Bernanke says credit downturn to do lasting harm

By Alister Bull

WASHINGTON (Reuters) - 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.