Federal Reserve chief Ben Bernanke on Tuesday called on governments to take "forceful" action to stem unending financial turmoil and immediately consider reforms to prevent another crisis.
Describing the current financial turmoil as the worst since the Great Depression of the 1930s, he said until governments stabilized the financial system, "a sustainable economic recovery will remain out of reach."
"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 told the Council on Foreign Relations, a think tank, in Washington.
Speaking ahead of a weekend meeting of the Group of 20 finance ministers and central bank chiefs in London, Bernanke said while fighting the current crisis, policymakers should embrace reforms to the financial architecture that could help prevent a similar turmoil from developing in the future.
"We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components," he said.
"In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim."
Financial turmoil stemming from a US home mortgage meltdown has plunged the world's biggest economy into prolonged recession, sending the unemployment rate to a 25-year high, pushing stocks to 12-year lows and forcing government bailouts of blue-chip companies such as AIG, Citigroup and General Motors.
Bernanke, in a question-answer session, allayed fears of deflation crippling the US economy after inflation disappeared in January in the weakest reading in more than a half century.
"We're not anticipating deflation," he said. "We do think inflation will be low over the next couple of years."
Amid the festering financial crisis, International Monetary Fund managing director Dominique Strauss-Kahn warned Tuesday that the global economy could contract for the first time in 60 years in 2009.
Differences have also surfaced ahead of the G20 talks between key emerging and industrialized nations designed to coordinate a global response to the worsening credit crunch.
The White House Monday denied a rift with Europe over whether economic stimulus or regulatory reform offers the best path to revival of the global economy.
Washington is pressing its transatlantic allies to emphasize stimulus. But the European Union has failed to forge a common approach, and some EU leaders led by France are pressing for a comprehensive rewrite of global regulation.
Bernanke said while governments had moved quickly with programs to support financial markets and ease credit flows to businesses and households, they must be accompanied by new policies to "limit the incidence and impact of systemic risk."
He emphasized the need to address problems posed by firms perceived to be "too big to fail" and to reduce the "procyclical effects" of capital regulation and accounting rules.
The Fed chief also called for a "more macroprudential approach" to the supervision and regulation of financial firms.
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