04 December 2009

Bernanke: The Same Approach that Failed this Time, Only Bigger, Better and Sooner

Excerpt from Bloomberg: Bernanke’s Booby Prize Waits Behind Door No. 1

You are chairman of the Federal Reserve, and you have just shepherded the country through a nail-biting, edge-of-your-seat financial crisis that threatened to turn into Great Depression II. Having stabilized the financial system and ministered to teetering financial institutions, you are looking at ways to ensure the past doesn’t repeat itself. With that in mind, you:

1) Promote the idea that a new set of regulators with broader supervisory powers will be able to identify the next crisis-in-the-making and intervene to arrest it in a timely fashion;

2) Close your eyes and hope it doesn’t happen again;

3) Build a financial-crisis-identification econometric model;

4) Focus on prevention as the best cure.

The correct answer is No. 4. Too bad Fed chief Ben Bernanke and his policy-setting committee are leaning toward No. 1.

Bernanke reiterated his preference for using regulation, rather than preemption through higher interest rates, as the “first line of defense” against bubbles yesterday at his confirmation hearing for a second term before the Senate Banking Committee yesterday.

“Heeding the lessons of the crisis, we are committed to taking a more proactive and comprehensive approach to oversight to ensure that emerging problems are identified early and met with prompt and effective supervisory responses,” Bernanke said in his prepared testimony.

In other words, the same approach that failed this time, only bigger, better and sooner.

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