Bernanke: Four Element Strategy for Financial Regulation

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

As Fed Chairman Bernanke has repeatedly indicated, “until we stabilize the financial system, a sustainable economic recovery will remain out of reach.” On Tuesday, Bernanke laid a groundwork for financial sector reform. He called for greater regulation, but also suggested that pro-cyclical accounting rules might be bent in extraordinary times. Congress appears to be on board with this idea, and will move quickly to modify the mark-to-market rule. The devil will be in the details.

...

Bernanke highlighted four key elements of a holistic strategy for financial regulation. First, we must address the problem of financial institutions that are deemed too big to fail. Second, we must strengthen the financial infrastructure (the system, rules, and conventions governing trading, payment, clearing, and settlement). Third, we must review regulatory policies and accounting rules to make sure that they are not excessively pro-cyclical – that is, that they do not magnify economic downturns. Finally, we should consider the creation of an authority to monitor and address systemic risks.

The current crisis has revealed a number of regulatory shortfalls regarding institutions that are deemed too big to fail. The Fed has done its part, by examining risk-management practices of these firms. However, more substantial regulation will be needed to prevent repeats of the current financial crisis.

Comments

[market ace:]

Talk about closing the barn door after the horse bolted out. Bernanke's answer to everything is just print more money and that will save the financial instuitutions. Isn't this the same Fed that kept interest rates artificially low to spur on this culture of leverage and greed? So now years later after the system falls apart he suddenly decides maybe some regulation is in order. Then he makes a farce of proposing real regulation and comes up with a bunch of BS.

He is not really talking about regulating the banks, but wanting to regulate the accountants so they no longer tell the truth about banks. Great way to regulate something by using artifiically bloated financial statements that attempt to paper over real fianancial problems.

The problem of banks to big to fail could have been addressed very easily months ago - let them fail and let real banks pick up the good pieces and run with them instead of pouring trillions in taxpayer dollars into institutions that have failed no matter how big they were.

Of course he still ignores the biggest problem of all - disclosing, regulating and winding down the derivatives that are the black hole about to eat the whole financial system. This is where regulation needs to start.

Mar 19 06:09 PM

[ArkansasAngie:]

Dissolve naked CDS' -- no harm no foul. Everybody go home and mutter to yourselves. Hope you didn’t spend money you didn’t have.

Mar 19 08:47 PM

[Mad Hedge F...:]

He needed to go the extra mile.Way to go Ben! If pouring gasoline on the fire doesn’t work, try nitroglycerine! Some $1.2 trillion in new agency and bond purchases, including previously untoucheable long term treasury bonds. Goodbye dollar, hello 4% home mortgage rates. Just tack on another 3% to the 2010 inflation rate. The bond market had its biggest up day in history, gold soared $50, the euro gapped up 4%, and commodity prices roared. Citigroup (C) has quadrupled from $1 to $4 since last week, while General Electric (GE) has doubled from $5 to $10! Just when you think this guy has thrown in the kitchen sink, he shows up another truckload of kitchen sinks. I guess this is what a 1590 SAT score gets you.

Mar 19 09:59 PM

[THofler:]

Reworking the regulatory system is hugely important and I like the Bernanke comments. Bernanke would be a good shepard, but I don't think this will happen quickly and I think Obama will make the mistake of putting Summers in as Fed chair before much progress is made.

The behavior of people is procyclical. The US had 5 or so depressions from 1840 to 1913 when the Fed was created. So far, the only countercyclical thing in our economy is the ability of the Fed to adjust short term Fed funds rate. While Fed control is powerful, it is very slow and subject to all kinds of piloting errors.

The "modernization" of the US and Euro financial regulatory system over the last ten years has introduced procyclical effects such as high leverage accompanied by risk management software that requires low capital in good times and higher capital in bad times.

We need to reduce or eliminate procyclical regs. and should consider Jamie Dimon's recommendation to create an intentionally countercyclical banking capital reg. of higher capital in good times and lower capital in bad times.

Mar 19 10:28 PM

[john s. gordon:]

yes let's have more substantial regulation.

however the rats & weasels will always find new ways to evade the rules or find ways to bend them to their own benefit.

'eternal vigilance is the price of liberty.'

we haven't had any vigilance during 2001-2008. we've had a what-me-worry alfred newman administration.
> jack

Mar 20 08:13 AM