Overhaul Regulatory System, Bernanke Says

Fed Chairman Suggests More Oversight Needed To Keep Nation's Economy Safe

(AP)  America's financial regulatory system must be overhauled to strengthen oversight of banks, mutual funds and large financial institutions whose collapse would put the entire economy in peril, Federal Reserve Chairman Ben Bernanke said Tuesday.

"We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components," Bernanke said in a speech to the Council on Foreign Relations.

In his most extensive remarks on the subject, Bernanke built upon previous suggestions to bolster mutual funds and a program that insures bank deposits - and repeated his call for Congress to create a system to cushion fallout from the failure of a big financial institution.

The Fed chief's remarks come as the Obama administration and Congress are starting to crafting their overhaul strategies. For the administration, critical work on that front will be carried out among global finance officials this weekend in London. That will help set the stage for a meeting of leaders from the world's 20 major economic powers in April.

Revamping the U.S. financial rule book - a patchwork that dates to the Civil War - is a complex task. Congress, the administration and the Fed are involved because they want to strengthen the system to prevent a repeat of the financial crisis - the worst since the 1930s- that has plunged the U.S. and many other countries' economies into recession.

Bernanke said the U.S. recession could end this year only if the government is successful in getting financial markets to operate more normally again. The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than the Fed had anticipated, he acknowledged in fielding questions after his speech.

To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in an orderly way - similar to how bank failures are handled by the Federal Deposit Insurance Corp. - to minimize fallout to the financial system and to the national economy.

Moreover, such "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking excessive risk, Bernanke said. The Fed is trying to identify "best practices" that can help companies detect trouble spots and best manage their risks.

The government over the past year has been forced to rescue major financial companies so interwoven with other players and the global financial system that their collapse would put the entire economy in danger. The bailouts of insurance giant American International Group Inc., Citigroup Inc., Bank of America Corp., and mortgage finance companies Fannie Mae and Freddie Mac have put billions of taxpayers' dollars at risk and angered the American public.

"Government rescues of too-big-to fail firms can be costly to taxpayers, as we have seen recently," Bernanke said. "Indeed in the present crisis, the too-big-to-fail issue has emerged as an enormous problem."

Bernanke also said the nation's financial plumbing - the infrastructure and policies that govern financial transactions- must be strengthened to ensure that it will perform under stress.

Policymakers should consider ways to bolster money market mutual funds that are susceptible to runs by investors, he said. One approach would be to impose tighter restrictions on the financial instruments that money markets can invest in. Another idea is to develop a limited system of insurance for funds that seek to maintain a stable net asset value.

In addition, Bernanke called for a review of regulatory policies and accounting rules to make sure they don't "overly magnify the ups and downs in the financial system and the economy." For instance, he suggested that a larger financial buffer to support the FDIC's insurance program for bank deposits be built up during good economic times so that it could be drawn down when conditions worsen.

Finally, the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one. Some in Congress - and the previous Bush administration - have proposed that the Fed take on this role of super financial cop.

As a lender of last resort to troubled financial companies, the Fed already has a major role in trying to put out financial fires.

"Effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," Bernanke said.

[JRBSVB]

After viewing the 60 Minute Program this evening, Mr. Bernanke?s assessment of the current economic conditions even more clearly describes the lack of regulation of the U.S. Banking system that has occurred since the enactment of the, so-called, Financial Modernization Act of 1999.

There has been little, in fact, almost no public discussion regarding Congress?s responsibility in ?gutting? the Glass Steagall Act of 1933, which (for over nearly seventy years) regulated the commercial and investment banks. The Gramm-Leach-Bliley Act effectively deregulated those controls and allowed the mega-mergers to occur. Fueled by the belief that ?Free Market? would regulate itself allowed entities like Citicorp and others to glean huge profits and disregard safe investment practices. Real estate boomed and greed took over.

What did Congress think would happen with a system that could not be ?policed?? The inmates were running the asylum.

Perhaps we should take a more critical view of what possibly was the genesis of our current economic condition and those in our own legislature who profited most form the resultant lack of government oversight

Such a story might be an even more eye-ope

[sjc_1]

I wonder how many of the Sovereign Wealth Funds of the Arab countries played the oil futures contracts and options markets. No better way than to get rich on both sides. Futures contracts and $147 per barrel oil make them richer quicker.

[gwbarry]

I found the "simplified" analogy he proposed to justify the bailout reasoning to the American public far more telling than he intended... he said that doing nothing about the failing banks was analogous to choosing not to put out a neighbor's house fire because he set it afire by irresponsibly smoking cigarettes. He went on to say that our own homes are made of wood too, and at risk, and the whole neighborhood could go up because we chose to do nothing... Baloney! The bailout is not just putting out the fire, it is giving that irresponsible neighbor a new house, a truckload of cigarettes, and paying all his medical bills for his lung cancer too... It is time for those who led us into this mess to bear the responsibility of their poor judgment, and FAIL.

[econstuff]

Good interview except for one thing: Bernanke's did not honestly explain the root problem. He did not actually lie, but slithered around the issue by laying it at the feet of foreign "saving" pouring into our money supply in 2007. If we had wisely invested that money, he said, it would not have made trouble. An honest statement should have made it clear that (1) those foreign savings were purchases of US Treasury issues that covered our massive debt buildup that started in the 80's (2) that money had already been spent and was not available for "wise investment." The Greenspan era massive expansion of the money supply was the root of our current problem.

[jab232]

Bernanke is right. We do need more regulation and more separation between the kinds of financial institutions. Go back to what we had before Gramm-Bililey.

[jehark]

In response to the interview with Ben Barnanke

The three biggest problems in our country are: to much government; a failing financial system; and terrorism. The problems stem from a single piece of legislation and one presidential administration.
The chairman made a comment of returning to full employment without inflation- the number one goal of the government according to the Full Employment Act of 1946. The Act defined modern economic thought and path of the political parties. The Republicans favor less taxes and less government while Democrats favor more taxws and more government. In a capitalist economy, commerce is the number one activity. The Federal Reserve system like all government entities is bloated having 12 banks when we only need 6.
The Carter Adminisrtation's weak foreign polocy gave rise to modern terrorism. Moreover, the 30 yeart bond was created during this time period. I remember my junior high school teachers saying terrorism would be a big probnlem in the world about the same time the 30 year bonds started coming due. I guess they were right.

Here are some famous quotes
"Government is not the solution but the problem"
"Socialism is misery for the masses"
"That which governs the least governs the best"

[Rettain]

AIG Bonuses can't be stopped. What a joke - businesses break contracts all the time. They are worried these people will get other jobs. Really? Are they serious? Let them go on unemployment with the rest of us. Let them quit!!!! They won't be able to find a job any better than the auto worker or the RV worker and they are afraid of them suing. Really. Since when!!!! Let them find another job. Businesses in my area - around Elkhart County, Indiana are cutting vacation pay, benefits and working less hours if you are lucky enough to not bget laid off.

Let me regulate the government money. Let me have line item veto. This doesn't even make sense in a thinking world!! Outraged. I say - theives!!!!

[WVGrammy]

I find it ironic that during a commercial break in the Bernanke story a "news flash" announced that AIG was paying their executives $165 MILLION from the "bail out money".
Is there no accountability for these funds? If not , why not?

[cdrago]

I realize that journalist are struggling to under stand the economic status of our country. One of my clients, gave me a book entitled, "The Creature fr0m Jekyll Island." I did not pay much attention to this book before the so called "recession." Now I understand what she was trying to convey to me. The Federal Reserve is a banking cartel. The only purpose for its creation in 1910 was to stop competition of smaller banks that were emerging.

This is a difficult book to read, some 595 pages. Bail outs are nothing new and the Federal Reserve is not a reserve. Checkout this book by G. Edward Griffin and please respond to my email.

Cheryl
A small business owner since 1973 who is living debt free.

[stevador39]

Alan Greenspan ignited this crisis with easy credit and low interest rates. Ben Bernanke is continuing it with easy credit and low interest rates. Ben Bernanke needs to be jailed along with Greenspan, Henry Paulson and Tim Geithner. None of them are 'getting it.'

[Kingrat001]

Juan Long

TaxPayer Bailout --------March 10, 2009 - 11:36 AM
Well, let me put it this way. The way things are going with the bailout money to financial entities, they will rise and shine, but the actual people who need to rise and shine, and to get the economy back into shape is the people/the tax payers. So, where should the Emergency Money go to, is the taxpayer?s. The moneys will be used to pay off their debts to the financial entities, thus money goes back into the banks. The way the economy is going more people will be losing their shirts, losing everything, and those who use to be able to qualify for loans will not be able to qualify for a loan because of their credit is shot to hell. The longer we wait for things to happen, the worst it will get for the taxpayers.

Solution: Have the IRS issue to each Taxpayer $100,000 dollars, as an emergency taxpayer bailout funds, have the IRS require these taxpayers to sign for the check and agree to pay their outstanding debts, and provide proof of payments which money was used to pay their debts, and the economy will recover immediately. The Financial entities will get their moneys, and all will be well, in the long run. The TAXPAYERS need the bailout, and not the financial giants....Everyone should qualify for the bailout..

[fool-ish]

Way to go, 60 Minutes. You've got the guy in the chair. All you had to ask is, "Isn't it true that the Federal Reserve is Unconstitutional? Was conceived of in secret? Is run in secret? Is answerable to no one? Is a private bank? Charges taxpayers for every dollar it creates out of thin air, with the stroke of a keyboard? Creates the booms and busts, including the one we are all suffering through now? No. You only ask, stupidly, "Gee, what year was the Fed formed?" Idiotic. And traitorous. The Fed is, has been, and will continue to enslave us all by the debt it ties around our necks. Trillions upon trillions. It caused the problem, it allowed it to continue, it sends us the bill, and it now wants more power. Unbelievable. People--wake up.

[post-science]

The Founder and President of Post-Science Institute wrote the following:

The Cause And The Cure Of The World-Wide Financial Crisis--
Conflict Between Non-Violable Laws Of Nature In Social Science And Man-Made Laws


Abstract

The solution of value is the permanent cure of our chronicle financial crises. Being mathematically rigorous, it is a non-violable law of nature, relating in an infinite spreadsheet the price to the expected rate of return. It will advance the world economy from pre-science economy regulated by man-made laws to the Free Market of Milton Friedman and finally to post-science and post-Friedman economy regulated by non-violable laws of nature. It will move our society from the value-absent Age of Science to the Age of Social Science and from predictions of material behavior to that of human behavior, both based on non-violable laws of nature.

[lulu9er]

My advice is to BRING BACK BIG GOVERNMENT TO WALL STREET. LOCKUP THE FORMER CHAIRMAN OF THE BUSH S.E.C. PUT THE BOARD OF DIRECTORS OF ALL THE BANKS THAT LEVERAGED THE COUNTRY INTO DEPRESSION 2 IN JAIL. REMOVE THE TERM "REAGENOMICS" FROM ALL COLLEGE ECONOMY TEXTBOOKS. PUT IN JAIL ANYONE USING THE TERM "CREDIT DEFAUlT SWAPS OR CDS.

[brianp55]

Now Bernanke wants more oversight and regulation. Strange that we didn't hear a peep out of him during the Bush administration, when he had every opportunity to step forward and try to avert the present economic disaster.

[noloyalisti]

Yes Bernancke, get rid of the SOCIALISM for the rich while we have capitalism for the poor. America has developed THE LARGEST income gap of any major country in the world. We have a small percentage of religious wackos running our foreign policy, the military and media. Start working for We the People or we will delete you and your corporate ilk.

[saturn05]

I would rather have more Gov't oversight than to continue to allow these corporate crooks to steal from us any longer. Oversight does not equal Big Brother. Someone needs to be watching the chicken coop.

[bajajohn1]

Meranwhile the Bush recession has given rise to Bushville's-tent cities across the country. The Greedy Republicans continue fighting for their failed policies placing a ball and chain on the American economy....and the President has to keep beating back the deadweight neocons whose only product is hot air and more calls to reduce taxes as a way to stimulate the failed economy the Bush Whackers left.

[rushlimpdrug]

There actually is an American financial regulatory system?

Really?

What does it regulate?

[ubrew12]

How $5 billion in bank lobbying in the last 10 years took us off a cliff:

1. Repeal Glass-Steagall: Now depositor banks can offer investment, commercial, and insurance services worldwide!! Churn those mortgages into derivatives!!
2. Take accounting off the books: No need to disclose money-losing assets; no one needs to know how empty your vault is, or how filled with toxic securities!
3. No derivatives regulation by the Commodity Futures Trading Commission (CFTC): fire the woman who heads CFTC for suggesting such a thing, and don't listen to that crazy man (Warren Buffett) calling derivatives 'weapons of financial mass destruction'.
4. Pass Phil Gramm's Commodities Futures 'Modernization' Act: Now we EXPLICITLY prohibit the regulation of derivatives!! Take THAT, big gov't liberals!!
5. Push that investment bank debt-to-net capital ratio from 15-to-1 up to 40-to-1 or higher! Goldman Sachs and their chair, Henry Paulson, pound the SEC to relax this 'dated' restriction and, in 2004, it relents. Another victory for the 'free-market'!!
6. Lets do the same with commercial banks! Let them use their OWN judgement to determine how much debt they can take on! Pass Basel II !!
7. Bribe the Federal Reserve and the Office of Comptroller of the Currency to look the other way on predatory lending practices. The Fed took 3 formal actions against subprime lenders from 2002 to 2007: Hey, Fed, that's THREE TOO MANY!!
8. Hold it!! It looks like the STATES are trying to protect borrowers from predatory lending on their own! Time for commercial banks to act: push the Feds to stop this state 'socialism'. The Office of Comptroller of the Currency and the Office of Thrift Supervision each prohibit the states from enforcing consumer protection rules against national banks. Capitalist Nirvana... here we come!
9. Stop Wall Street investors from being prosecuted for profiting from predatory lending practices! 'Assignee Liability' doesn't apply to mortgage loans, thanks to Rep. Bob Ney! (sorry about that Abramoff thing, though. Enjoy prison...)
10. Lets get Fannie and Freddie into the subprime mess! Why should Republicans have all the fun?! Although they're gov't sponsored, they can still be purchasers in the secondary subprime market. Why limit them to prime loans? If they go bankrupt, the taxpayer'll get stuck with the bill! Way to go, Democrats!!
11. The only good capitalism is BIG capitalism. Keep merging those banks, even after they get TARP funds! We have to get the banks so big they are 'too big to fail'. That way the 'little guys' will be STUCK with bailing us out of our greed!! All the advantages of monopoly, and none of the 'public utility' downsides!! (can't have socialism, after all).
12. Keep the SEC from enforcing credit rating agency independence!! Pass the Credit Rating Agencies Reform Act of 2006!! As long as a credit rating agency follows ITS OWN STANDARDS, make the SEC give them a passing grade. Now pension funds can enter the worthless derivatives game because these 'securities' have been given a 'high rating' by credit agencies in the pockets of the companies offering the derivatives!!

Today's exercize in (too little, too late) socialism was brought to you by the 'finest' capitalist minds on the planet. Of course we need reregulation. Thanks, Bernanke, for stating the obvious.