Bernanke sees regulatory role in fighting bubbles

WASHINGTON (Reuters) - Economic policymakers may need to use their regulatory authorities to anticipate and restrain asset price bubbles, such as in the housing market, that cause big economic problems when they burst, Federal Reserve Chairman Ben Bernanke said on Wednesday.

"Obviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the U.S. economy. And there's no doubt as we emerge at the current crisis we're all going to be looking very hard at that issue and what to do about it," Bernanke said in remarks to the Economic Club of New York.

One debate that needs to take place is about the role that monetary policy and supervisory regulatory policy should have in fighting asset bubbles, he said.

"I do believe the latter does have a significant role to play in constraining excessive leverage, excessive risk-taking and the other elements that lead to bubbles," said Bernanke, who has previously said it is hard for policymakers to burst an inflating asset bubble.

One reform U.S. policymakers should consider is a "more macro-oriented or a more macro-prudential regulatory system that takes into account the broader issues of financial stability, as well as issues related to the safety and soundness of individual institutions," Bernanke said.

Bernanke has said in a previous speech that regulators tend to focus on a specific institution and may fail to see risks to the broader financial system.

One key to resolving the current crisis is to prevent further sharp declines in housing prices because of the "adverse feedback" effect that has on the financial system as a whole, Bernanke said.

Steps the U.S. government has already taken to shore up the banking system should help do that, but "the U.S. housing market is enormous and affecting it directly is difficult," Bernanke said.

U.S. policymakers should continue to push in that direction because stabilizing house prices "will be a critical element I think in stabilization of the financial system and then the recovery of the economy," Bernanke said.