Federal Reserve Chairman Ben Bernanke said on Friday that the U.S. must confront the problem of “moral hazard,” the possibility that short-term solutions to fix the financial system could hinder long-term stability.
The U.S. has implemented a number of reforms, such as higher capital and liquidity standards, to improve the resiliency of the financial system. Bernanke said, however, that market discipline only limits moral hazard “to the extent that debt and equity holders believe…they will bear costs” in the event of financial downturn.
“Our continuing challenge is to make financial crises far less likely and, if they happen, far less costly,” Bernanke said. “The task is complicated by the reality that every financial panic has its own unique features that depend on a particular historical context and the details of the institutional setting.”
Bernanke pointed to former World Bank economist Stan Fischer’s attempt to find the shared elements of a crisis, adding that the 1907 panic and 2008 financial crisis “were instances of the same phenomenon.”
“The challenge for policymakers is to identify and isolate the common factors of crises, thereby allowing us to prevent crises when possible and to respond effectively when not,” Bernanke said.