Federal Reserve Chairman Ben Bernanke said on Friday that the U.S. recession had done lasting harm to household finances and that regulators must protect consumers from willfully confusing forms of credit.
"The damage from this turn in the credit cycle -- in terms of lost wealth, lost homes, and blemished credit histories -- is likely to be long-lasting," he said, in the sole reference to the economy in a speech to a community finance conference in Washington D.C.
"One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be," he said.
The Fed chief said that innovation should have been a force for good in making credit more available, but acknowledged that it was now perceived as being one of the main culprits for contaminating the financial system with deliberate complexity.
"The challenge faced by regulators is to strike the right balance: to strive for the highest standards of consumer protection without eliminating the beneficial effects of responsible innovation on consumer choice and access to credit," he told the Fed-sponsored conference.
Bernanke, who did not directly discuss the outlook for the U.S. economy or monetary policy and took no questions after his remarks, said that some lenders had purposefully made their products more confusing in order to mask higher fees.
"Some aspects of increasingly complex products simply cannot be adequately understood or evaluated by most consumers, no matter how clear the disclosure.
"In those cases, direct regulation, including the prohibition of certain practices, may be the only way to provide appropriate protections," the Fed chief said.
He cited credit cards charging a variety of interest rates that deliberately prolonged the period that customers were paying at the highest level, as well as subprime mortgage practices that understated the costs of home ownership.
"Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes," he said.
"When complexity reaches the point of reducing transparency, it impedes competition and leads consumers to make poor choices. And, in some cases, complexity simply serves to disguise practices that are unfair and deceptive."
He also took aim at the practice of repackaging loans into so-called securitized bundles that can be distributed to a broader range of investors than traditional bank lenders.
"The practice of securitization, notwithstanding its benefits, appears to have been one source of the decline in underwriting standards during the recent episode," he said.
"Complexity made the problem worse, as the wide array of specialized products made consumer choices more difficult."