Bernanke summarizes the problem regulators face: no one person can reliably predict the behavior of financial markets, and the regulators couldn’t identify such a person if he did exist. But then he suggests that the Systemic Risk Council created by the Dodd-Frank financial regulation bill will be able to make useful predictions about overall conditions (emphasis added):
COMMISSIONER [JOHN W.] THOMPSON: So no calamity of this magnitude occurs without there being some early signals that something’s going wrong. In the case of this calamity, what were the signals? Why did we — and had we acted on them, might we have averted the disaster?
MR. BERNANKE: Well, I don’t know, I have to think about that.
I think there were people — there were people saying — including people at the Fed but others as well — saying, in the year before the crisis, that risk was being underpriced, that spreads were very narrow, that markets seemed ebullient, that liquidity was, in some sense, excessive.
There were — you know, the way I would put it is, I think there were people — not necessarily the same people — identifying various parts of the problems. You know, there were people who were concerned about derivatives, there were people that were concerned about subprime mortgages, there were people concerned about the overall credit environment, there were people who were concerned about off-balance-sheet vehicles.
But I think notwithstanding the claims of one or two people out there who are now sort of living on the fact that they, quote, anticipated in the crisis, I would still say that the interaction of these things, the “perfect storm” aspect was so complicated and large, that I was certainly not aware, for what it’s worth — and it could be just my deficiency — but I was not aware of anybody who had any kind of comprehensive warning.
There are people identified — and the trouble is — and particularly in this blogosphere we live in now — at any given moment, there are people identifying 19 different problems, crises.
Vice Chairman Thomas: And they may be right at some point.
MR. BERNANKE: And this is the thing, one of them is probably right, but you don’t know who in advance. So that’s something you ought to look into.
But I would be very skeptical — there are people like — you know, even — take somebody like Robert Shiller who is now pretty famous for identifying the stock market and the housing bubbles; right? A great economist. I have great admiration for him. He’s a very serious guy. But he identified the stock market crash when the Dow was at 7,000. So it went a lot further after that.
And he was pretty open-minded in 2002, 2003, whether there was a housing bubble or not.
So people that, quote, identify a problem, but they don’t get the timing and the magnitude right. So I welcome your — you know, your attempts to unravel this.
Again, consistent with what I’ve been saying, which is that a consistent systemic risk council would probably be able to identify some of these things and, you know, approach it systematically and so on.
So while I can point to a number of different things that various people said, I don’t know of anybody who really anticipated the —
COMMISSIONER THOMPSON: So there were no actionable signals?
MR. BERNANKE: Well, no, I don’t think that’s true. I mean, I think — well, so it’s always a question from a legal perspective, if you’re trying to figure out intent, and da, da, da, what did you know and when did you know it. It may be that very few people fully appreciated the risks of subprime lending in 2001 or 2002.
If we had been smarter or more systematic, might we have identified them? Possibly, yes.
So I think rather than saying, you know — obviously some folks are going to come out looking bad or whatever based on what they saw or didn’t see. But I think instead of relying on the future on particularly perspicacious financial geniuses who identify these problems accurately in advance, I think we just need to have a more systematic government or whatever structure that will at least make an attempt to look at the possible problems and…
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