Dr Bernanke also said prudential policies being used in Australia and other Commonwealth countries are “the best approach” to address concerns about house prices.
“If Australia finds that because of the strong Australian dollar that it has high unemployment, then it would have to respond and it would either increase domestic demand or weaken its own currency,” he told an audience at the World Business Forum in Sydney on Thursday.
Dr Bernanke said during his time as chairman the US Federal Reserve created a division to monitor developments in the financial system, to identify problems and excessive risk-taking.
“I think the best approach to it is to monitor it closely,” he said.
“Australia, the UK and other Commonwealth countries are being particularly good at using various kinds of prudential policies to try to address concerns about housing prices, so I think that’s the best approach.”
He said it’s important that the central bank be allowed to use interest rates and monetary policy to achieve its macro economic objectives: jobs and keeping inflation under control.
“If that requires policies to prevent build-ups of risk or mis-pricing of other assets then that’s the second best solution I think.”
Slower China growth desirable
Dr Bernanke also discussed the changing economic environment in Australia’s key trading partner, China, suggesting slowing growth is inevitable and desirable.
However, the world’s second largest economy is unlikely to have a hard landing, he added.
Dr Bernanke said geopolitical shocks remained the biggest risk to the global financial system, which was in better shape than before the 2008 crisis.
“China can no longer grow based on its traditional model of exports, heavy industry and construction,” he said.
“It has to liberalise, and it’s in that process.”
Dr Bernanke said risks remained in the Chinese system, and gave the example of banks that have expanded their credit and issued “not very good loans” to regional governments and state-owned enterprises.
But he said China had the financial mechanisms to avoid a big shock.
“The one area I would put aside of course is geopolitical shocks,” Dr Bernanke said.
“It’s always possible something could happen in the Middle East or so on that would have major implications for the world economy, but that’s almost always true.
“By its very nature it’s very hard to know where the next shock is going to come from, but I think the system is stronger and so the chance of a destabilising kind of situation is less than it would have been otherwise.”
Dr Bernanke said former Bank of England governor Mervyn King would joke that central bankers and economic policymakers should strive to be boring.
“I’m hoping for a lot of boredom going forward,” he said.