Special Access:With the Central Banker

Ben Bernanke,Chairman of the Federal Reserve,testified before the House Financial Services Committee last week,strongly defending the Fed's role in supervising the largest financial institutions.He also reflected on the current economic situation,including inflation and the structural deficit.We're not expecting inflation to rise in the near or medium term,Mr.Bernanke said.Employers are seeing slow wage growth and strong productivity gains.Unit labor costs are falling and there is weak demand,discouraging price increases.It's conceivable long term debt could directly or indirectly affect the economy by causing a loss of confidence.
The Federal Reserve still retains 1.25 trillion dollars of mortgage-backed securities.We think our holding them will keep mortgage rates down,even though we are ending new purchases.The very high vacancy rates in rental properties are keeping rents down.
Stripping the Fed of supervisory authority,in light of the recent crisis,would be a grave mistake.Large institutions need to be seen as a whole,the wide range of activites of a complex international financial firm.The Fed has a range of multidisciplinary skills for consolidated oversight.The Fed is the one institution with the full breadth of skills.The Fed of course made errors,but we were hardly alone in that respect.
We've learned that regulations need to be tougher;we have changed our approach to one of tougher risk assessment.We've increased capital requirements and scrutiny of executive compensation.You have to be careful not to restrict hedging activity,which involves securities purchases.We would implement regulations as part of our overall risk assessment of the company,whether the company has adequate management capabilities to manage those risks.A lack of strong controls would be grounds for the supervisor to require changes or elimination of those activities.If you can get market discipline to bear on firms,that would help the regulators,Mr.Bernanke told the committee.
Ben Bernanke was recently reappointed and confirmed for another four-year term as Chairman,despite distrust of the Fed by some members of Congress.Congress feared disrupting financial markets by denying his reappointment,among other considerations.