Last Sunday January 3 2010, U.S. Federal Reserve chairman Ben Bernanke made an interesting statement.

To fight against excessive speculation that could send the U.S. economy into a new crisis, Bernanke said the Federal Reserve should strengthen financial regulation.

“All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs,” said Bernanke at an annual meeting of the American Economic Association in Atlanta, Georgia.

“However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool,” he continues.

Critics of the current economic turnaround plan have said the U.S. central bank kept interest rates too low in the early 2000s, which spurred a mad rush for the population to acquire housing, raising prices to almost unimaginable levels.

However, Bernanke said that it was a failure to regulate, not lax monetary policy that was responsible for the runaway housing bubble and subsequent financial meltdown due to subprime mortgage defaults.

“House prices began to rise in the late 1990s, and although the most rapid price increases occurred when short-term interest rates were at their lowest levels, the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone,” said Bernanke.

Furthermore, across the country evidence shows “no significant relationship between monetary policies and the pace of house price increases.”

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” said the U.S. central bank chief.

Concluding – “That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary,” said Bernanke.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.”

Better Regulation or Better Financial Education?

While Bernanke says the economy needs regulation. I’m of the mind that the best medicine to this ailing economy is better financial education for the population.

It is not enough that the government regulate the economy, but its people will be better spending time and money to get smarter about investing in assets. That way, when a crisis comes, you don’t have to rely on anybody. You will be ready, willing and able to make the necessary moves to deal with any up or down market.

More Power To Us,