Bernanke Says Federal Reserve, Regulators Could Have Tackled Risks Better
Sept. 2 (Bloomberg) -- Byron Georgiou, a member of the Financial Crisis Inquiry Commission, discusses the panel’s inquiry into events during the financial crisis. Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair are scheduled to testify today. Georgiou talks with Peter Cook on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke said the central bank and other regulators could have done a better job tackling mortgage and banking risks that helped precipitate the worst financial crisis in seven decades.
“The Fed was slow to identify and address abuses in subprime lending, especially those outside the banking firms that the Fed regulates directly,” Bernanke said in testimony prepared for a Financial Crisis Inquiry Commission hearing in Washington. While the lack of broader statutory oversight of financial companies was a major gap, “regulators could have done more to try to identify risks to the broader financial system,” he said.
Since the crisis, Bernanke, 56, has pledged to tighten supervision of financial companies and said new Wall Street regulations signed into law in July will help the government wind down failing firms. Senate Banking Committee Christopher Dodd, a Connecticut Democrat, and other lawmakers have faulted the Fed for lax regulation before the crisis.
“If the crisis has a single lesson, it is that the too- big-to-fail problem must be solved,” Bernanke said, citing financial firms whose failure could pose risks to the broader financial system. “A promise not to intervene in and of itself will not solve the problem.”
In January, U.S. senators approved Bernanke, a former Princeton University economist, for a second term, with the largest number of dissenting votes since lawmakers began confirming central bank chiefs in 1978.
The chairman reiterated his stance, outlined in a January speech, that low Fed interest rates in the past decade didn’t cause the U.S. home-price bubble.
Insufficient Links
He said recent studies have found insufficient links between Fed monetary policy and home prices during the period. In addition, “raising the general level of interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy,” he said.
Bernanke focused much of his testimony on the causes and aggravators of the crisis, including losses on mortgages and the “shadow banking” system’s dependence on “unstable” short- term funding. Shadow banks include securitization vehicles, money-market funds and investment banks, Bernanke said.
“The system’s vulnerabilities, together with gaps in the government’s crisis-response toolkit, were the principal explanations of why the crisis was so severe and had such devastating effects on the broader economy,” Bernanke said.
The remarks come on the second of two days of hearings by the commission examining regulators’ actions before and during the financial crisis in 2008, including the decision to let Lehman Brothers Holdings Inc. fail.
The Fed, often invoking emergency powers, made more than $2 trillion of loans to keep companies afloat and avert a deeper recession.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., is scheduled to testify after Bernanke.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
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