By Steven K. Beckner

ATLANTA (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart said Wednesday that financial crisis are bound to recur, as
last week’s intensification of the Greek debt turmoil shows, and he said
there is “no magic bullet” to prevent them.

But he said there is a mix of steps that can and should be taken to
ameliorate future problems in the financial system.

Lockhart, summing up the Atlanta Fed’s annual financial conference,
said “I doubt we can engineer or legislate away too big to fail and
systemic risk in the short term. The political position of ‘never again’
sounds good but can’t be guaranteed.”

“Crises will recur I fear,” he said. “Last week may have been a
little bit of a reminder and wake-up call to that effect … . The
bumper sticker is right: stuff happens.”

The risks posed by large, internationally connected financial
institutions is a “condition” to be managed, not an illness that can be
cured, he said. “There is no magic bullet.”

Lockhart said it is “realistic to assume” that perfect symmetry
between public loss and private gain will never be achieved, that banks
will continue to pursue maximum returns to capital and that “the half
life of lessons of crisis will be shorter than we would like.”

“We are likely to see an attenuation of attention to the causes of
the crisis” in years to come, he said.

“To fortify our defenses” against financial crises, Lockhart said
it is important to recognize that “a mix of measures” will be needed,
not some “silver bullet.”

Among those measures, he said, are “better supervision, more and
higher quality capital, some Volcker limitations on permissible
activities, and a resolution authority that seems will be enhanced (but
that) will be imperfect, particularly regarding large, international
institutions, rating agency reform, action where possible on incentive
problems … all in context of greater international coordination.”

Boston Fed President Eric Rosengren earlier differentiated between
how monetary policy and supervisory policy are perceived.

For monetary policy, he said, people largely “accept the fact that
when we raise rates going to affect some areas of the economy
disproportionately and we don’t get much political interference.”

“My observation on the supervisory side is that is not as
true,” Rosengren said, “and one example of that was the real estate
guidance that started in 2004 … but didn’t come out until the problem
was much more severe.”

Rosengren said the Fed “knew there were real estated issues; we
just didn’t go as far to actually implement policies to actually address
them.”

He said recently released 2004 Federal Open Market Committee
transcripts show that “real estate was being discussed.”

Rosengren’s question was: “Is there something we can do to make
sure that supervisory policy as well as monetary policy is viewed as
more of a technical rather than a political thing?”

Paul Kupiec, associate director of the Federal Deposit Insurance
Corporation, expressed great skepticism about the government’s ability
to identify asset price bubbles and manage systemic risk, as proposed
legislation would have the Fed do.

He showed a cartoon depicting officials emerging from Fed
headquarters wielding butterfly nets and chasing bubbles … over a
cliff.

“We pretty much have a spotty record spoting bubbles,” said Kupiec.
The tools for identifying systemic risks are “not so good,” and “we’re a
good way” from developing such tools.

What’s more, Kupiec said there are “significant political pressures
to overpromise on stability benefits.” And he warned, “bankers may
embrace macroprudential oversight as a substitute for additional capital
and liquidity buffers.”

Such things should be considered “before we dive into these kinds
of approaches,” he said.

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$CR$,M$$BR$]