Bernanke’s Advice Like “An Arsonist’s Lecture on Fire Prevention”: David Stockman

Testifying on Capitol Hill Thursday, Fed chairman Ben Bernanke sought to encourage, chide and gently prod Congress into putting the U.S. on a "sustainable path" to bring down -- or at least stabilize -- debt-to-GDP levels.

"Achieving this goal should be a top priority," Bernanke said.

But Bernanke giving politicians advice about fiscal stability is "about as useful as an arsonist's lecture on fire prevention," according to David Stockman, who was Ronald Reagan's budget director. "His radical zero interest rate policy has destroyed the bond market, crushed the yield curve and eviscerated any resolve to address the deficit on Capital Hill."

Stockman, also a former U.S. Congressman, say politicians "will make tough choices and walk the plank if they're fearful but [Bernanke's] made financing the deficit almost pain free, cost free."

Speaking of pain and the deficit, the CBO this week estimates the 2012 federal budget deficit will be $1.1 trillion, assuming current laws remain unchanged. Barring Congressional action, several tax provisions - including AMT relief -- are scheduled to expire and Medicare payment rates are scheduled to drop while automatic spending cuts start hitting in January 2013 following the failure of the so-called Super Committee last year.

But this 'do nothing' approach is a "terrible way" to run fiscal policy, Stockman tells Dan Gross and me.

According to CBO projections -- which Stockman says are overly optimistic about GDP growth -- the U.S. will face $3 trillion of deficits for the next decade. But if temporary policies like the Bush tax cuts and long-term extension of unemployment benefits are continued, the deficit balloons to $10 trillion.

"Basically, they're going to be facing down a $7 trillion decision and it's going to hit economy like a ton of bricks if you let the everything expire," he says. "And if you don't you're going to be borrowing $1 trillion a year and wondering how long Bernanke can keep printing the money. It's a giant trap that's been created."

The real trap, it seems, is how to simultaneously address the long-term fiscal deficit without sabotaging what Bernanke calls "the current economic recovery."

There are no easy answers to that conundrum, as policymakers are finding out both here and abroad.

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