Addressing Weaknesses in Global Financial Markets

Federal Reserve Chairman Ben S. Bernanke spoke earlier today about how the recent turmoil in financial markets came about and how the recent recommendations by the Treasury Department should help to address the root causes. In a very readable summary of the situation, Bernanke writes: 'Although many factors played a role, to a considerable extent the current problems arose in the implementation of the so-called originate-to-distribute approach to credit extension. The originate-to-distribute model breaks down the process of credit extension, from origination to the ultimate financing, into component parts, or stages, in a manner reminiscent of how contemporary manufacturers distribute the stages of production across firms and locations. This approach has had considerable benefits, including increased access of small and medium-sized borrowers to the broader capital markets, but pitfalls in its implementation are now evident.'