Bernanke: Regulation Needed To Prevent Bubbles
Fed Chairman Ben Bernanke just finished taking questions after his speech today at the Economic Club of New York and was asked how future bubbles -- such as the exploded housing bubble at the root of the current crisis -- could be prevented.
"We know that bursting bubbles can be an extraordinary dangerous and costly phenomenon for the economy," Bernanke said. "One of the key issues that should be debated as we look at the problem of bubbles in the future -- What should be the leading approach? Should it be monetary policy or regulatory supervisory authority?"
Bernanke said he would favor the latter -- more and better regulation -- to curb excessive leveraging, or borrowing, that leads to bubbles.
Invoking a piece of what he called "wonk-speak," Bernanke said the economy has been stuck in an "adverse-feedback loop:" Falling housing prices hurt the financial sector, which stopped extending credit, which hurt the economy and so forth.
In response to another question, Bernanke said he wished Lehman Bros. had not failed. But in a sense, it had to be allowed to fail.
Why? Because, Bernanke said, it became clear that if the weakest firm -- Lehman -- were propped up, the stresses that led to its duress would simply hop to the next-weakest firm, like a virus moving from a depleted host to a healthier host.
In a way, Lehman became like a firebreak -- a swath of ground plowed clear of vegetation in front of an advancing forest fire.
-- Frank Ahrens
Posted by: Beau James | October 15, 1908 1:45 PM | Report abuse
Posted by: tom007 | October 15, 1908 2:26 PM | Report abuse
Posted by: Beau James | October 15, 1908 4:45 PM | Report abuse
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