Bernanke Makes The Right Call On Systemic Financial Risk

The Woodward Report ^ | October 2, 2009 | David John

[honestabe010]

One of the larger mistakes in the Obama financial regulatory reform package was its attempt to give the Federal Reserve additional powers so that it could in theory protect the economy from risks such as the housing bubble that could endanger the entire financial system.

As we have argued in the past, the entire concept of minimizing systemic risk is a thankless task that is probably impossible. A key question is how much power such a regulator would have. As we said in June, “Congress could grant it such wide powers that the agency could intervene in just about any aspect of the financial industry, thus causing even more chaos and uncertainty than it prevents. It could also hinder the development of new products and other innovations if the agency develops an attitude that anything new may be risky.”

However, if there is to be a systemic risk regulator, it would be far better to give that responsibility to a council of regulators than to the Federal Reserve or any other single agency. Now, Federal Reserve Chairman Ben Bernanke has endorsed the council approach even though it could cost his agency additional powers and resources. Testifying before the House Financial Services Committee this morning, Bernanke said that:

"…the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets–both regulated and unregulated–may exceed the capacity of any individual supervisor. Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole. This objective can be accomplished by modifying the regulatory architecture in two important ways...

[HarleyD]

Ben Bernanke, “Mr. Depression-Expert”, wouldn’t know a recession if it hit him in the face. Where’s the “green shoots” he said would happen in September?

Ben Bernanke sees what ways the tea leaves are falling on the reserves. He could have said something when it was first proposed and didn’t. This isn’t wisdom as much as politics.