WASHINGTON — The nation’s financial rule book must be rewritten to prevent a repeat of the global economic crisis now gripping the United States and other countries, Federal Reserve Chairman Ben Bernanke said Tuesday.
“We must have a strategy that regulates the financial system as a whole . . . not just its individual components,” Bernanke said in a speech to the Council on Foreign Relations.
Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.
The Fed chief’s remarks come as the Obama administration and Congress are crafting their overhaul strategies. For the administration, critical work will be carried out among global finance officials this weekend in London ahead of next month’s meeting of leaders from the world’s 20 major economic powers.
The patchwork of U.S. financial rules dates to the Civil War.
Congress, the administration and the Fed want to strengthen the system to prevent any future financial crises from plunging the U.S. economy and many others into recession.
Bernanke said there’s a “good chance” the U.S. recession could end this year if the government is successful in getting financial markets to operate more normally again. The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than anticipated, he acknowledged after his speech.
To guide the regulatory overhaul, Bernanke laid out four key elements:
• Legislation so the failure of a huge financial institution can be handled in such a way to minimize fallout to the national economy — similar to how the Federal Deposit Insurance Corp. deals with bank failures.
• Policymakers also should consider ways to bolster money-market mutual funds that are susceptible to runs by investors.
• Review of regulatory policies and accounting rules, suggesting a larger financial buffer for the FDIC’s insurance program for bank deposits that could be used when conditions worsen.
• Consider creating an authority responsible for monitoring financial risks and protecting the country from crises like the current one.
