Renewed call for regulation

How apt that my first post in 2010 regards increased regulation of the U.S. financial system.

In Atlanta at the American Economic Association’s annual meeting, Federal Reserve Chairman, Ben Bernanke, said that regulation should be the first line of defense against economic crises. He also strongly stated that the Fed should be allowed to raise interest rates to offset the potential effects of economic bubbles. Its very important to note that this is in stark contrast to prior Federal Reserve policy. During both the dot.com bubble of the late 90s and the real estate bubble of the late 00s, the Federal Reserve did not feel that its job was to stave off bubbles. Instead the Federal Reserve felt its job was to implement monetary policy through the manipulation of interest rates. Its particular focus was to manage inflation and unemployment. In my opinion, economic bubbles are inflation. So my comment to the Federal Reserve is: DUH!

Bernanke also spent time stating that he felt the Federal Reserve and its low interest rates throughout the 00s was not responsible for creating the most recent financial catastrophe. Instead, he focused on lax regulation as being the source of the problem. I strongly disagree with this assessment. I feel it was a deadly combination of freely available economic intoxicants (read: super cheap money via super low interest rates) with an economic regulatory environment that allowed fraternity brother-type behavior to unfold.

However, I am very encouraged that increased regulation of the financial industry is still on the mind of the Federal Reserve Chairman. I am hopeful that 2+ years into this economic turn down that we might actually see increased regulations in the United States.

Here’s to a prosperous 2010 for each of you!

Jason