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MAKE MONEY BLOG$ ~ Federal Reserve Chairman Ben Bernanke addressed a crowd of economists, finance professionals and media at New York‘s Princeton Club Friday afternoon, reflecting once again on the causes of, and response to, the 2008 financial crisis.
Bernanke offered little in the way of hints toward what policy actions the Fed might take at the April 24-25 meeting of the FOMC, but renewed his arguments that the chief cause for the extent of the crisis was not the meltdown in the subprime mortgage market, but a financial system rife with vulnerabilities including, but not limited to, insufficient regulatory authority and failure to exercise the authority that was available.
By way of illustration, Bernanke compared the subprime meltdown to the bursting of the dot-com bubble. Data at the time and since has indicated the total subprime mortgage market was somewhere in the neighborhood of $1 trillion. Add in all the securitized products that reference those mortgages and the total increases by a few hundred billion dollars, which Bernanke argued is a far short of the amount of paper wealth destroyed in the dot-com stock price collapse.
“[A]ny theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth — more than $8 trillion — resulted in a relatively short and mild recession and no major financial instability,” Bernanke said.
The answer, the Fed chief believes, is that while dot-com exposure was widespread, and thus the pain was not as acutely felt for a small group of institutions, the mortgage exposure was centered in a financial system that had grown increasingly reliant on short-term funding. Firms like Bear Stearns and its ilk found out in 2008 that such short-term funding can be extraordinarily fleeting the moment there is a whiff of instability.
Bernanke, speaking at a conference on rethinking the financial crisis co-hosted by the Russell Sage Foundation and the Century Foundation, was asked whether the new regulations on banks under the Dodd-Frank reform legislation might be setting up another issue as shadow banks crop up to fill the gaps in markets the traditional firms vacate.
In response, Bernanke said the transition of the biggest investment banks into bank holding companies — Goldman Sachs and Morgan Stanleyconverted after Lehman’s collapse, while Merrill Lynch was acquired by Bank of America — has been one key step in that regard, and that other provisions of new regulations allow for Fed supervision of critically important financial firms.
“There has been progress made to this point, but we can’t be complacent,” the chairman said.
source: forbes.com
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