Lax Oversight Caused Crisis, Bernanke Says
Business Standard, January 05, 2010, Page 11
By CATHERINE RAMPELL, ATLANTA
Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.
Mr. Bernanke’s remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress.
“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke said in remarks to the American Economic Association.
Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued in his speech that the interest rates set by the central bank from 2002 to 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period.
“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” Mr. Bernanke said.
Some lawmakers and economists have argued that the Fed kept interest rates too low in the aftermath of the 2001 recession, making loans cheap and feeding reckless lending by banks.
“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated,” Richard Shelby of Alabama, the Senate Banking Committee’s top-ranking Republican, said in December during a committee vote on Mr. Bernanke’s reconfirmation.
The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition.
Even if confirmed, however, Mr. Bernanke is likely to face further political challenges over financial regulatory reform and the governance of the Fed.
The House passed a provision to audit the Fed as part of a larger financial reform package last month. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades.
The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.
In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed’s vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said “the appropriate use and sequencing of these tools is under active discussion” by regulators.
But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”
Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against “systemic risk.”
Business Standard, January 05, 2010, Page 11
By CATHERINE RAMPELL, ATLANTA
Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.
Mr. Bernanke’s remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress.
“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke said in remarks to the American Economic Association.
Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued in his speech that the interest rates set by the central bank from 2002 to 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period.
“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” Mr. Bernanke said.
Some lawmakers and economists have argued that the Fed kept interest rates too low in the aftermath of the 2001 recession, making loans cheap and feeding reckless lending by banks.
“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated,” Richard Shelby of Alabama, the Senate Banking Committee’s top-ranking Republican, said in December during a committee vote on Mr. Bernanke’s reconfirmation.
The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition.
Even if confirmed, however, Mr. Bernanke is likely to face further political challenges over financial regulatory reform and the governance of the Fed.
The House passed a provision to audit the Fed as part of a larger financial reform package last month. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades.
The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.
In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed’s vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said “the appropriate use and sequencing of these tools is under active discussion” by regulators.
But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”
Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against “systemic risk.”
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