Yesterday, Federal Reserve Chairman Ben Bernanke gave a speech at the Dallas Regional Chamber describing the origins of the financial crisis and economic downturn, the Federal Reserve's policy responses, and several near-term and longer-term challenges facing the country.
Chairman Bernanke briefly discussed how "significant gaps" in regulatory oversight and the "theoretical" dispersion of credit risks under the "shadow banking system," from the packaging of subprime loans to the use of derivative financial instruments, led to an "unraveling" during 2007 and 2008 that resulted in falling home prices, rising mortgage delinquency and unemployment rates, limited credit and overall "loss of confidence." He also briefly discussed how the Federal Reserve's "aggressive" monetary policy" and development of "innovative programs" such as TALF and cooperative programs with foreign central banks "help[ed] restore normal functioning in key financial markets."
Looking forward, Chairman Bernanke called for "fixing structural weaknesses in the financial system" and the regulatory framework, including "tough new rules to make financial institutions safer and to constrain excessive risk-taking," and ending "the belief that some financial institutions are too-big-to-fail". He noted that the Federal Reserve "strongly supports ongoing congressional efforts to reform our financial regulatory framework," while emphasizing that the Federal Reserve is not "wait[ing] for new legislation to make improvements." Finally, Bernanke reiterated his call for a long-term reduction in federal budget deficits, saying “nothing prevents us from beginning now to develop a credible plan.” as without a commitment to “fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.”