Bernanke blames regulatory failure for crisis

REGULATORY failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the past decade, US Federal Reserve chairman Ben Bernanke said yesterday. Dr Bernanke's remarks, perhaps his strongest language yet on the roots of the financial crisis, came as he awaited both confirmation for a second term as Fed chairman and greater regulatory authority from Congress. ''Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,'' Dr Bernanke told the American Economic Association. Advertisement: Story continues below Dr Bernanke, responding to accusations that the Fed contributed to the financial crisis, argued that the interest rates set by the central bank from 2002-06 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period. ''When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader Rosetta Stone macro-economic environment,'' Dr Bernanke said. Some economists have argued that the Fed kept interest rates too low after the 2001 recession, making loans cheap and fuelling reckless lending by banks. The Senate Banking Committee approved Dr Bernanke's renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on January 31, despite some vocal opposition. Dr Bernanke has been pushing for Congress to grant the Fed greater oversight powers over the financial system, including the authority to monitor and regulate against ''systemic risk''. He has argued that the Fed lacked the authority to constrain the housing bubble through regulatory power. Yesterday he echoed previous calls for Congress to grant the Fed greater oversight over the financial system. Dr Bernanke has pointed to the Fed's extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. Economists have widely praised the Fed's handling of the crisis.

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