Federal Reserve Chairman Ben Bernanke Friday called for a strengthening of the nuts and bolts of the financial system and said the Fed and other regulators should focus more on the stability of the overall system, rather than just the health of individual companies.
JACKSON HOLE, Wyo. — Federal Reserve Chairman Ben Bernanke Friday called for a strengthening of the nuts and bolts of the financial system and said the Fed and other regulators should focus more on the stability of the overall system, rather than just the health of individual companies.
He also said the recent drops in commodity prices and stabilization of the dollar should reduce inflation later this year and next year, though he noted that the outlook is uncertain.
He said the central bank will “act as necessary” to achieve price stability in the medium run.
Still, the comments signaled that the Fed is unlikely anytime soon to increase the short-term interest rate it controls as an inflation-fighting measure.
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Bernanke’s speech implicitly offered his broadest analysis to date of the regulatory breakdowns that led to the sprawling financial crisis that is now a year old, offering ideas for changes that might reduce the frequency and intensity of future crises.
Speaking at an annual symposium sponsored by the Federal Reserve Bank of Kansas City, he stressed that it is key to strengthen some of the basic infrastructure of the financial system.
He said the Fed, for example, ought to be given the explicit authority to oversee the way financial institutions pay each other and clear trades.
Bernanke again defended the Fed’s role in keeping Bear Stearns from collapse, and said “the economy could hardly have remained immune from such severe financial disruptions.”
Bernanke said bank regulators need to broaden their horizons further beyond the health of individual institutions and devote more attention to the risks banks present to the overall system.
“An alternative approach … would broaden the mandate of regulators” to encompass systemic risks, Bernanke said.
He thus implicitly acknowledged some of the regulatory weaknesses that allowed the current crisis to arise. He noted that regulators issued guidance in 2006 about exotic home loans. However, because that process followed a lengthy comment period, they were in many ways too late to prevent some bad lending from occurring.
“The process is not always as nimble as we might like,” Bernanke said.
He warned, however, that the public and financial players may come to assume that the government will prevent any financial crisis, which could lead to more risk-taking and potentially set the stage for an even broader crisis.
“We would be wise to maintain a realistic appreciation of the difficulties of comprehensive oversight in a financial system as large, diverse and globalized as ours,” Bernanke said.