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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

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

By Frank Ahrens  |  October 15, 2008; 1:30 PM ET
Categories:  The Ticker  
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Comments

It looks like the thing is caught between raising hell and amazing grace. Things will get better. We'll get back to August next August. See you then Post. Until then, good luck. The way I'm feeling you have a better shot at getting there than I do. I need to get back to work here.

Posted by: Beau James | October 15, 1908 1:45 PM | Report abuse

Adverse-feedback loop? Well here's something to consider Mr. Bernanke:

In a negative feedback loop fixing the effects, i.e., the feedback loops, masks the true causes and give false impressions of relief. All the while the causes keep going and the feedbacks keep getting stronger.

And the final collapse or blowup will be a lot worse than if you had pulled the plug earlier.

The causes are the housing burst, overleveraging, debt financed overconsumption, etc.

All you guys and gals have done so far is to dress up the effects. As a matter of fact all these new bailout spendings, all these stimulus spendings financed by more government borrowing, are the reasons we got in this mess in the first place.

Rate cuts. Fed lendings. Stimulus. Forced capital injections. All have failed.

Time to face the music. Gordon Brown and Paul Krugman notwithstanding.

Posted by: tom007 | October 15, 1908 2:26 PM | Report abuse

The music is playing and I'm sticking with the permanent plan. Nobody wanted to hear it. I got screwed seven ways to Sunday all for doing the right thing. Now all the screwballs are taking the beatings. They deserve every bit and some more. I'm going forward with my life. Enjoy your big money crisis that you created. Fake people trying to make life a living hell for you. Go to hell and keep going. There should be profit in scrapping your whole junk empire. They all committed themselves to this financial suicide and want paid. Oil is coming down, so feeding the kids should get cheaper. They want to keep killing us over and over again using the corrupt financial system. Well all the corruption is shaking out and all the people doing us wrong are screwed. Screw you. Go watch Bill's monkey show and play monkey see monkey do morons. We'll just roll on and ride on. Creeps.

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Posted by: Beau James | October 15, 1908 4:45 PM | Report abuse

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