MEDIA RELEASE

U.S. Sen. Daniel K. Akaka (D-Hawaii) questioned Federal Reserve Chairman Ben Bernanke at a hearing Thursday of the Senate Committee on Banking, Housing, and Urban Affairs on The Semiannual Monetary Policy Report to the Congress.

In response to Akaka’s questioning on the consequences of a government default, Bernanke noted that “default on the debt would have very real consequences for average Americans” and that “mortgage rates and all other interest rates that consumers pay would rise.”

Bernanke said a default would actually increase the deficit because the interest rate the government pays on its debt would rise. There could be a reduction in pay to military service members and Medicare checks would be affected.

“And then without much delay…this would also slow the economy and the job situation would get worse,” Bernanke said. “Almost every area where people have pocketbook concerns: jobs, interest rates, credit, availability of government payments, benefits…would be affected in relatively short order.”

Akaka also questioned Bernanke on falling loan limit levels that could have an impact on prospective homebuyers in Hawaii.

Later this year, the limit on the value of mortgages than can be insured by the Federal Housing Administration or bought by Fannie Mae or Freddie Mac is scheduled to decrease.

Bernanke suggested that lower loan limits could “impose some extra costs on borrowers and very large mortgages,” although he added that borrowers would not be entirely pushed out of the housing market.

The full transcript of Akaka’s questioning:

AKAKA: Before I begin, I want to thank you very much for your strong leadership. You continue to do an excellent job under very difficult circumstances.

Chairman Bernanke, we all understand the importance of preventing a government default. Many Americans, however, seem not to share this urgency. A Gallup poll in May found that only 19 percent of Americans would want their member of Congress to vote for a debt ceiling increase and 34 percent didn’t even know enough about the issue to answer the question.

Another poll in July by Pew and theWashington Post showed that Americans are more concerned about controlling spending than they are about a government default.

Chairman Bernanke, will you please explain specifically how a government default would affect the everyday lives of working class Americans?

BERNANKE: Yes, Senator, I’d be glad to. First, an analogy I made yesterday, you know, some people make the analogy that this is all about sitting down at the kitchen table making sure that your income and your spending are equal. That’s true for the long run, but the debt ceiling is really about paying for bills that we’ve already incurred.

So it’s more like saying, “Well, we’re going to solve our problems by defaulting on our credit card,” which is not, I think, something that most people would consider to be the right way to behave.

But putting that aside, not increasing the debt ceiling and allowing default on the debt would have very real consequences for average Americans. First, interest rates would jump. Treasury rates are the benchmark interest rates, so mortgage rates and all other interest rates that consumers pay would rise. Of course, that would also increase the federal deficit because we have to pay the interest on the debt as part of our spending.

If the Treasury cut back, as it would be required to do, because it couldn’t borrow, it would mean that there would be a significant reduction in both the payments, benefits, payments for services paid to the armed forces and so on, so people would see that in terms of their Medicare check or whatever other benefit they’re getting. And then without much delay, I think this would also slow the economy and so the job situation would get worse.

So in almost every area where people have pocketbook concerns — jobs, interest rates, credit, availability of government payments, benefits — all those things would be affected in relatively short order.

AKAKA: Well, thank you for briefly explaining all of that. Chairman Bernanke, even though home prices have only slightly declined, high-cost housing areas like Hawaii are still feeling the full effects of a weak housing market. Mortgage credit is still limited. The concern for the future is that bank-retained mortgages are performing worse than those sold to or backed by the government. And yet the loan limits are scheduled to step down later this year.

Do you think it’s a good idea to allow the loan limits to decrease? How might lower limits affect the housing market and home ownership opportunities?

BERNANKE: Well, there’s a tradeoff, as always, Senator. The increase in the loan limits was made on an emergency basis, obviously, to try to address the housing crisis. The administration, I guess, or the GSEs are making the determination that it’s time to begin to wean a little bit the mortgage market from those higher conforming limits.

I think the question in terms of the affect on the housing market is to what extent are nonconforming jumbo mortgages available and how are they priced in Hawaii. And I don’t know specific facts for Hawaii, but nationally there has been I think some improvement in the willingness of banks to make jumbo loans. And the differential, which at one point was more than 100 basis points, I think is much closer to 25 to 35 basis points at this point.

So it will impose some extra costs on borrowers and very large mortgages, but I don’t think in most cases that they’ll be squeezed out of the market. So there are some of the tradeoffs that GSEs and of course the Congress are looking at.

AKAKA: Thank you, Mr. Chairman.