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Dr. Ben S Bernanke Calls for Increased Financial Market Regulation
By Amarendra Bhushan for CEOWORLD Magazine Updated:March 11, 2009
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Guide Regulatory Revamp, Less Restrictive Money-Fund Rules!
Federal Reserve Chairman, Ben S Bernanke urged an overhaul of financial regulatory policies and accounting rules in an effort to smooth out the extreme volatility in financial markets. Bernanke also reiterated his call for an agency to take on sweeping responsibility for financial stability.
“It’s asking too much for a meeting like that to come out with detailed proposals in many different areas,” Bernanke told the Council on Foreign Relations. “The better goal for a meeting of leaders would be, as much as possible, to establish some principles that would guide reforms around the world.”
“We have to get the major financial centers around the world around the table … and agree on a common set of rules of the game that are applied more evenly across all those critical institutions,” he said on Public Broadcasting’s “Charlie Rose Show, ” adding that “what we can’t allow is a race to the bottom on the regulatory standards.”
“In particular, we need to work together effectively to make sure that we have solutions for our banking systems that are not mutually inconsistent or create problems across jurisdictions,” Bernanke said.
Ben S. Bernanke was sworn in on February 1, 2006, as Chairman and a member of the Board of Governors of the Federal Reserve System. Dr. Bernanke also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. He was appointed as a member of the Board to a full 14-year term, which expires January 31, 2020, and to a four-year term as Chairman, which expires January 31, 2010.
Before his appointment as Chairman, Dr. Bernanke was Chairman of the President’s Council of Economic Advisers, from June 2005 to January 2006.
Financial Reform to Address Systemic Risk
The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s.
Too Big to Fail
In a crisis, the authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and the broader economy. However, the belief of market participants that a particular firm is considered too big to fail has many undesirable effects. For instance, it reduces market discipline and encourages excessive risk-taking by the firm.
Strengthening the Financial Infrastructure
The first element of my proposed reform agenda covers systemically important institutions considered individually. The second element focuses on interactions among firms as mediated by what I have called the financial infrastructure, or the financial plumbing if you will: the institutions that support trading, payments, clearing, and settlement.
Procyclicality in the Regulatory System
It seems obvious that regulatory and supervisory policies should not themselves put unjustified pressure on financial institutions or inappropriately inhibit lending during economic downturns. However, there is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical–that is, they lead financial institutions to ease credit in booms and tighten credit in downturns more than is justified by changes in the creditworthiness of borrowers, thereby intensifying cyclical changes.
Systemic Risk Authority
The policy actions I’ve discussed would inhibit the buildup of risks within the financial system and improve the resilience of the financial system to adverse shocks. Financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the United States. Macroprudential policies focus on risks to the financial system as a whole. Such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets.
Financial crises will continue to occur, as they have around the world for literally hundreds of years. Even with the sorts of actions I have outlined here today, it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system. Nonetheless, these steps should help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy.
Who is Ben S Bernanke?
Dr. Bernanke has already served the Federal Reserve System in several roles. He was a member of the Board of Governors of the Federal Reserve System from 2002 to 2005; a visiting scholar at the Federal Reserve Banks of Philadelphia (1987-89), Boston (1989-90), and New York (1990-91, 1994-96); and a member of the Academic Advisory Panel at the Federal Reserve Bank of New York (1990-2002).
From 1994 to 1996, Dr. Bernanke was the Class of 1926 Professor of Economics and Public Affairs at Princeton University. He was the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs and Chair of the Economics Department at the university from 1996 to 2002. Dr. Bernanke had been a Professor of Economics and Public Affairs at Princeton since 1985.
Before arriving at Princeton, Dr. Bernanke was an Associate Professor of Economics (1983-85) and an Assistant Professor of Economics (1979-83) at the Graduate School of Business at Stanford University. His teaching career also included serving as a Visiting Professor of Economics at New York University (1993) and at the Massachusetts Institute of Technology (1989-90).
Dr. Bernanke has published many articles on a wide variety of economic issues, including monetary policy and macroeconomics, and he is the author of several scholarly books and two textbooks. He has held a Guggenheim Fellowship and a Sloan Fellowship, and he is a Fellow of the Econometric Society and of the American Academy of Arts and Sciences. Dr. Bernanke served as the Director of the Monetary Economics Program of the National Bureau of Economic Research (NBER) and as a member of the NBER’s Business Cycle Dating Committee. In July 2001, he was appointed Editor of the American Economic Review. Dr. Bernanke’s work with civic and professional groups includes having served two terms as a member of the Montgomery Township (N.J.) Board of Education.
Dr. Bernanke was born in December 1953 in Augusta, Georgia, and grew up in Dillon, South Carolina. He received a B.A. in economics in 1975 from Harvard University (summa cum laude) and a Ph.D. in economics in 1979 from the Massachusetts Institute of Technology.
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