Bernanke Says Central Banks Should Learn More About Policy Tools

Federal Reserve Chairman Ben S. Bernanke said central bankers are working to sharpen their understanding of programs created during the financial crisis to restore liquidity and spur economic growth.

“The Federal Reserve and other central banks have had to deploy a variety of new tools and approaches to carry out their responsibilities regarding monetary policy and the provision of liquidity, tools about which we still have more to learn,” Bernanke said today in the text of a speech in Washington.

The Fed has cut interest rates to near zero and purchased $2.3 trillion of assets in two rounds of bond purchases, aimed at cutting an unemployment rate that peaked at 10 percent in 2009 and persists at 8.3 percent. The European Central Bank reduced its interest rate to a record low 1 percent and provided euro-area banks with more than $1 trillion of three-year loans in so-called longer-term refinancing operations.

Bernanke spoke at the opening of a Fed conference in Washington involving policy makers from the U.K. and Japan that will focus on topics including challenges for central bankers and financial market supervision. Speakers at the conference include Fed Vice Chairman Janet Yellen, Bank of England Governor Mervyn King, Bank of Japan Governor Masaaki Shirakawa and former European Central Bank President Jean-Claude Trichet.

“In the wake of the crisis, the Federal Reserve and other regulatory agencies have been charged with challenging new responsibilities in the area of macroprudential supervision, with the objective of promoting financial stability and reducing the likelihood and the costs of a future financial crisis,” Bernanke said. “Although much progress has been made, we are still at an early stage in understanding how best to meet these new macroprudential responsibilities.”

Cut Rates

The conference will first consider a research paper by New York University Professor Mark Gertler saying the Fed’s asset purchase programs will help spur growth by reducing interest rates rather than by increasing the amount of reserves in the banking system.

Gertler, an adviser to the New York Fed who has co-written research with Bernanke, said in an interview yesterday the economy may not need such stimulus.

“Inflation still appears to be contained so that’s good,” Gertler said in a phone interview. “Employment growth is picking up, so that’s good. It seems like the controls are at the right setting now.”

Index Rose

The unemployment rate was 8.3 percent in February, down from 9.1 percent as recently as August. The personal consumption expenditures index rose 2.4 percent in the 12 months through January, above the Fed’s 2 percent goal.

Fed policy is “always subject to change as the news changes,” Gertler said. “But the economy is definitely picking up and inflation is contained and it seems like stimulus, at least from the Fed, is not appropriate now.”

The conference also hosts three papers on financial stability. Charles Goodhart of the London School of Economics and Anil Kashyap of the University of Chicago Booth School of Business discuss the optimal mix of capital regulations, margin requirements and liquidity regulation to ensure financial stability.

The economists, and their co-authors, Dimitrios P. Tsomocos of Said Business School and St Edmund Hall, University of Oxford, and Alexandros P. Vardoulakis of the Banque de France, explain the benefits from raising capital requirements to minimize an asset boom or bust, and warn against “piling on” regulations in an effort to stop multiple channels of financial contagion.

‘Plumbing’ of Finance

Darrell Duffie, a finance professor at the Graduate School of Business at Stanford University, focuses in a research paper on the “plumbing” of the financial system during the crisis, and on securities-based collateral financing.

Duffie looks at broker dealers in the days following the collapse of Lehman Brothers Holdings Inc. in September 2008 and says that “runs” by hedge funds, that may switch their prime brokerage accounts from one dealer to another, may result in a sudden drop in available collateral, reducing liquidity.

Viral Acharya and T. Sabri Oncu of New York University’s Stern School of Business detail the risks in the repo market.

Craig Torres in Washington at


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