Bernanke: We Must Fix the 'Too Big to Fail' Problem

The government must be ready to close even the biggest banks if they threaten to bring down the financial system, Ben Bernanke said today, in testimony before the Financial Crisis Inquiry Commission. "If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," the Fed chairman told commission, which is investigating the 2008 crash. "Too-big-to-fail financial institutions were both a source ... of the crisis and among the primary impediments to policymakers' efforts to contain it," he said.

Bernanke praised the Democrats' new financial reforms, the Wall Street Journal reports, saying that had they been in place in 2008 "much of the chaos ... could have been avoided." The commission also asked Bernanke why the Fed had allowed Lehman Brothers to fail, and why it hadn't raised rates to curb the housing bubble. Bernanke replied that Lehman hadn't had the collateral to justify a loan, and that the Fed didn't like to use monetary policy to deal with market crazes. "We should use supervision and regulation to approach bubbles," he said. "We didn't do that. Going forward we need to be able to." (More Ben Bernanke stories.)