Fed chairman Ben Bernanke had nothing to say to soothe panicked investors in a keynote speech Monday night at the Federal Reserve’s Atlanta bank following a day in which the major U.S. stock market indexes shed 1% or more.
In the face of continued weak economic growth, the chatter on Wall Street has long focused on what tools the Fed might employ to provide further monetary stimulus, be it a sort of Quantitative Easing III or Operation Twist II.
The Fed has often sought to reassure jittery markets at times of economic weakness, and last Friday’s dismal March jobs report—which at 120,000 jobs came in far below the 200,000 consensus estimate and below even the 125,000 jobs considered necessary just to keep up with population growth—may have raised expectations for Monday night’s speech.
In the event, Bernanke’s speech focused entirely on the Fed’s regulatory functions, particularly with regard to the so-called shadow banking system where financial institutions often carry out bank-like functions under looser supervision. The shadow banking system, Bernanke said, creates “potential channels for the propagation of shocks through the financial system and the economy.”
He cited money market funds and asset-backed commercial paper as examples of instruments that intermediate credit as banks do, but which lack the “protections afforded by deposit insurance and access to the Federal Reserve’s discount window.” Bernanke said that measures advocated by SEC chairwoman Mary Schapiro to require funds to maintain capital buffers or allow net asset values to float rather than maintain a fixed $1 value “warrant serious consideration.”
Even while detailing increased supervisory efforts in money market funds, securitization, securities lending and the repo market, and tighter scrutiny of banks and shadow banking entities, the Fed chairman acknowledged that “an inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas.”