About The leader of America’s central bank is hesitant to proclaim an end to economic trouble after examining recent trends. At the Federal Reserve’s Chicago branch recently, Chairman Ben Bernanke stated that current market conditions continue to be precarious even as many financial experts have declared a full recovery.
Bernanke made his remarks during a lengthy speech that described the Fed’s role in observing the successes and failures of the banking system. The speech was a focal point of the 49th Annual Conference on Bank Structure and Competition, which brings together experts in technical, financial and academic research.
As a central thesis of his speech, Bernanke noted that participants in the financial market have been taking considerable risks in recent months. The extended run of economic stability in America reduced their desire to use reasonable provisions.
Securities lending endures as a major problem. Borrowers have proven unable to finance asset holdings and subsequently were forced to sell. This occurrence drove asset prices down even further, leading to extreme asset liquidation.
Money market funds are also susceptible to the unstable environment. Bernanke believes that risk is amplified because the Treasury has been stripped of its power to secure investors’ holdings in money market funds, which proved critical in halting the disastrous 2008 run.
To introduce the subject of income inequality, Bernanke said that wealthier households have made great gains in net worth, while lower- or middle-income households have declined in capital since the financial crisis. This reality is most apparent in the area of real estate. A number of homeowners are still “underwater,” with homes valued at much less than their mortgage balances. According to Bernanke, this fact alone indicates that the country’s financial well-being is more fragile than statistics might show. As a side note, he recommended that additional regulation should be installed in the repossession market—the wholesale market that financial institutions use for their daily funding requirements.
Bernanke stated that more preparation is required for both investors and market participants so that they can deal with any potential consequences. Leading research for this is the Office of Financial Stability Policy and Research, which educates both the central bank and the Federal Open Market Committee on policy decisions.
In closing remarks, Bernanke assured attendees that the Fed continues to identify threats in order to thwart future emergencies, and carefully monitor the activity of the nation’s financial institutions.