Scott Eisen/Bloomberg NewsBen S. Bernanke at a Boston Fed conference on Tuesday.
What did the financial crisis teach central bankers?
The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that the great lesson was the need to juggle two jobs: the traditional work of managing the pace of inflation and the forgotten job of maintaining financial stability.
Mr. Bernanke’s speech largely amounted to a defense and explanation of the Fed’s conduct during the crisis. The lessons he described included the propriety of the Fed’s existing approach to monetary policy and the necessity of its various innovations, including lending dollars to other countries.
But the Fed chairman acknowledged, as he has before, that the Fed and other central banks had neglected the work of financial supervision.
“The crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively,” Mr. Bernanke said at an annual policy conference hosted by the Federal Reserve Bank of Boston.
One of the great questions left by the housing crash is whether the Fed could have popped the bubble at an earlier stage, limiting the damage. Mr. Bernanke said Tuesday that the Fed does have a responsibility to address emerging problems, something that central bankers long described as impossible or inappropriate.
Mr. Bernanke said, however, that he agreed with “an evolving consensus” that this work required different tools than those for monetary policy.
“In my view, the issue is not whether central bankers should ignore possible financial imbalances — they should not — but, rather, what ‘the right tool for the job’ is to respond to such imbalances,” he said.
The Fed, by adjusting interest rates, can deflate the economy, but there is no obvious mechanism for focusing the impact on a specific asset class, like housing.
Instead, Mr. Bernanke said that the tools of financial regulation were the best means for maintaining financial stability, through limits and requirements on the ways financial institutions lend and borrow.
Mr. Bernanke said that the crisis had tested what he described as the consensus model of monetary policy but that in his view it had emerged largely unscathed.
He described this model as “flexible inflation targeting,” meaning that the Fed seeks to maintain a steady rate of increase in prices and wages of about 2 percent a year, with a willingness to make short-term adjustments to encourage employment growth, and an emphasis on communication and transparency.
He closed with a reminder that it would take some time to fully understand the lessons of the crisis. Perhaps he was thinking of his own academic career, devoted to the mechanics of the Great Depression, 80 years ago. Or perhaps it was a recognition that this crisis remains very much in progress.
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