03 June 2008

Fed Bernanke on long-term perspective of the turmoil

Stepping back one can see that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments, Bernanke said and outlined some of the factors that served as prologue.

Stepping back one can see that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments, Bernanke said in a speech provided for the International Monetary Conference in Barcelona.  Several longer-term developments such as the U.S. housing boom, an even broader credit boom, and the unprecedented growth in developing and emerging market economies served as prologue for the recent turmoil, he outlined.

 

The losses from sub-prime mortgages triggered the end of the broader credit boom and forced the credit rating agencies to downgrade what had been highly rated mortgage-backed securities, Bernanke described the situation. With investors reversing their aggressive risk-taking, the resulting pullback affected a much broader range of securities, including leveraged and syndicated loans, asset-backed commercial paper, commercial mortgage-backed securities, and a variety of structured credit products.

 

Focusing on the Fed policy, he noted that “for now policy seems well positioned to promote moderate growth and price stability over time”. Pointing to the exchange rate development of the dollar Bernanke noted that this “contributed to the unwelcome rise in import prices and consumer price inflation.”

 

“Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy … will be key factors ensuring that the dollar remains a strong and stable currency.”

 

He also reiterated the Feds collaboration with other regulators. “Among the changes we expect to see are strengthening of capital and liquidity rules, greater disclosure requirements, an increased emphasis on the measurement and management of firmwide risks, and further steps to increase the transparency and resilience of the financial infrastructure”, he said.

 

Full speech

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