Financial storm is still blowing: Bernanke

August 23, 2008
Financial storm is still blowing: Bernanke
Fed working on three fronts to maintain economic stability, says US
central bank chief

(WASHINGTON) US Federal Reserve chairman Ben Bernanke said yesterday
the financial storm that began last year 'has not yet subsided',
creating 'one of the most challenging' economic environments in
memory.

In comments to the Fed's annual symposium in Jackson Hole, Wyoming,
Mr Bernanke said economic conditions remain soft as unemployment is
rising and inflation pressures remain hot.

The mix has created 'one of the most challenging economic and policy
environments in memory', Mr Bernanke said, according to a text of his
remarks released by the central bank.

Mr Bernanke said the Fed has been working on three fronts in an
effort to maintain economic stability - keeping interest rates low to
prevent a collapse of economic activity, offering extra liquidity to
banks and brokerages facing a credit squeeze, and revamping the
regulatory structure to prevent a recurrence of the housing boom-bust
cycle.

'By cushioning the first- round economic impact of the financial
stress, we hoped also to minimise the risks of a so-called adverse
feedback loop in which economic weakness exacerbates financial
stress, which, in turn, further damages economic prospects,' he said.

Yet Mr Bernanke said the efforts to prop up the economy are
complicated by a commodity-fuelled surge in inflation.

But he said the Fed's strategy 'has been conditioned on our
expectation that the prices of oil and other commodities would
ultimately stabilise, in part as the result of slowing global
growth'.

He said the Fed's extraordinary efforts to pump liquidity into the
financial system were 'intended to mitigate what have been, at times,
very severe strains in short-term funding markets and, by providing
an additional source of financing, to allow banks and other financial
institutions to deleverage in a more orderly manner'.

Mr Bernanke said the Fed and government authorities are looking at
more comprehensive regulatory overhauls to help avert further crises
and stabilise the financial system.

This means moving beyond the banking system that is closely regulated
by the Fed and having tighter rules for investment firms and
brokerages that allows regulators to potentially step in and take
control in a manner similar to that of a failed bank.

He said the rescue of Bear Stearns, in which the Fed and Treasury
helped the failing firm's buyout by JPMorgan Chase, 'was severely
complicated by the lack of a clear statutory framework' and that
Congress should consider such a framework.

'A statutory resolution regime for non-banks, besides reducing
uncertainty, would also limit moral hazard by allowing the government
to resolve failing firms in a way that is orderly but also wipes out
equity holders and haircuts some creditors, analogous to what happens
when a commercial bank fails,' the Fed chief said.

He said another point to consider is 'a more fully integrated
overview of the entire financial system', which he said 'has become
less bank-centred'.

Earlier yesterday, billionaire investor Warren Buffett said the US
economy is unlikely to improve before 2009, and that he expects the
government to take action to support troubled mortgage financiers
Fannie Mae and Freddie Mac.

Speaking on CNBC television, Mr Buffett said retail businesses within
his Berkshire Hathaway Inc, insurance and investment conglomerate
have been struggling and that the economy is now suffering from past
excesses in the availability of credit.

'You always find out who's been swimming naked when the tide goes
out. We found out that Wall Street has been kind of a nudist beach,'
said Mr Buffett, the world's richest person, according to Forbes
magazine.