Bernanke gives hope for a real plan

(breakingviews.com) -- Uncertainty is the bane of markets. And the apparently piecemeal nature of the U.S. government's response to the financial crisis has eroded confidence.

Federal Reserve boss Ben Bernanke took a somewhat belated step toward restoring it in a speech on Tuesday. His diagnosis of the roots of the economic crisis - "too big to fail" banks, ad hoc financial infrastructure, pro-cyclical regulation, fractured oversight - makes sense.

Granted, some of these issues appear intractable. In particular, regulatory intervention in financial firms deemed too big to fail, such as American International Group (AIG, Fortune 500) and Citigroup (C, Fortune 500), has been limited to keeping them ticking along until, over time, they can be wound down.

And Bernanke focused on how to manage these firms through risk controls, liquidity requirements and capital standards, rather than how to wind them down - or whether to intervene to keep future Hank Greenbergs and Sandy Weills from assembling ungovernable monsters. He did, however, rightly call for a new resolution regime for failing institutions.

Reforming financial infrastructure during a period of unprecedented financial innovation is no mean feat. Despite this, Bernanke's agenda in that area is probably too modest, focusing on tweaks to the plumbing - money fund, derivatives and repurchase market improvements - rather than more ambitious reform.

Still, Bernanke's sensible broader themes should help regulators craft intelligent rules. For example, his concerns about the procyclicality of capital rules - and of often overlooked but important ephemera such as deposit insurance premiums - are well-founded and should inform policymaking.

And his call for watchdogs to consider larger, systemic risks when devising rules seems reasonable - although it may be difficult to implement in the U.S., at least, due to the bureaucratic interests vested in the host of competing regulatory bodies.

It is tempting to criticize Bernanke's agenda as barn-door slamming - and there's an element of that. Also, broad brush strokes, no matter how sensible, are of little use unless they translate into specific rules.

But the U.S. stock market's 4% jump after Bernanke's speech reflects, in part, relief that the country's chief financial watchdog has the right priorities in mind.