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The Globe and Mail

Bernanke defends Fed response to financial crisis

Federal Reserve chairman Ben Bernanke testifies on Capitol Hill on Tuesday.

J. Scott Applewhite/AP

Chairman Ben Bernanke said Friday that the Federal Reserve was left with few good options when it stepped in to shore up the largest U.S. financial institutions during the 2008 crisis.

Mr. Bernanke defended the central bank's actions to support insurance giant American International Group and help with the sale of investment bank Bear Stearns, during a speech to a New York conference examining the crisis.

While there were risks associated with that support, Mr. Bernanke said that the billions of dollars in loans the Fed provided were backed by adequate collateral and taxpayers did not lose money. And he noted that the Fed and other U.S. regulators are better positioned to deal with a crisis because Congress passed an overhaul of financial regulations in 2010.

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"The Federal Reserve's responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options, given the absence of a legal framework for winding down such firms in an orderly way in the midst of a crisis – a framework we now have," Mr. Bernanke said.

Some have criticized the Fed for helping rescuing those institutions rather than letting them fail. They said the Fed sent a message: banks could expect the government to bail them out after taking extraordinary risks that threatened the larger financial system.

In his speech, Mr. Bernanke disputed this view and said the regulatory overhaul gave the Fed new powers to wind down those institutions without threatening the larger financial system.

In his speech, Mr. Bernanke made no comments about the current state of the economy or the Fed's policies to boost growth. But he did emphasize that the Fed's regulatory duties are just as important as that mission.

"Going forward, for the Federal Reserve as well as other central banks, the promotion of financial stability must be on equal footing with the management of monetary policy as the most critical policy priorities," Mr. Bernanke said.

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