Bernanke vows to strengthen financial regulation to prevent new crisis

WASHINGTON, Jan. 3 (Xinhua) -- The U.S. Federal Reserve should strengthen financial regulation to fight against excessive speculation that could send the U.S. economy into a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.

"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," Bernanke told an annual meeting of the American Economic Association in Atlanta.

"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool," he said.

Critics have said the U.S. central bank kept interest rates too low in the early 2000s. But Bernanke said that regulatory failure, not lax monetary policy, was responsible for the housing bubble and subsequent financial crisis.

"House prices began to rise in the late 1990s, and although the most rapid price increases occurred when short-term interest rates were at their lowest levels, the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone," said Bernanke.

Moreover, cross-country evidence shows "no significant relationship between monetary policies and the pace of house price increases," he stated.

"When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment," said the U.S. central bank chief.

"That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary," said Bernanke. "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."