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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World Fed's Bernanke warns of risk to bank independence AFP - Thursday, May 27 Send IM Story Print TOKYO (AFP) - – US Federal Reserve chairman Ben Bernanke mounted a staunch defence of central bank independence Wednesday, in a message tailored as much to Washington lawmakers as his Japanese hosts. Addressing a Bank of Japan conference in Tokyo, Bernanke warned that any curbs on central bankers' ability to execute monetary policy would lead to economic instability and "undesirable boom-bust cycles". Against the backdrop of a biting recession, the Fed -- like other central banks -- has come under fierce pressure to help reduce ballooning unemployment. But Bernanke warned banks must be allowed to make policy "based on what is good for the economy in the longer run, independent of short-term political considerations." "Policymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy's underlying potential," he said. "Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy's longer-term prospects." Bernanke's message will likely resonate with some of his hosts and in other capitals around the world. The Bank of Japan gained independence in 1997, but has often been criticised for being overly swayed by the ministry of finance. It has found itself under government pressure to combat Japan's crippling deflation ahead of upper house elections in July, in a bid to lift an economy saddled by falling consumer prices and soaring welfare costs. However, Bernanke hailed the 1997 law by saying "This revision significantly diminished the scope for the ministry of finance to influence central bank decisions, thus strengthening the Bank of Japan's autonomy in setting monetary policy,' he said. His comments are likely to be seen in Washington as a thinly veiled shot at US lawmakers, who are putting the final touches to a sweeping financial reform package that could give Congress more powers over the Fed. US policymakers last week approved a bill that curbs proprietary trading by banks and creates a consumer protection agency designed to prevent a rerun of the worst recession since the Great Depression. The set of rules "will govern how the government could come in and prevent the collapse of large financial institutions from creating chaos in the financial system," said Bernanke. During the 2008-2009 financial crisis the US Treasury and the Federal Reserve, considered a lender of last resort, bailed out major Wall Street institutions and provided billions of dollars to help them weather massive write-downs. In doing so the Fed helped firms such as American International Group, Citigroup, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Bank of America. "Once those rules are put into place whatever role the Fed has, if any, will be delineated by Congress and we hope never again to have to be involved in those kinds of activities," he added. During the crisis Bernanke frequently confronted criticism over political interference in the bank's independence as many saw him bowing to government pressure to rescue large financial firms. While he acknowledged a central bank can be an "extremely valuable" stabilising force, "that is a possibility to contemplate only under emergency and rare circumstances." The use of the Fed's balance sheet to prevent the collapse of the financial sector was "something that we didn't want to be involved in and it's really not ideally where the central bank ought to be," said Bernanke. "But there were no good mechanisms for preventing the collapse of those institutions." 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