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Fed Chief Bernanke favors regulation to prevent meltdown repeat

Fed Chairman Ben Bernanke said he doesn’t think super-low interest rates were the catalyst for the housing crisis.

Associated Press

Fed Chairman Ben Bernanke said he doesn’t think super-low interest rates were the catalyst for the housing crisis.

ATLANTA — Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben Bernanke, the Federal Reserve chairman, said in a speech on Sunday.

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 has been seeking 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," Bernanke told the American Economic Association.

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 2002-06 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," he said.

Some lawmakers and economists have argued that the Fed kept interest rates too low after the 2001 recession, making loans cheap and fueling reckless lending by banks. Bernanke didn't rule out higher interest rates to stop new speculative investment bubbles from forming.

The Senate Banking Committee approved Bernanke's renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires Jan. 31.

Even if confirmed, however, he 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.

At the same time, Bernanke has been pushing for Congress to grant the Fed greater oversight powers over the financial system, including the authority to help monitor and regulate against "systemic risk."

The debate over what caused the meltdown comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation. After their rate-setting meeting last month, Fed regulators said they expected to maintain near-zero interest rates for an "extended period" while the economy remained fragile.

Fed Chief Bernanke favors regulation to prevent meltdown repeat 01/03/10 [Last modified: Sunday, January 3, 2010 11:00pm]
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