bernanke20100902a

bernanke20100902a - For release on delivery 9:00 a.m. EDT...

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For release on delivery 9:00 a.m. EDT September 2, 2010 Statement by Ben S. Bernanke Chairman Board of Governors of the Federal Reserve System before the Financial Crisis Inquiry Commission Washington, D.C. September 2, 2010
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Chairman Angelides, Vice Chairman Thomas, and other members of the Commission, your charge to examine the causes of the recent financial and economic crisis is indeed important. Only by understanding the factors that led to and amplified the crisis can we hope to guard against a repetition. Appropriately, the problem of too-big-to-fail, and the policies that the government uses to address that problem, will be a particular focus of your forthcoming report and in the hearing today. In my view, the too-big-to-fail issue can best be understood in the broader context of the financial crisis itself. Accordingly, this testimony provides an overview of the factors underlying the crisis, as well as some of the problems that complicated public officials’ management of the crisis. Too-big-to-fail financial institutions were both a source (though by no means the only source) of the crisis and among the primary impediments to policymakers’ efforts to contain it. As you requested, I will also briefly discuss monetary policy during the period prior to the crisis. Before proceeding, I should state that my testimony reflects my own views and not necessarily those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee (FOMC). Triggers of the Crisis In discussing the causes of the crisis, it is essential to distinguish between triggers (the particular events or factors that touched off the crisis) and vulnerabilities (the structural weaknesses in the financial system and in regulation and supervision that propagated and amplified the initial shocks). Although a number of developments helped trigger the crisis, the most prominent one was the prospect of significant losses on residential mortgage loans to subprime borrowers that became apparent shortly after house prices began to decline. With more than $1 trillion in subprime mortgages outstanding, the potential for losses on these loans was
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- 2 - large in absolute terms; however, judged in relation to the size of global financial markets, prospective subprime losses were clearly not large enough on their own to account for the magnitude of the crisis. (Indeed, daily movements in global equity markets not infrequently impose aggregate gains or losses equal to or greater than all the subprime mortgage losses incurred thus far.) Rather, the system’s vulnerabilities, together with gaps in the government’s crisis-response toolkit, were the principal explanations of why the crisis was so severe and had such devastating effects on the broader economy. In midsummer 2007, events unfolded that would engender a sea change in money market
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bernanke20100902a - For release on delivery 9:00 a.m. EDT...

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