might address that concern at the appropriate time."
Bernanke, speaking in front of the Joint Economic Committee, was referring to the year-end intersection of the Bush-era tax cuts expiration, $1.2 trillion in scheduled spending cuts and expiring payroll tax breaks, which, if not addressed could cost American taxpayers with $310 billion in tax increases next year.
The picture the Fed chairman painted today was not pretty.
"The so-called fiscal cliff would, if allowed to occur, pose a significant threat to the recovery," Bernanke warned. "If no action were taken and the fiscal cliff were to kick in in its full size, I think it would be very likely that the economy would begin to contract or possibly go even into recession, and that unemployment would begin to rise."
Bernanke said that, in the short term, if all the measures would occur together, it would amount to a withdrawal of spending and increase in taxation of between 3 and 5 percent of the gross domestic product, which would have a "very significant impact" on the near-term recovery.
"What I'm saying is that, in ways that are up to Congress, steps should be taken to mitigate that overall impact. And what combination of tax reductions and spending increases [to enact], that's really up to you," Bernanke said. "But I urge Congress to come to agreement on that well in advance so as not to push us to the 12th hour. But again, I think that trying to put our fiscal situation on a sustainable basis is perhaps one of the most important things that Congress can be working on."
The single biggest item making up the fiscal cliff, Bernanke said, is the potential expiration of the so-called Bush tax cuts. If everything else were held constant, he said, the expirations alone would have adverse effects on spending and growth in the economy that would be significant.
"I'm not necessarily saying that the right thing to do is to extend those cuts," he added. "It could be there are other steps you could take that would have a similar impact. But that is the single biggest component of the so-called cliff.
Rep. Sean Duffy, R-Wis., asked if that basically meant, in essence, that the Fed chairman would advise that the tax cuts should be extended.
"I'd tell you to try to avoid a situation in which you have a massive cut in spending and increase in taxes all hitting at one moment, as opposed to trying to spread them out over time in some way that will … create less short-term drag on the U.S. economy," Bernanke responded.
Beyond Congress' end of the year to-do list to avoid the potentially devastating effects of "taxmageddon," Bernanke said the Federal Reserve is prepared to take steps to help the U.S. economy. But he refused to be pinned down on what additional steps could be taken to spur growth and did not signal imminent action.
"As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate," Bernanke said.
After nearly two hours of testimony discussing the fragile state of the world and U.S. economy, there was a brief moment of levity when Sen. Coats, D-Ind., asked if the Fed chairman sleeps well at night.
"I generally sleep pretty well, yes, but I have a lot to do during the day and I need to be well-rested," Bernanke said, laughing.