Bernanke: Stabilize Financial System For Recovery

Federal Reserve Chairman Ben Bernanke says the stabilization of the financial system is key to the economic recovery, both here in the U.S. and globally. In a speech made today at the Council on Foreign Relations, in Washington, D.C., Bernanke says that economic recovery hinges on stabilizing the financial system and he is proposing new policies to buffer financial problems moving forward.

"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," says Bernanke. Governments must work together to address problems with financial institutions that are "too big to fail." The largest banks and companies, such as insurance giant AIG, pose systemic risk to economic stability. "In the present crisis, the too-big-to-fail issue has emerged as an enormous problem," he says.

Bernanke says by allowing companies to become this big increases excessive risk taking and lowers market discipline. His speech comes one week after Treasury juggled its bailout of AIG and gave it another $30 billion. He says regulators need new tools to respond to the failure of a "systemically important nonbank financial firm." Federal bankruptcy laws aren't enough to protect the public's interest when a major nonbank financial firm fails.

He says regulators need to strengthen the nation's financial infrastructure to make it more secure in the event of another crisis. Certain accounting rules and other regulations have made the financial sector excessively "procyclical" or sensitive to swings in financial markets, he notes. "In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," he says.

Buffett: U.S. Economy Potentially Very Inflationary

Things are bad when the richest man in America says so. Billionaire Warren Buffett says the American economy has fallen off a cliff, and efforts to stimulate recovery may drive the economy to inflation rates higher than what was experienced in the 1970s. Buffett's Berkshire Hathaway Inc. posted its worst ever results in 2008.

Buffett says the economy can't turn on a dime, and while the recession will end, some inflation is appropriate now. He called on Congress to unite behind President Barack Obama, and compared the current economic crisis to a military conflict that needs a commander in chief.

Berkshire shares have dropped half of their value in the last year as the company's operating businesses have been dragged down. The company's Geico insurance unit and Dairy Queen ice cream businesses have pushed forward, but Buffet says other areas that Berkshire operates are losing money, including its jewelry units. The days of special games to create investment vehicles to keep producing earnings growth are over, Buffett says. Corporate America must behave better, he notes.

Buffett was ranked the richest man in America by Forbes magazine in October. He transformed Berkshire, an Omaha, NE-based textile manufacturer into one of the richest enterprises in the world.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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