Wider Oversight Needed by Market – Fed Chairman

Federal Reserve Chairman Ben Bernanke unveiled a proposal on Friday calling it the “macro-prudential regulation” approach to oversee the credit markets.  Bernanke said that the proposal would empower regulators to have a comprehensive view of the financial system thus avoiding future crisis that the US economy finds hard to shake off.

Moderate Inflation Seen

Mr. Bernanke downplayed inflation in a 25-minute speech at the Fed’s yearly economic forum.  He stated that inflation is slowing down thus raising interest rates would not be needed at this time.

The Fed controls interest rates at a low 2% level which significantly influence credits such as mortgages, car loans, among others.  Some Fed officials however are worried that if the Fed will not raise rates, it could be overtaken by another acceleration of inflation.

Bernanke agreed that inflationary pressure would likely increase but added that future inflations due to oil and food prices pressures would be moderate.  Bernanke’s view came amidst reduction of commodity prices and greater stability of the dollar.  He said that if the trend continues, inflation would likely be moderate at the end of the year and will spill over the following fiscal year.

Exploratory Proposal Unveiled

The plan of Mr. Bernanke involves exercising oversight to the credit market to avoid a financial crisis triggered by numerous defaults on sub-prime mortgages.  He delivered the planned proposal at the conference attended by international bankers, Wall Street investors, and economic experts from the government and the academe.

Under the planned oversight scheme, investment banks would be subjected to similar regulations imposed upon commercial banks because they use various financial instruments for borrowing and lending schemes.  Mr. Bernanke emphasized that the Fed is already exercising de facto supervision over investment banks and only needs formal grant of regulatory authority from the US Congress.

More Government Control

Mr. Bernanke asserted that the US Congress should assign a government institution to exercise authority and effectively intervene in bailing out investment houses that might collapse.  

This is to replace the current expensive arrangements exercised by the Fed and Treasury Department in facilitating such initiative.  Mr. Bernanke also pointed out that official authority has been exercised over commercial banks and it is high time for Congress to define similar arrangements with non-bank entities.
Implementing Exchange Systems

Mr. Bernanke included in his plan the implementation of an exchange system that will facilitate the buying and selling of credit instruments.  The system, under Mr. Bernanke’s plan, would give regulatory authorities oversight functions not just for individual portfolios or unstable investment banks and houses.  

Mr. Bernanke said the system would also include broader lending activities to filter shaky loan transactions such as sub-prime mortgages.  He added that such shaky loans pose hazards to the entire financial system if their widespread practices continue to go unchecked.