Fed Can't Rule Out Rate Hikes To Pop Asset Bubbles: Chief

Discussion in 'Wall St. News' started by maxitronixy, Jan 4, 2010.

  1. http://www.cnbc.com/id/34673202
    Federal Reserve Chairman Ben Bernanke said Sunday that vigorous financial regulation would have been the best way to restrain the housing bubble that helped cause the deep recession, but said policy makers can no longer rule out monetary policy to curb the buildup of risk.
    In a speech defending the Fed's rock-bottom interest rates in the early 2000s, a policy many say fueled a runaway housing boom that triggered a devastating crisis when it went bust, Bernanke said regulatory and supervisory actions, rather than rate increases, would have been more effective ways to check the run-up in house prices.

    Bernanke and the Fed face sharp criticism over actions leading up to the crisis. Bernanke's renomination as Fed chairman faces an unusual degree of opposition, and the Fed's responsibilities stand to be curtailed if congressional proposals become law.

    Bernanke said, however, in a speech to the American Economic Association, that policy makers can no longer eliminate rate increases from their arsenal to prevent future crises.

    "If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplemental tool for addressing those risks,'' he said.

    Bernanke conceded that efforts by the Fed and other regulators beginning in 2005 came too late or were insufficient to slow the housing bubble.

    "The lesson I take from this experience is not that financial regulations are ineffective for controlling emerging risks, but that their execution must be better and smarter,'' he said.

    The US Senate is poised to begin debate over financial rules reforms that would peel away the Fed's authority for regulating large financial firms.

    The U.S. central bank would be charged instead with focusing on monetary policy.

    Bernanke and other Fed officials have argued that such a change would hurt the Fed and oversight of the system in general by removing a crucial monitor from the pulse of the financial system.

    Analyzing the Fed's decisions to keep rates low for an extended period in the early 2000s, the Fed chairman argued that those policies were a response to the worry about a possible deflationary spiral that hobbled the Japanese economy through much of the previous decade.

    If the Fed followed some rules of thumb for setting interest rates, it might have been raising rates well into 2008, when the recession and the financial crisis were at or near their peaks, he said.

    The Fed's actions in slashing rates to near zero and pumping hundreds of billions of dollars into the financial system are credited with helping avoid an even more disastrous breakdown.

    Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.