The Federal Reserve Bank and financial regulators must act aggressively to avoid a repeat of the near collapse of the global financial system that sparked the historic 2007- 09 recession, the bank’s new vice chairwoman said in a speech Monday in Denver.
“A first-order priority must be to engineer a stronger, more robust system of financial regulation and supervision — one capable of identifying and managing excesses before they lead to crises,” Janet Yellen told members of the National Association for Business Economics at their annual meeting. “We must find a way to contain these threats without putting a straitjacket on financial innovation and risk-taking.”
In a far-ranging speech, Yellen touched on the origins of the financial crisis, the new financial-regulation reforms passed by Congress, international banking accords and the Fed’s role in preventing asset bubbles.
Congress’ financial overhaul, which expanded federal banking and securities regulation to areas such as derivative trading and created powerful new regulating bodies including a financial consumer-protection agency, was a critical step toward reducing systemic risk, Yellen said.
The Fed will play a central role in supervising major financial institutions and helping them establish better risk-management standards, she said. It also has a limited ability to reduce risk through its control of monetary policy, she said.
“Words are important, but clearly they are not enough. We need strong policies to back them up. We need . . . policymakers ready to take away the punch bowl when the party is getting out of hand,” Yellen said.
Michael Drury, chief economist with McVean Trading in Memphis, Tenn., said Yellen struck an appropriate tone of caution that the market needs to hear from the Fed.
But John Silvia, chief economist for Wells Fargo Securities, questioned whether it’s realistic that the Fed or other regulators have the foresight to remove the punch bowl at the right time.
“I have a problem with the notion that somehow regulators are smarter than everybody else in the market,” he said.
Yellen did not directly address the Fed’s current policy of holding short- term interest rates near zero, but she conceded that low rates can have undesirable consequences.
“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system,” she said.
Yellen, president of the Fed’s San Francisco bank, was confirmed by the Senate last month to be the bank’s No. 2 official.
Greg Griffin: 303-954-1241 or ggriffin@denverpost.com
