Economic crises cannot be permanently eliminated, Federal Reserve Board chairman Ben S. Bernanke told the Council on Foreign Relations yesterday.
“Financial crises will continue to occur, as they have around the world for literally hundreds of years,” Bernanke said, according to prepared text of his remarks released by the Fed.
Even if reforms are enacted, he said, “it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system.” But several steps could “help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy.”
The fundamental causes of the crisis, Bernanke said, “remain in dispute,” but he pointed to trade imbalances and capital flows, which “reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations. … Saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low.”
In general, he said, “the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested, a failure that has led to a powerful reversal in investor sentiment and a seizing up of credit markets.”
To remedy the situation in the short term, governments must continue their unified forceful actions to get the financial markets functioning and credit flowing, the Fed chief said.