Today In Economic History
From the Senate Banking Committee hearing to confirm Bernanke as Greenspan's successor, November 15, 2005:
SENATOR SARBANES: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?
BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced, and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.
...
SENATOR SARBANES. Do you think these issues contain a sufficient danger in them that it would warrant the Fed undertaking a special examination of these questions if you were to become the Chairman? Because if this went bad on your watch, I mean, there could be tremendous consequences, obviously.
BERNANKE: I think it is useful to have informal contacts to try to understand what is going on in the market, and the Federal Reserve has various mechanisms for learning about this market; in particular, working through the various counterparties that deal with hedge funds.
SENATOR SARBANES: Well, I commend this area to you as one that should have some focus of your attention. Otherwise, it may well come back to haunt you.
SENATOR SARBANES: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?
BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced, and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.
...
SENATOR SARBANES. Do you think these issues contain a sufficient danger in them that it would warrant the Fed undertaking a special examination of these questions if you were to become the Chairman? Because if this went bad on your watch, I mean, there could be tremendous consequences, obviously.
BERNANKE: I think it is useful to have informal contacts to try to understand what is going on in the market, and the Federal Reserve has various mechanisms for learning about this market; in particular, working through the various counterparties that deal with hedge funds.
SENATOR SARBANES: Well, I commend this area to you as one that should have some focus of your attention. Otherwise, it may well come back to haunt you.
posted by The Cunning Realist at Monday, November 15, 2010
6 Comments:
"With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."
Oh, good. The same professionals who managed the MBS market.
CR - good to see you posting again!
Bill M
Nice find
may come back to haunt whom?
Ummm... Fel baby. He clearly means Bernanke's reputation and... Cough... Cough... "good" name.
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