Bernanke warns policymakers: don’t cut too much

The Federal Reserve has hinted this week that it’s concerned about the state of the economy, and may yet consider additional intervention efforts. But Fed Chairman Ben Bernanke reminded lawmakers today that it’d sure be helpful if they didn’t make things worse by taking a lot of money out of the economy.

Federal Reserve Chairman Ben Bernanke warned Congress on Thursday that overzealous cuts to government spending could derail an already fragile recovery and said a U.S. debt default could wreak financial havoc.

“I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told members of the Senate Banking Committee.

My expectations are probably a little too low, but I’m always a little relieved to hear Bernanke talk this way.

Economic growth is awfully weak and the unemployment rate has inched higher, not lower, in recent months. It’s against this backdrop that the only topic policymakers are willing to discuss is major spending cuts, which necessarily takes money out of the economy when we need the opposite.

I assume Republicans will ignore this. After all, Bernanke pleaded with them months ago not to screw around with the debt ceiling, and they did the exact opposite.

But I think Washington needs the occasional reminder about the basics of supply and demand. A fragile recovery can break if Congress and the White House agree to lay off public-sector workers and weaken demand when it needs to be strengthened.

At his press conference the other day, President Obama shot down the notion that he’s pushing for increased revenue right away. “Nobody is looking to raise taxes right now,” he said. “We’re talking about potentially 2013 and the out-years.”

What’s less clear to me is when the proposed spending cuts would take effect. Here’s hoping everyone, on both ends of Pennsylvania Ave, remember Bernanke’s warning that “sharp and excessive cuts in the very short term would be potentially damaging to that recovery.”

Postscript: On the debt ceiling and the potential default, Bernanke also told the Senate Banking Committee, “It would be a calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy.”