This is a topic that I've spoken on many times when Congresses were faced debt ceiling type situations. I feel the consequences for the United States and the global economy of defaulting on treasury debt would be very severe. U.S. treasury securities are the safest and most liquid benchmark security in the global financial system. They play a critical role in financial markets and the consequences of such a default while they're uncertain, I think there could be no doubt that it would be long-run harmful to the U.S. interests and at a minimum result in much higher borrowing costs for American households and businesses

BACHUS: Chairman Bernanke, I'm not seeing a lot of discussion concerning the reduction in treasury issuance with the deficit coming down. It seems like that would give you more latitude to reduce your purchases of treasuries. Would you like to comment on that?

BERNANKE: Well, the Fed still owns a relatively small share of all the treasuries outstanding. It's true that as the new issuance comes down that our purchases become a larger share of the new flow of treasuries coming into the market. But we have not seen that our purchases are disrupting the treasury market in any way. And we believe that they have been effective in keeping interest rates low.

That being said, as I've described, depending how the economy evolves, we -- you know, we are considering changing the mix of tools we use to maintain the high level of accommodation.

BACHUS: Yeah, but the fact that they are -- will be probably issuing less is a factor you're considering, I guess.

BERNANKE: We would consider that. But, you know, again, our view of it, which, you know, people disagree -- but our view is that what matters is the share of the total that we own not the share of the new issuance.

“We’re seeing a flight to quality,” said Fisher, who called the U.S. “the best-looking horse in the glue factory.”

We have just begun to look at the issue of whether or not you could reorder, reprioritize payments so that the debt interest would be paid but other things not paid. This has not been done before, and our early assessment is that there would be some difficulties from just a purely operational point of view. For example, you would have to differentiate between Social Security payments, which presumably would not be going out, versus interest payments to individuals holding savings bonds, which would be going out, and that might cause some operational issues. So we do have some concerns on that score.

In response to a question about the debt ceiling

The rise of Treasury rates, or yields, has been characterized as both good and bad omens. Various interpretations have been put forward. To wit:

• The rise of term Treasury rates reflects the improved outlook for real growth.
• The rise of term Treasury rates signals declining risk aversion and the unwinding of the safe haven inflows that occurred last fall.
• The rate rise demonstrates increased inflation expectations related to concerns of monetization of the burgeoning federal debt.
• The rise is evidence of decreased demand on the part of foreign investors.

These and possibly other explanations may all be factors in the market. I'm sympathetic to the good omen explanations—that the rise is connected to the improved outlook—but I don't rule out that there is something here to monitor very carefully. The steepening of the yield curve may reflect growing concern over the nation's ability to correct profound structural imbalances; that is, to combine recovery with transition.

If we’re going to go the supplemental financing programme route, we need SFPs to be exempt from the debt ceiling. The other approach is the Fed bill approach. It’s not subject to the debt limit. [Fed bills] can be sold broadly in the market, for example to money-market mutual funds. The problem is then there are two issuers of US government obligations. You don’t want both a three-month Fed bill and a three-month T-bill. It creates confusion. I don’t think it’s a big problem; lots of central banks have authority to issue central bank bills. We don’t want to be in the Treasury’s way so we’d probably restrict maturity to less than 30 days so they have 30 days and up.

I think Treasury is quite sympathetic to letting us do one or the other. We’d like Congress to consider it. It’s nice to have—as opposed to critical. That said, if I could get a belt and suspenders, I’ll take belt and suspenders. As long as people are worried about whether we have adequate tools, it makes sense for us to get more tools even if we don’t think we need them.

[D]emand for Treasuries and other official paper of U.S. government issuers will be determined by their attractiveness relative to alternatives, and they may well be judged more, rather than less, attractive under most reasonable future scenarios.

[A shortage of Treasury securities] is not one of the things I'm worried about.

From audience Q&A as reported by Bloomberg News.

The financial distress since August has also underscored the importance of international cooperation among central banks. For some time, central banks have recognized that managing crises involving large financial institutions operating across national borders and in multiple currencies can present difficult challenges. Funding pressures can easily arise in more than one currency and in more than one jurisdiction. In such cases, central banks may find it essential to work closely together. For just this reason, the Federal Reserve, the ECB, and the Swiss National Bank have established currency swap arrangements and have coordinated their provision of dollar liquidity to international financial institutions over recent months.

... I come here to praise TIPS… In my opinion, the benefits of the TIPS program significantly exceed the costs of the program.  

Briefly, let me give you a few examples of events that I never expected to see—ever:

...[N]early a failed Treasury bill auction—total bids were barely sufficient to cover the amount the Treasury was offering. This near-miss occurred despite the fact that money market mutual fund investors were fleeing to rather than away from Treasury securities.

A reference to the 4-week bill auction on August 21

Of course, we all want to consider whether the recent problems related to securitizing assets are going to have a longer lasting impact on the economy or financial markets. Securitizations have made it possible to efficiently finance pools of assets. In particular, investors with low risk tolerance were willing to buy what they thought were investment grade securities without a detailed understanding of the underlying assets as long as they had confidence in the ratings of the securities. To the extent that these investors have less confidence in ratings, they may choose to buy government or agency securities, where they do not need to make an independent analysis of potential credit risk. In part, this accounts for the reduction in rates on government securities relative to other financial instruments over the past two months.