Ben Bernanke: They don't deserve it, but we have to give banks special treatment

The incoming US administration and Congress are discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilise and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.

The public in many countries is understandably concerned by the commitment of substantial government resources to aid the financial industry when other industries receive little or no assistance. This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt. Indeed, the destructive effects of financial instability on jobs and growth are already evident worldwide. Responsible policymakers must do what they can to communicate to their constituencies why financial stabilisation is essential for economic recovery and is therefore in the broader public interest.

Even as we strive to stabilise financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises. Particularly pressing is the need to address the problem of financial institutions deemed "too big to fail".

It is unacceptable that large firms the government is now compelled to support were among the greatest risk-takers during the boom period. The existence of too-big-to-fail firms violates the presumption of a level playing field among financial institutions. In the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking.

In the near term, the highest priority is to promote global economic recovery. But we do not have the luxury of postponing work on longer-term issues. High on the list are strengthening regulatory oversight and improving the capacity of both the private sector and regulators to detect and manage risk.

Ben Bernanke, chairman of the US Federal Reserve, spoke at the London School of Economics yesterday