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Global Economy 'Leveling Out,' Federal Reserve Chairman Bernanke Says

Fed Chairman Ben Bernanke, right, chats with European Central Bank president Jean-Claude Trichet, center, and Bank of Japan governor Masaaki Shirakawa during a break in the Federal Reserve annual conference at Jackson Lake Lodge in the shadow of the Grand Tetons.
Fed Chairman Ben Bernanke, right, chats with European Central Bank president Jean-Claude Trichet, center, and Bank of Japan governor Masaaki Shirakawa during a break in the Federal Reserve annual conference at Jackson Lake Lodge in the shadow of the Grand Tetons. (By Reed Saxon -- Associated Press)
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But this year, the economists were trying to piece together how last fall's financial typhoon has altered the financial system, and what they, as policymakers, can do to stop it from happening again.

Bernanke and a Fed colleague, Brian Madigan, argued that the Fed's extraordinary interventions were a logical extension of central banking practices first explained by Walter Bagehot, the 19th century British father of modern central banking.

Bagehot said that central banks should halt panics, an idea that has long been government policy for conventional banks. Bernanke and Madigan said Fed programs to support money market mutual funds, commercial paper and consumer and business lending are an adaptation of that notion for the 21st century.

"Bagehot's dictum continues to provide a useful framework for designing central bank actions for combating a financial crisis," said Madigan, director of the Fed's division of monetary affairs. But, he said, that framework should be used amid "the modern structure of financial markets and institutions."

While speakers were generally cautiously optimistic about the future, many seemed wary of becoming complacent about continuing risks to the economy -- or forgetting the lessons of the last year.

"I am a little a bit uneasy when I see that because we have some green shoots here and there, we are already saying, 'Well, after all, we are close to back to normal,' " said Jean-Claude Trichet, president of the European Central Bank, commenting on a paper presented at the conference. "We know that we have an enormous amount of work to do and we should be as active as possible."

Stanley Fischer, governor of the Bank of Israel and a onetime thesis adviser to a young Ben Bernanke, gave a particularly sharp warning about the risk that world governments will fail to rein in the excesses that created the crisis.

"At this stage, we seem to be taking it for granted that we should go back to the structure of the financial system as it was on the eve of the crisis," Fischer said in a speech. "But we need to be thinking more broadly, including the possibility that some radical restructuring is needed," such as sharply restricting the ability of banks to have large trading operations.


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