In prepared remarks delivered to the Financial Crisis Inquiry Commission today, Federal Reserve chairman Ben Bernanke said it’s super important that the government establish a way to wind down behemoth financial institutions, and that elimination of the “too-big-to-fail” phenomenon is key to averting any future crisis.
“The creation of a resolution regime for systemically critical nonbank financial firms is a critical innovation of the recently passed financial reform bill,” said Bernanke.
At the conclusion of his speech, he said that a rigorous anti-intervention policy on the part of the government would be counterproductive:
If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved. Simple declarations that the government will not assist firms in the future, or restrictions that make providing assistance more difficult, will not be credible on their own. Few governments will accept devastating economic costs if a rescue can be conducted at a lesser cost; even if one Administration refrained from rescuing a large, complex firm, market participants would believe that others might not refrain in the future. Thus, a promise not to intervene in and ofitself will not solve the problem.
Bernanke offered his views on the triggers of the crisis and the vulnerabilities in the financial system that allowed a problem in the subprime market to explode into a foundation-shaking paralysis. As might have been predicted, he deflected allegations that the Fed had helped cause the crisis by keeping interest rates low.
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