Bernanke: Regulators must prevent a future crisis

April 10, 2008 10:24:55 AM PDT
Federal Reserve Chairman Ben Bernanke said regulators must move ahead on ways to prevent a future financial crisis from occurring even as they battle one that threatens to plunge the country into a recession. "We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said Thursday in a speech in Richmond.

Last month Bernanke, Treasury Secretary Henry Paulson and other top economic policymakers called for stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of the credit and financial problems that have damaged the economy.

The recommendations from the presidential advisory group on financial markets cover mortgage lenders and other institutions as well as investors, credit ratings agencies and regulators.

Federal and state regulators should strengthen oversight of mortgage lenders, the presidential group proposed last month. Also, states should follow strong, uniform licensing standards for mortgage brokers. Legislation in Congress would create a nationwide licensing system.

Those recommendations were put forward after spreading problems in the housing and credit markets threatened to paralyze the entire financial system, which could be devastating to the national economy.

"Many of the necessary changes that have been identified, including increasing transparency, improving risk management and attaining better coordination among regulators could provide important support to the process of normalizing our financial markets," Bernanke said.

Bernanke said the recommendations from the presidential advisory group if implemented would guard against future financial troubles. "These recommendations should moderate the likelihood and severity of future financial shocks and enable market participants to better withstand shocks when they occur."

In a separate effort last month, the Bush administration unveiled a sweeping plan that would revamp a financial regulatory system dating back to the Civil War to better deal with 21st century challenges.

Under the plan, the Fed created in 1913 after a series of bank panics, would become an uber cop - overseeing the stability of the entire financial system including commercial banks, investment banks, insurance companies, hedge funds, private-equity firms and others. At the same time, the Fed would lose daily supervision of big banks.

Bernanke, in his speech, didn't get into a discussion about the changes to the Fed's role under this proposal. However, the Fed chief has said in the past that it is important for the Fed to retain oversight of banks.

The Fed chief also didn't talk about the state of the economy or provide clues about the Fed's next move on interest rates.

Many economist believe the Fed will lower rates again when they meet later this month, especially given a recent report showing that employers have slashed jobs for three months in a row.

Better consumer protections and disclosures also would help prevent a repeat of current mortgage and credit problems, Bernanke said.

The Fed has proposed rules to protect home buyers from dubious lending practices. The plan would crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers - those with spotty credit or low incomes - who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

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