NEW YORK – It is not possible to prevent all crises, since some risk-taking is needed to achieve sustained growth and stability, Federal Reserve Board Chairman Ben S. Bernanke said Thursday.
“We should not imagine, though, that it is possible to prevent all crises,” Bernanke testified before the Financial Crisis Inquiry Commission, according to prepared text released by the Fed. “A growing, dynamic economy requires a financial system that makes effective use of available saving in allocating credit to households and businesses. The provision of credit inevitably involves risk-taking. To achieve both sustained growth and stability, we need to provide a framework which promotes the appropriate mix of prudence, risk-taking, and innovation in our financial system.”
While some have argued an accommodative monetary policy allowed a bubble in housing prices, which helped trigger the financial crisis, Bernanke said, “The evidence is more consistent with a view that the run-up in house prices primarily represented a feedback loop between optimism regarding house prices and developments in the mortgage market.” In the end, he said, innovative mortgages and eased standards “had far greater effects on borrowers' monthly payments and housing affordability than did changes in monetary policy.”
Raising rates to stop the housing bubble was not practical, he added, because when rates were their lowest there was no consensus that there was a housing bubble, and “monetary policy is a blunt tool; raising the general level of interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy. In this case, to significantly affect monthly payments and other measures of housing affordability, the FOMC likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as `jobless’ and deflation was perceived as a threat.”
Financial regulation and supervision, he argued, would have been better ammunition for fighting credit-related problems. “Enhancing financial stability through regulation and supervision leaves monetary policy free to focus on stability in growth and inflation, for which it is better suited,” he said. “We should not categorically rule out using monetary policy to address financial imbalances, given the damage that they can cause; the FOMC is closely monitoring financial conditions for signs of such imbalances and will continue to do so. However, whenever possible, supervision and regulation should be the first line of defense against potential threats to financial stability.”
