Fed chief offers economic assurance

Federal Reserve Chairman Ben S. Bernanke said yesterday in Richmond that the nation is not heading toward a slide similar to the Great Depression that lasted 12 years.

Banks were allowed to fail then, the Fed chief said during a question-and-answer period after his speech at a sold-out luncheon at the University of Richmond sponsored by the World Affairs Council of Greater Richmond.

"We will not experience anything remotely like that," Bernanke said.

The banking system is well-capitalized and in good shape despite the strain in financial markets, he said.

That assurance aside, "the financial distress we are seeing is the most severe of our era." Moreover, it has a broad effect on the overall economy, he said.

"It will not be easy going to eliminate the financial crisis, but we can strengthen the system."

The Fed has provided extra liquidity to the system this year and reduced key rates to spur borrowing. The Fed also helped save Bear Stearns, an investment bank, that got into a liquidity crunch.

In his speech, Bernanke called for stronger nationwide licensing standards for mortgage brokers, more consistent oversight of lenders and better consumer protections.

Some people won't want that added con-

trol, said Alex Eschenroeder, a senior at Trinity Episcopal School and a member of an economics team there, who listened in an overflow room. "But . . . in light of what is happening right now and all the problems that we have been seeing recently . . . what he is doing is necessary."

Bernanke said policymakers and regulators have identified the sources of financial turmoil and are taking steps to correct the situation.

"He was able to give us important information about the way forward, not only with regard to regulatory policy but with regard to how markets are going to react, and the human psychology that has ensued from this current financial strain," said Randolph Bell, president of the local World Affairs Council.

Treasury Secretary Henry M. Paulson Jr. last month released a blueprint aimed at overhauling regulation of the financial sector; Bernanke's speech yesterday focused on recent developments and near- and medium-term solutions.

"We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said.

The Federal Reserve, for instance, has proposed a rule that prohibits mortgage lenders from imposing penalties when borrowers pay early. Regulations regarding the accuracy of mortgage advertisements also are in the works, he said.

Responding to a question posed by University of Richmond students after the speech, Bernanke said the U.S. financial distress is different from the Japanese banking crisis of the 1990s.

Japanese banks suffered severe losses and were allowed to operate in weak conditions for years, leading to a prolonged period of stagnation.

"The banking system in the U.S. came into this episode very well capitalized," Bernanke said. "The U.S. banking system remains well capitalized."

Rich Johnson of The Wilton Cos., a realty firm, said he was reassured after Bernanke's comments. "Yes, this is a storm, but we can weather this storm. The system can handle it."

Henry Miller IV of RBC Wealth Management said Bernanke's statements reaffirmed his beliefs in the soundness of the financial system. "It was nice to hear it from the top."

Richmond Mayor L. Douglas Wilder said Bernanke offered the assurance that a lot of people wanted to hear.

Yet, said Gov. Timothy M. Kaine, "my sense is we have a ways to go to get through this."

During his speech, Bernanke said experience shows that economies cannot perform at their full potential when the supply of credit to sound borrowers is restricted.

More must be done, he said. Bank regulators, including the Fed, should help financial firms manage their risk, he said.

"They were slow to recognize the problem that was taking place," said Walter Craigie, an investment banker with Morgan Keegan. "They were more concerned about inflation. But I believe we are in the process of change and I think we will get through that change."

Bernanke said the U.S. is not alone in the solution. "Given the global nature of our financial markets and institutions, international cooperation is essential to making regulatory and supervisory structure more effective."

After his speech, the local World Affairs Council presented its Virginia Global Business Ambassador Awards for exemplary international dealings to Lynchburg-based Areva NP Inc. and McLean-based Booz Allen Hamilton. Areva, a nuclear power plant designer and builder, won in the award in the manufacturing sector; Booz Allen, a strategy and consulting firm, won in the service sector.