The Wall Street Journal
The U.S. Federal Reserve must be open to raising interest rates to pop asset bubbles, even though stronger regulation remains the best solution to prevent a repeat of the crisis, the Fed chief said Sunday.
Fed Chairman Ben Bernanke said all efforts should be made to strengthen the U.S. regulatory system to prevent a repeat of a financial crisis that Bernanke described as possibly the worst in modern history.
"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous build-ups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach," he told an annual meeting of economists here.
The Fed has been criticized for keeping interest rates too low for too long in early 2000, helping to fuel a housing bubble at the root of the recent financial crisis.
Although admitting that monetary policy was accommodative in early 2000, Bernanke said the housing bubble was likely the result of exotic alternative mortgages that could have been prevented with better regulation.
Until now, the Fed's main strategy has been to mop up after a bubble burst with lower interest rates to cushion the blow to the economy, instead of trying to prick a bubble pre-emptively by raising rates.
Such a strategy was a key conclusion of Bernanke's writings on the subject of bubbles when he was an economics professor, and again when he first came to the Fed as a governor in 2002.
"Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era," Bernanke told the American Economic Association.
"Maintaining flexibility and an open mind will be essential for successful policy-making as we feel our way forward."
Fed Chairman Ben Bernanke said all efforts should be made to strengthen the U.S. regulatory system to prevent a repeat of a financial crisis that Bernanke described as possibly the worst in modern history.
"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous build-ups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach," he told an annual meeting of economists here.
The Fed has been criticized for keeping interest rates too low for too long in early 2000, helping to fuel a housing bubble at the root of the recent financial crisis.
Although admitting that monetary policy was accommodative in early 2000, Bernanke said the housing bubble was likely the result of exotic alternative mortgages that could have been prevented with better regulation.
Until now, the Fed's main strategy has been to mop up after a bubble burst with lower interest rates to cushion the blow to the economy, instead of trying to prick a bubble pre-emptively by raising rates.
Such a strategy was a key conclusion of Bernanke's writings on the subject of bubbles when he was an economics professor, and again when he first came to the Fed as a governor in 2002.
"Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era," Bernanke told the American Economic Association.
"Maintaining flexibility and an open mind will be essential for successful policy-making as we feel our way forward."
