As economies around the world grow more interdependent, pressure increases on regulators to keep the financial services industry healthy, Federal Reserve Board Vice Chairman Alice M. Rivlin said Wednesday.
"We can't afford policy errors because the spillover effects on other countries are too great," Ms. Rivlin said during a speech to the Institute of International Bankers in New York.
Japanese banks have yet to recover from the dramatic drop in real estate values, she noted. That has hurt spending and borrowing in Japan as well as in scores of countries that sell goods there, she said.
The new global economy also means the failure of a major bank can have international repercussions, Ms. Rivlin said. "The crisis in one major banking institution can spread rapidly to others," she said.
But Ms. Rivlin added that she sees no signs of trouble in the U.S. banking industry. "The banking industry is as healthy as it has been in years," she said.
In wide-ranging remarks, Ms. Rivlin also praised the role that foreign banks play in the United States, saying they make one-third of all commercial and industrial loans and contribute to the "strength and vitality" of the economy.
Ms. Rivlin also said the Fed proposed raising the limit on commercial underwriting for banking company affiliates once it realized that Congress wasn't going to pass comprehensive Glass-Steagall reform this year. "We had been waiting for Congress to move but they just didn't get their act together," she said.
She added that she expects lawmakers to tackle Glass-Steagall reform again next year.
Ms. Rivlin also briefly discussed the state of the economy. She noted that several experts believe the government overstates the actual inflation rate because it doesn't account for improvement in financial and other service-sector products.
"We might find we were close to zero if we knew how to measure it," she said.
She also noted the current debate over whether the central bank should try to eliminate inflation entirely or if it should aim for a 2% or 3% rate. She did not take a position on the debate, saying there are pros and cons to both views.
Ms. Rivlin said the biggest economic challenge facing the United States is the growing gap between the rich and poor. Massive education and training initiatives are needed prepare low-income workers for higher- paying jobs, she said.
A similar problem exists on the international scene. The gap between rich and poor countries continues to expand. "The world community ... must think and act constructively to pull those countries off the slide," she said.
