The US needs an overarching regulatory authority to prevent a repeat of risks building up unchecked across the financial system and exploding into economic crisis, Ben Bernanke said on Tuesday. In remarks that echo calls on Capitol Hill for a powerful co-ordinating regulator in the US, the Federal Reserve chairman said the central bank would need to be involved in such a body, if not take the lead role itself. He said the financial crisis, which had seen huge risks building up in lightly regulated institutions, had revealed the weakness of fragmented regulation. "This crisis has revealed some rather shocking gaps," he said. "Who was overseeing the subprime lenders, for example? Who was overseeing AIG? There simply wasn't enough adequate oversight in those cases." – Financial Times
Dominant Social Theme: An "adult" sounds a warning.
Free-Market Analysis: Again comes the drum roll of potential cures for the economic crisis. Over in Britain, Gordon Brown has his own ideas about what constitutes a cure for the current financial maelstrom. Brown wants an over-arching global regulator and a regulatory regime administered by the United Nations or the International Monetary Fund. It is not quite clear whether Ben Bernanke's recent comments could be extrapolated as a comment on an international model. But he obviously wants to expand the regulatory order.
And is also clear is that Bernanke expects to use the same personnel that oversaw the current crisis. In private business, when an executive presides over a catastrophe, that executive is usually let go. In the public sector, or quasi-public in the case of the Fed, executives are often not released. The point is inevitably made that the failing execs simply didn't have enough power, authority or budgetary heft and that what is needed is an expansion of authority and an increase in the budget. That is essentially what Bernanke is asking for.
"We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components," he said. "In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim." He called for a more explicitly "macroprudential" approach, which took into account the risks to the financial system as a whole. "One way would be for the Congress to direct and empower a governmental authority to monitor, assess and, if necessary, address potential systemic risks."
Bernanke goes beyond recommending the expansion of regulatory power in the financial field. What he says explicitly is that the regulatory authority is one that would monitor, assess and address systemic risks. Is he serious? It defies belief to think that the American federal government would be able to assess systemic risk on a regular basis. Alan Greenspan, the former head of the Fed, warned against "irrational exuberance" in the market but then he lowered interest rates and spurred that same exuberance. It is central banking itself that is largely responsible for modern booms and busts. How will the mechanism that causes the problem treat it?
One waits in vain for someone in a position of authority other than former Republican presidential candidate Ron Paul to pin the blame on the correct entity. Ron Paul fingers the Federal Reserve every chance he gets. But for the most part, it is the Fed itself in the person of Ben Bernanke who gets the last, and first, word. It is fairly obvious what needs to be done. Honest money, lower taxes and less regulation would help renew economic animal spirits. Instead Bernanke talks about a government facility to monitor systemic risks, an approach he calls "macroprudential." It is a solution that can hardly be pronounced, let alone effectively implemented.