In his first speech of 2010 Governor of US Federal Reserve Ben Bernanke has made it clear that he is now banking upon stronger regulation to duel out ‘excessive speculation’ that threw the market into a tailspin causing the worst crisis since World War II.
Speaking during the American Economic Association’s annual meeting in Atlanta on Sunday, he gave hints of strengthening the existing regulatory system. He said, “All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.”
He further added, “If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous build-ups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks–proceeding cautiously and always keeping in mind the inherent difficulties of that approach.”
Countering critics blame that Fed’s stretched lower interest rate policy between 2001 and 2004 allowed higher speculation in the housing market; Mr. Bernanke argued that was the need of the hour to get the economy back to full steam. Defending Fed’s decisions he said, “Interest rate increases in 2003 or 2004 sufficient to constrain the bubble could have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established.”
As per critics erstwhile Fed Chief Alan Greenspan’s decision to cut key lending rates from 6.5% in 2000 to 1% in June 2003 and then to keep it at the same level for nearly one year were major factors behind the astronomical boom in housing speculations.
However, he accepted that more than monetary policy, a better regulation would have been more effective in curbing the boom. He added, “Regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices.”