Stronger regulation should be the first line of defense against speculative bubbles that could send the economy into a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.
But he didn't rule out higher interest rates to stop dangerous bubbles, such as the recent one in housing, from forming.
The Fed chief's remarks were his most extensive on the subject since the housing market's tumble led to the gravest financial crisis since World War II — and perhaps the worst in modern history, in his view.
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Critics blame the Fed for feeding that housing bubble by holding interest rates too low for too long after the 2001 recession.
But Bernanke, in prepared remarks to the American Economic Association's annual meeting in Atlanta, defended the central bank's actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said.
Bernanke said the direct links between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time are "weak." The stance of interest rates during that period "does not appear to have been inappropriate," he said.
Still, the enormous economic damage from the housing bust — the longest and deepest recession since the 1930s and double-digit unemployment — shows how importance it is to guard against a repeat, Bernanke said.
"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," he said.
"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool," he added.
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