WASHINGTON (MNI) – The following is the sixth and final section of
the text of Federal Reserve Chairman Ben Bernanke’s remarks prepared for
the Bendheim Center for Finance and the Center for Economic Policy
Studies at Princeton University Friday afternoon:
Disasters require urgent action to prevent repetition. Engineers
seek to enhance the reliability of a complex machine through
improvements in basic design; more-rigorous testing and quality
assurance; and increases in the resilience of the machine through means
such as stronger materials, greater redundancy, and better backup
systems. Economic policymakers efforts to avoid, or at least mitigate,
future financial crises are proceeding along analogous lines. First, the
recent reform legislation has improved the design of the regulatory
framework, closing important gaps such as the lack of oversight of the
shadow banking system. Likewise, in the private sector, firms have taken
significant steps to improve their systems for managing risk and
liquidity. Second, to reduce the probability and severity of future
crises, policymakers will monitor the system more intensively. For
example, the recent legislation creates a Financial Stability Oversight
Council, made up of the heads of the financial regulatory agencies,
which will assess potential risks to the financial system, identify
regulatory gaps, and coordinate the efforts of the various agencies.
Enhanced market discipline, the result of a new resolution regime for
systemically critical firms and a number of measures to increase
transparency, will complement regulatory oversight. Finally, numerous
steps, both prescribed in the legislation and taken independently by
regulators, will work to make our financial system more resilient to
shocks. Examples include rules that will strengthen key financial
utilities, toughen bank capital and liquidity standards, and require
that more derivatives instruments be standardized and traded on
exchanges rather than over the counter.
Economic engineering is effective only in combination with good
economic management. For its part, the Federal Reserve has revamped its
supervisory operations to provide more effective and comprehensive
oversight. In particular, we are taking an approach that is both more
multi-disciplinary–making greater use of the Federal Reserves wide
expertise in macroeconomics, finance, and other fields to complement the
work of bank supervisors; and more macroprudential–that is, focused on
risks to the system as a whole as well as those to individual
institutions. Together, better design of private- and public-sector
frameworks for managing risk, better monitoring and supervision, and a
more resilient financial system do not by any means guarantee that
financial crises will not recur, but they should both reduce the risk of
crises and mitigate the effects of any that do happen.
In short, the financial crisis did not discredit the usefulness of
economic research and analysis by any means; indeed, both older and more
recent ideas drawn from economic research have proved invaluable to
policymakers attempting to diagnose and respond to the financial crisis.
However, the crisis has raised some important questions that are already
occupying researchers and should continue to do so. As I have discussed
today, more work is needed on the behavior of economic agents in times
of profound uncertainty; on asset price bubbles and the determinants of
market liquidity; and on the implications of financial factors,
including financial instability, for macroeconomics and monetary policy.
Much of that work is already under way at the Bendheim center and in the
Department of Economics here at Princeton.
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** Market News International Washington Bureau: 202-371-2121 **
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