Bernanke’s plan to tame Wall Street

Call it Ben Bernanke’s blueprint for reform – a new architecture to prevent future financial meltdowns and trillion-dollar government interventions.

To accomplish it, the Federal Reserve chairman is calling for sweeping changes that would put all financial institutions under the hot lights of a new super-regulator. This government overseer would not only assess risk in the financial sphere, but also have authority to correct imbalances before they threaten the entire world economy.

This could temper Wall Street’s ability to devise new financial instruments, which created much wealth in the past 20 years but which also led to today’s tottering markets.

Although Mr. Bernanke has testified before Congress many times since the financial crisis began, Fed observers say this is his first presentation of a comprehensive plan.

“This is the first time he has stepped to the plate and done what is necessary,” says Doug Roberts, director of research at Channel Capital Research in Shrewsbury, N.J. “He’s saying you have to update the system for the 21st century.”

Four reforms

In a speech Tuesday before the Council on Foreign Relations in Washington, Bernanke laid out four areas of reform:

•Toughen regulations for financial institutions deemed “too big to fail.”

•Strengthen the financial infrastructure to ensure it performs under stress.

•Make sure that banks lend money during bad times as readily as they do during good times.

•Form a Systemic Risk Authority tasked with spotting problems before they threaten the entire financial system.

“It’s not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future,” Bernanke said in his speech. “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach.”

Too big to deal with?

A key reform is dealing with the problem of financial institutions that have become so gigantic their failure could result in a global economic meltdown. That is one reason the government has pumped hundreds of billions of dollars into institutions such as insurance giant AIG and banking behemoths Citigroup and Bank of America.

“What Bernanke wants to do is supervise individual organizations and groups so we don’t get into this kind of problem in the future,” says Lyle Gramley, a former Fed governor. “There is no question we are heading for much more regulation, and we need it.”

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