Lax Oversight Caused Crisis, Bernanke Says

In the January 4, 2010 New York Times article "Lax Oversight Caused Crisis, Bernanke Says," Catherine Rampell reports that the Federal Reserve chairman blames regulatory failure for the economic decline of recent years:

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

Mr. 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 sought 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,” Mr. Bernanke said in remarks to the American Economic Association.

Mr. 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 to 2006 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,” Mr. Bernanke said.

Some lawmakers and economists have argued that the Fed kept interest rates too low in the aftermath of the 2001 recession, making loans cheap and feeding reckless lending by banks.

“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated,” Richard Shelby of Alabama, the Senate Banking Committee’s top-ranking Republican, said in December during a committee vote on Mr. Bernanke’s reconfirmation.

The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition.

Even if confirmed, however, Mr. Bernanke 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. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades.

The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.

In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed’s vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said “the appropriate use and sequencing of these tools is under active discussion” by regulators.

But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”

Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against “systemic risk.”

The implication is that the Fed believes that regulation and supervision, rather than tighter monetary policies, should be used to address asset bubbles in the future.

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

Fed Chairman Bernanke argues for increased regulation of financial markets

In the January 3, 2010 article "Fed: Regulation 1st defense against speculation," Associated Press economics writer Jeannine Aversa reports that Federal Reserve Chairman Ben Bernanke argues increased regulation of financial markets is necessary to avoid future economic crises:

WASHINGTON – Stronger regulation is the best way to prevent financial speculation from getting out of hand and throwing the economy in a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.

But he didn't rule out higher interest rates to stop new speculative investment bubbles from forming.

The Fed chief's remarks were his most extensive on the subject since the housing market's tumble led to the gravest financial crisis since World War II — and perhaps the worst in modern history, in his view.

Critics blame the Fed for feeding that speculative boom in housing by holding interest rates too low for too long after the 2001 recession.

But Bernanke, in a speech to the American Economic Association's annual meeting in Atlanta, defended the central bank's actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said.

Bernanke said the direct links were weak between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time. The stance of interest rates during that period "does not appear to have been inappropriate," he said.

Still, the enormous economic damage from the housing bust — the longest and deepest recession since the 1930s and double-digit unemployment — shows how important it is to guard against a repeat, Bernanke said.

"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," he said.

"However, 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 supplementary tool," he added.

Speculative excesses are not easy to pinpoint in their early stages, he said, and using higher interest rates to combat them can hurt the economy.

For instance, rate increases in 2003 and 2004 to constrain the housing bubble could have "seriously weakened" the economy just when a recovery from the 2001 recession was starting, he said.

To help the country emerge from that recession, the Fed under then-Chairman Alan Greenspan cut its key bank lending rate from 6.5 percent in late 2000 to 1 percent in June 2003. It held rates at what was then a record low for a year. It's this action that critics blame for feeding the housing speculation.

Bernanke, however, said the expansion of complex mortgage products and the belief that housing prices would keep rising were the keys to inflating the housing bubble. As a result, lenders made home loans to people to finance houses they couldn't afford.

The Fed in 2005 did crack down on dubious mortgage practices and the type of mortgages blamed for the crisis. Bernanke acknowledged that these efforts "came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble."

Still, Bernanke said the lesson learned from the crisis isn't that regulation is ineffective but that regulation "must be better and smarter."

However, the Fed's regulatory lapses and its failure to spot problems leading up to the crisis have spurred efforts in Congress to rein in the Fed's powers and subject it to more oversight. Bernanke, who has been tapped by President Barack Obama to a second term as Fed chief, faces a contentious confirmation in the Senate.

During a brief question-and-answer session after his speech, Bernanke didn't talk about current economic conditions or the future course of interest rates.

When the Fed meets later this month, it is expected to keep its key bank lending rate at a record low, near zero. The big question is whether the Fed will provide clues at that time about when it will need to start raising rates to prevent inflation from taking off.

Some analysts worry that the Fed, which has held rates at record lows since December 2008, could be fueling a new speculative period and potentially a future economic crisis.

Looking back, Bernanke suggested the Fed might have underestimated the full force of the recession, which struck in December 2007. "It turns out the recession was worse than we thought at the time," he said.

After four straight losing quarters, the economy finally grew from July through September last year. Much of that growth, though, came from government-supported spending on homes and cars. There's concern about how vigorous the recovery will be once government supports are removed later this year.

Obama blasts banks for opposition to improved regulation of financial markets

In the December 11, 2009 Salon article "Obama blasts banks," Associated Press writer Darlene Superville says Obama "singles out financial institutions for opposition to tighter regulations."

President Barack Obama singled out financial institutions for causing much of the economic tailspin and criticized their opposition to tighter federal oversight of their industry.

While applauding House passage Friday of overhaul legislation and urging quick Senate action, Obama expressed frustration with banks that were helped by a taxpayer bailout and now are "fighting tooth and nail with their lobbyists" against new government controls.

In his weekly radio and Internet address Saturday, Obama said the economy is only now beginning to recover from the "irresponsibility" of Wall Street institutions that "gambled on risky loans and complex financial products" in pursuit of short-term profits and big bonuses with little regard for long-term consequences.

"It was, as some have put it, risk management without the management," he said.

The president also told CBS' "60 Minutes" that "the people on Wall Street still don't get it. ... They're still puzzled why it is that people are mad at the banks. Well, let's see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year ... in decades and you guys caused the problem," Obama said in an excerpt released in advance of Sunday night's broadcast of his interview.

The House bill, which passed 223-202, would grant the government new powers to split up companies that threaten the economy, create an agency to oversee consumer banking transactions and shine a light into shadow financial markets that have escaped federal oversight.

Obama is seeking swift approval in the Senate "because we should never again find ourselves in the position in which our only choices are bailing out banks or letting our economy collapse."

No House Republicans voted for the bill, and 27 Democrats voted against it. Opponents argue that the broad legislation overreaches and would institutionalize bailouts for the financial industry.

The Senate Banking, Housing and Urban Affairs Committee is working on its own version of the package.

In his address, Obama contended that the worst economic downturn since the Depression wouldn't have happened if the rules governing Wall Street been clearer and enforcement tougher.

Obama singled out Republicans and industry lobbyists for trying to block the changes.

Last week, top House Republicans urged more than 100 financial industry lobbyists to work harder to defeat the bill. Lobbyists have spent more than $300 million this year trying to scuttle the bill.

Opponents say that the changes would limit consumer choice and that added federal oversight would stunt financial market innovation.

Obama suggested that was one risk worth taking.

"Americans don't choose to be victimized by mysterious fees, changing terms and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not," he said. "We can't afford to let the same phony arguments and bad habits of Washington kill financial reform and leave American consumers and our economy vulnerable to another meltdown."

Obama has scheduled a meeting Monday at the White House with financial services industry leaders to seek support for his effort to tighten federal oversight of the industry and to limit pay for top executives at institutions that accepted billions in bailout money from the government.

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Information on the House bill, H.R.4173, can be found at http://thomas.loc.gov/

Obama address: http://www.whitehouse.gov

Bank Crisis Through The Ages

According to "Bank Crisis Through The Ages" on National Public Radio's Weekend Edition on Sunday, June 28, 2009, "Each financial crisis in American history has brought sweeping changes and pledges that bank failures will be averted in the future. Planet Money's Chana Joffe-Walt and Alex Blumberg take a tour of financial regulation through the ages."

Click the link above to listen to the story (6 min 39 sec).