Bernanke calls for increased regulation of financial markets

Federal Reserve Chairman Ben Bernanke said that federal and state regulators must act quickly to implement the reforms necessary to rescue the sinking U.S. economy during a speech at the Jepson Alumni Center April 10.

He acknowledged that it could be challenging because of pressure to manage short-term problems associated with the financial crisis, but he said stalling would only cause more harm.

"We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said in a speech in front of more than 250 people from the World Affairs Council of Greater Richmond.

In attendance were Gov. Timothy M. Kaine, Richmond Mayor L. Douglas Wilder, senior university officials, several students from the E. Claiborne Robins School of Business and about 200 area business executives.

John McCulla, director of community relations, called the speech the most high-profile event at the university since the 1992 Presidential Debate, which featured former President George H.W. Bush, Bill Clinton and Ross Perot.

Bernanke did not discuss the vastly changing role of the Federal Reserve since the start of the economic downturn, and didn't offer any new information on the state of the economy or the Federal Reserve\0xB9s next action with interest rates. Instead, he said the Federal Reserve -- at the recommendation from a presidential advisory group -- needed to use its authority to strengthen consumer protection rules and enhance disclosures.

Bernanke identified the subprime mortgage crisis as the most serious example of maverick market practices gone awry. The problem, Bernanke said, was lenders would often offer mortgages to people who had poor credit histories. Lenders did so because they benefited more by handing out more loans, Bernanke said.

As the housing market cooled, subprime mortgage borrowers -- with already poor credit histories -- couldn't pay their mortgages when interest rates soared, and because subprime mortgages were a part of so many securities, peoples' inability to pay stifled the market.

"Market participants will not easily forget the lessons of the recent period, and so market discipline will help in this respect," he said. "I expect that, in the future, [that] should lead to more conservative and careful underwriting."

Last month Bernanke and other financial regulators called for increased scrutiny of mortgage lenders to prevent a crisis like the current one from happening in the future. The Federal Reserve in recent months has slashed interest rates and enacted other measures to quell the rise in foreclosures nationwide and stabilize the volatile stock market.

He urged credit rating agencies to serve investors better by providing greater transparency in how they determine their ratings, and said that correcting overall weaknesses was the responsibility of the financial firms' management.

Bernanke blamed "the loosening of credit standards" and a general erosion of market discipline on investors who failed to pay attention to the risks of their investments for creating something of a perfect storm that eventually brought the economy tumbling down.

"These recommendations should moderate the likelihood and severity of future financial shocks and enable market participants to better withstand shocks when they occur," Bernanke said. "We will monitor the effectiveness of the new rules and take additional steps as necessary."

He said the current economic crisis was one of the worst of the post-World War II era, but noted that it would not rival the economic turmoil characteristic of the Great Depression.

Bernanke, a scholar of the financial crises including the Great Depression era, co-wrote a book with business school professor Dean Croushore.