WASHINGTON — Tougher regulations may mean less profit for banks. But Ben Bernanke says that’s a fair price to pay after the damage caused by the 2008 financial crisis.
The Federal Reserve chairman told lawmakers Thursday that the crisis led to “an enormous waste of resources” and new rules proposed by the Fed and other regulators to safeguard the financial system are “well-justified on a cost-benefit basis.”
“Unsafe practices by large financial institutions pose a risk not just to themselves but to the rest of society,” Bernanke told the Senate Banking Committee.
“In setting policy we should look at the social cost and not just the cost to the firms.”
Bernanke made the comments during his second appearance before Congress this week. He was presenting the Fed’s semiannual economic report, perhaps his last as Fed chairman. Many speculate he will not seek another term when his second four-year term ends in January.
Much of the hearing focused on the Fed’s efforts to boost the economy. On that topic, Bernanke stuck with the message he delivered to the House Financial Services Committee on Wednesday, saying any change in the Fed’s low interest rate policies will depend on the job market’s health and inflation.
But lawmakers also pressed him on rules that the Fed and other regulators are mulling in response to the worst financial crisis since the Great Depression.
The crisis triggered a recession that put millions of Americans out of work, pushed the unemployment rate to 10 per cent, sent home values plummeting and edged millions of Americans toward foreclosure.
The economy is still struggling four years after the recession officially ended.
Growth remains tepid, wages are barely keeping pace with inflation and unemployment rate is a still-high 7.6 per cent.
The banks argue that requirements to hold larger capital reserves and higher ratios of equity to loans can constrain them from lending.
They also say such rules could put U.S. banks at disadvantage against their competitors in other countries.
But lawmakers appeared less sympathetic to such complaints, particularly after seeing big second-quarter profits reported this week by Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo.
“It’s no surprise that mega-banks are doing quite well, yet they continue to claim that ....regulations are killing them,” said Sen. Sherrod Brown, D-Ohio.
Brown asked Bernanke if smaller bonuses and fewer dividends are a fair price to pay for a safer financial system.
Bernanke said the first concern should be how those regulations affect lending.
But he agreed that banks could handle the costs.
“Given the enormous cost of the crisis, that strong measures to prevent (a) repeat are obviously well-justified on a cost-benefit basis,” he said.
Bernanke didn’t stray from his comments earlier in the week on the Fed’s interest rate polices, which have spurred a stock market rally and encouraged more borrowing and spending.
Bernanke repeated his position that there is no “preset course” for the Fed’s $85 billion-a-month bond-buying program, he said. Any change will depend on the economy’s performance.
And he said that the Fed could hold its benchmark short-term interest rate near zero even after unemployment falls below 6.5 per cent. One reason the Fed might consider keeping the rate near zero longer is if inflation fails to move closer to the Fed’s 2 per cent target rate.
Another would be if the decline in unemployment is caused by people leaving the workforce. The government counts people as unemployed only if they are actively looking for a job.
At one point in the hearing, Sen. Bob Corker, R-Tenn., prodded Bernanke to evaluate the job Congress has done to support the economy. Corker said Congress has grown too dependent on the Fed’s efforts to drive growth, instead of taking action to help.
Bernanke offered measured criticism. The Fed has shouldered “an awful lot of the burden” to drive economic growth, he said. He and other Fed officials would have been very happy to “share that burden” with Congress.
Instead, he said lawmakers have spent too much energy on implementing tax increases and spending cuts when the economy was growing only modestly. Those actions could end up reducing economic growth by 1.5 percentage points this year.
But Bernanke said it wasn’t the Fed’s role to force the issue.
“I don’t think it’s my place or the Federal Reserve’s place to try to force Congress to come to any particular outcome,” Bernanke said.
Sen. Tom Coburn, R-Okla., agreed with Corker that Congress should have done more.
“We have let you down,” he told Bernanke. “The kindergarten of Congress has let you down by not doing the things to create confidence in the business community.”