"In deciding, we must walk a fine line: We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refunding opportunities for subprime borrowers," Bernanke said.
In fielding questions after his speech, Bernanke said that the currently benign risk environment in the global financial markets that has led to relatively low long-term term interest rates over the last several years probably won't last forever.
To global investors, Bernanke offered this advice: "Keep your head about you, so to speak" and make sure risk assessment systems are in good condition.
Bernanke also repeated his belief that heavy regulations are not needed to guide the hedge fund industry. Market forces, he said, are the best way to police potential problems.
"We believe the first line of defense in ensuring stability in the hedge fund sector is via market discipline," he said. Regulators, however, do need to keep close watch on hedge fund activities, he added.
Warsh Weighs In
Also Tuesday, Federal Reserve Governor Kevin Warsh said that financial regulators must stay on guard for investor overconfidence about risk as new financial products increase liquidity in financial markets.
"There is little doubt ... that liquidity in most financial markets is high today and that investors seem willing to take risks, even at today's market-prevailing prices," Warsh said in remarks to the European Economics and Financial Centre in London.
Warsh did not comment on the outlook for the economy or interest rates in his prepared comments, which were distributed in Washington.