Breaking Views

Bernanke gives hope for a real plan

While it comes a little late, the Fed chief takes a step toward restoring a little confidence in the nation's financial system.

By Dwight Cass, breakingviews.com

(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. To top of page

Company Price Change % Change
Bank of America Corp... 16.13 -0.26 -1.59%
Facebook Inc 59.72 0.63 1.07%
Yahoo! Inc 36.35 0.00 0.00%
Intel Corp 26.93 0.16 0.60%
Alcoa Inc 13.42 0.37 2.84%
Data as of Apr 16
Index Last Change % Change
Dow 16,424.85 162.29 1.00%
Nasdaq 4,086.23 52.06 1.29%
S&P 500 1,862.31 19.33 1.05%
Treasuries 2.64 0.01 0.34%
Data as of 4:13am ET
More Galleries
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
7 businesses Amazon wants to shake up From industrial supplies to educational software, Amazon is about more than just retail and books. More
Don't miss these Tax Day deals From massages and paper shredding to cookies and queso, celebrate the end of tax season with these Tax Day freebies and discounts. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.