Financial crises and bailouts are inevitable and legislators should focus on containing them rather than trying to prevent them completely, Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said yesterday.
Congress is considering legislation to restructure financial regulation.
“No matter how well-written or how well-intentioned the legislation may be, no law can completely eliminate the kinds of collective investor and regulator mistakes that lead to financial crises,” Kocherlakota told the Economic Club of Minnesota, according to a prepared text of his speech released by the Fed. “These mistakes have taken place periodically for centuries. They will certainly do so again.
“And once these crises happen, there are strong economic forces that lead policymakers — for the best of reasons — to bail out financial firms,” he said. “No legislation can completely eliminate bailouts. Any new financial regulatory structure must keep this reality in mind.”
However, bailouts can be contained by taxing financial institutions, he said.