Bernanke Makes The Right Call On Systemic Financial Risk

David C. John / October 02, 2009

One of the larger mistakes in the Obama financial regulatory reform package was its attempt to give the Federal Reserve additional powers so that it could in theory protect the economy from risks such as the housing bubble that could endanger the entire financial system.

As we have argued in the past, the entire concept of minimizing systemic risk is a thankless task that is probably impossible. A key question is how much power such a regulator would have. As we said in June, “Congress could grant it such wide powers that the agency could intervene in just about any aspect of the financial industry, thus causing even more chaos and uncertainty than it prevents. It could also hinder the development of new products and other innovations if the agency develops an attitude that anything new may be risky.”

However, if there is to be a systemic risk regulator, it would be far better to give that responsibility to a council of regulators than to the Federal Reserve or any other single agency. (more…)