Bernanke: Innovation Needs Regulation

(AP)  Federal Reserve Chairman Ben Bernanke said Friday that financial innovation is good for the economy but must be accompanied by proper regulation.

New financial products, such as subprime mortgages and structured investment vehicles, have become symbols of the economic crisis. The challenge for the government is to come up with regulations that protect consumers without stifling innovation, the Fed chief said.

"As we have seen all too clearly during the past two years, innovation that is inappropriately implemented can be positively harmful," Bernanke said in a speech to a Fed conference. "It would be unwise to try to stop financial innovation, but we must be more alert to its risks and the need to manage those risks properly."

The central bank already is moving in that direction. The Fed and other regulators last year put forward credit card rules that were seen as the biggest clampdown in decades, seeking to protect consumers from companies that arbitrarily raise interest rates or don't give borrowers adequate time to pay their bills. But those rules don't take effect until next year.

The central bank also approved new regulations aimed at curbing abuses on home mortgages. They bar lenders from making loans without proof of a borrower's income and would require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.

However, critics complained that federal regulators have moved too slowly and not done enough in the face of heavy lobbying from financial services firms. On the housing front, critics contend that a more vigilant Fed might have prevented the worst abuses during the boom when borrowers got homes they clearly could not afford, often under terms they did not fully understand.

In his speech, Bernanke said regulators need to watch closely to ensure that complex financial products and services are explained in ways that consumers can understand.

Structured investment vehicles and securities tied to subprime mortgages are among the complex products that contributed to the financial crisis and credit crunch.

SIVs are funds that borrow money by issuing short-term securities at a low interest rate and then lend that money by purchasing long-term securities at higher interest. Investors can profit from the difference, but SIVs began to struggle as demand dried up for short-term bonds during the credit crisis. The value of SIV holdings fell sharply, forcing banks such as Citigroup Inc. that operated the off-balance sheet funds, to provide them with financial support.

High-interest, subprime mortgages made to borrowers with poor credit records exploded in popularity until the housing boom started to burst. The mortgages were packaged into securities snapped up by investors worldwide. Lenders stopped worrying about the creditworthiness of borrowers and offered them ever-riskier mortgages. Many were made by commission-driven mortgage brokers, who had nothing to lose if the loan went bad.

Despite the financial crisis, Bernanke said he did not believe anyone would want to return to the highly regulated financial industry of the 1970s because today's wide range of financial products has expanded access to credit and reduced borrowing costs.

"We should not attempt to impose restrictions on credit providers that are so onerous that they prevent the development of new products and services in the future," he said.

The Obama administration has unveiled a broad outline for overhauling the nation's financial rule book and key leaders in Congress have pledged to take up the proposals later this year.

"The challenge faced by regulators is to strike the right balance: to strive for the highest standards of consumer protection without eliminating the beneficial effects of responsible innovation on consumer choice and access to credit," Bernanke said.

[stn_sage]

Having Ben Bernanke as head at the Federal Reserve is akin to putting "Gilligan" in charge of an ocean-liner! Why would you want to do that?!

Obviously, my point is, I think he should be immediately replaced!! But, until he is; I, for one, don't care at all what he has to say about anything!! The more he speaks, the more apparent it is that he doesn't know what he's doing!!

His newfound devotion toward regulation of "contrived" financial instruments, is years late and trillions of dollars short!!

Once again, replace him now---BEFORE he sinks the ship!!

[J_G_H]

David Broder said that these "innovative" financial ideas were so compelex that CEOs had trouble understanding them let alone government regulators, and implied that this meant that the regulators should stay away from what they can't understand. Leaving aside the point that I think he seriously misjudged the relative intelligence of CEOs and government employees, I also think he drew a wrong conclusion. If a companies finances are too complex for regulators to understand then they are an irresistible temptation to the dishonest to use them in a criminal way. Enron is a prime example. There is ample evidence of criminality in the current crisis, from salesmen coaching clients to lie on their mortgage applications to the rating agencies knowingly giving risky financial instruments prime ratings.
There is, of course, one further issue. Elect a Republican president, he will appoint lax regulators. We saw this with Reagan and the S&L failures before Bush and the current failures.

[hungry1968-15]

Bernanke: Innovation Needs Regulation
Despite Shadow Of New Products Like Subprime Mortgages, Innovation Shouldn't Be Stifled, Fed Chair Says





BS.

The financial system should be gutted and stifled to the point that it was in the very beginning:

Investing should be stocks, bonds, or mutual funds - that's IT.

None of these CDO's, CDS's, hedge funds, "short selling", etc, etc, etc.

[pensacola8-2009]

Capitalist financial performance requires capitalist integrity to be present in all forms of the transactions that occur. Many often feel that lender's greed, or investor's greed is a good enough form of integrity to qualify for consideration, but in fact, it is not.

I saw thousands of families/borrowers see low mortgage interest rates lure them into taking mortgage loans under the premise that they were honestly qualified to repay their mortgage loans. Those families were horrified when they learned their A.R.M.'s became high interest loans which they couldn't repay without preparing to pay 50% more each month. The cascade of defaults took exponential directions with A.R.M.s going far higher than most were led to believe possible.

Lender's faith and borrower's faith clearly became lender's remorse and buyers remorse.

I ask, "What was the crime of the borrower or the lender?" Is it a crime to lack imagination that the defaults of a few could fulminate into a bigger problem with a cascade of defaults?"

What essentially has happened is that borrowers have lost trust in lenders who tell them they are qualified for any transaction. Lenders are literally acquiring predatory reputations for hunting out victims to exploit.

Fed Chairman Bernarke clearly defends the lender's license to take risk and get burned. We do not need a Fed Chairman who disregards common sense lending education and asks to keep regulatory officers as far away as possible from their risky transactions.

Police routinely tell car and home owners they must lock their homes and automobiles to avoid theft. Fed Chairman Bernarke's interpretation of home or vehicle security contradicts popular advice given by police which says, "Don't make it too easy to get ripped off".

Education is taught to all investors and lenders and guidelines clearly give a range of parameters and boudaries that assure lending/borrowing sanity. The sub-prime mortgage idea clearly operated outside those boudaries and bundling them into other forms of securities clearly repeated the same practice found to exist in the 1929 which served as a gateway to the depression that followed.

Consumers - both corporate and private, borrowed their way into the Great Deprssion of the 1930's , the recessions of the 1980's and the current one. All economic downturns were resolved with government spending. The depression was dragged out because of the adherance to the gold standard, which was later abandoned in the 1970's.

Since 2007, the combined borrower debt of all borrowers in the USA is greater than the Gross Domestic Product of this nation. The last time that happened was in 1929.

Fed Chairman Bernarke had this data available to him, but set it aside as he precided.

[weedapeapl]

The first IPO is investment capital, everything after that is gambling.
Posted by curse914 at 10:08 PM : Apr 17, 2009

No, everything after that is investors trying to guess the future prospect of the company buying its stock back in the future at a much higer price, which is how investors make their money.

In the mean time, investors will buy and sell their shares with each other due to their differences of opinion over the expected value of the shares.

It's gambling only when amateurs do it.

[curse914]

Your financial knowledge is astounding. You put a dollar into a company because you felt as though the company had a good product, that people would want, and the company would grow. The company would use that dollar as capital to build plants, buy equipment, and hire employees. It was essentially a loan to a company with the repayment in terms of dividends and higher stock prices. I thought the Libs wanted the loans to start flowing again?? I guess they only like loans to people with no means or motivation to pay them back.

Posted by jonesjep at 1:35 PM : Apr 17, 2009

You can kiss your precious Stock Market goodbye. The first IPO is investment capital, everything after that is gambling. There are other ways to acquire capital that can and will evolve away from the ponzi scheme aka Stock Market.

[sjc_1]

Everyone that sold an over priced house between 2003-2007 took the sub prime money. If they did not buy in again and walked away, they made a bundle off the guy that bought at a super high price and could not afford the house. Legalized bank robbery.

[rssllbll55]

First of all I would like to give Mr. Bernanke his props. In the face of treason on the part of some americas this week with theirs show throughout the country in regards to the tax situation. I believe in the Feds and what is being proposed. The problem is there is a element in this country that is resistant to change. And its become ever more clear that that resistance is coming from the republicans. And they are hell bent on doing whatever can possibly be done to drive the train off the tracks. Not only for there sick satisfication. But to see what ends up happening . there senario is: we all suffer for a longer period of time simple because of a need to make the president look bad. And it is my hope that the president continues with is plan inspite of. Because the day is coming when all the bickering will come to a halt, simply because the results will begin to really take hold. And I am just waitiing in the wings for the president to call on all of his supporters to take action, to get in this fight for change inspite of the rich and weatlhy's worries about the possiblity that yes they to could loose what they once treasured just like the rest of us.

The possiblity scares the wealthy to death. And I think thats good for the country. And look whos the first to get on the line for not paying taxes. The ones who haven't being paying any, or very little in the first place.
You make me sick!!!! This is a good lesson for the country. I just hope the presidents supporters contiinue to hang in there with him inspite of the trups in this country.

[cattlekate1]

Can't we figure out who took out their funds in 2006, 2007, 2008, and put them in the Caymens and Swiss accounts? There should be a paper trail. Bernake = Self-serving Scmuck & Schister.

[weedapeapl]

Looks like the Obama nation is doing an EXCELLENT job of regulating the stock market.

It STILL hasn't risen past 8200, where it was on the morning of Inauguration Day.