Fed's Plosser: Financial Crisis Not Yet Fully Understood

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Philadelphia Federal Reserve President Charles Plosser said Friday that it is important for policy makers to be realistic in assessing last year's financial crisis.

Speaking at the beginning of the Philadelphia Fed Policy Forum, Plosser said that it is too soon to say that the financial turmoil of last year is fully understood and that policymakers must continue to learn about the crisis before making major regulatory decisions.

"My own view is that in the face of so much uncertainty, we should move more deliberately in designing, major regulatory reforms, certainly more deliberately than the current legislative calendar suggests," he said in prepared remarks.

He added, "Making major policy reform based on anecdotes and narratives that have not yet met the test of more rigorous analysis is misguided. Rushing major policy reforms in the immediate aftermath of a crisis risks adopting policies that have unintended consequences."

Plosser went on to say that policy makers should look beyond market failures to understand what went wrong during the financial crisis.

The Philadelphia chief said first that the too-big-to-fail problem must be addressed, adding that large firms now expect the government to protect them from losses and leads such firms to take risks at the expense of tax-payers.

"In my view, this situation is untenable and must be reversed," he said. "No firm ought to be too big to fail."

Plosser later discussed the need for a resolution mechanism for allowing large, interconnected firms to fail safely without causing damage to the financial system.

This has been a busy week for the Fed, marked most notably by Chairman Ben Bernanke's confirmation hearings in the Senate.

Testifying before the Senate Banking Committee on Thursday, the chairman said that actions taken by the Fed have helped to mitigate the financial crisis and helped to prevent further damage to the economy.

The Fed has been under increasing scrutiny from lawmakers accusing the Fed of doing too little to regulate large financial institutions that collapsed and contributed to the financial crisis that crippled the U.S. economy.

Some of the harshest criticism came yesterday at Bernanke's confirmation hearings, during which Senator Jim Bunning (R-KY) called Bernanke the "definition of moral hazard."

Philadelphia Federal Reserve President Charles Plosser said Friday that it is important for policy makers to be realistic in assessing last year's financial crisis. (Market News Provided by RTTNews)