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Bernanke Advocates for 'Rainy Day' Funds

NEW YORK ( TheStreet) -- Federal Reserve Chairman Ben Bernanke said Wednesday evening that state and local governments ought to "revisit" their plans for building reserves against fiscal stress.

"Governments may wish to revisit their criteria for accumulating and using fiscal reserves," Bernanke said at an event in New York City. "Building an adequate reserve may not be politically popular, but doing so can pay off during bad times as well as lessen the tendency to overspend when times are good."

The Fed chief was the keynote speaker at the New York City's Citizens Budget Commission annual dinner, which honored him. His comments dovetail with those of other regulators and accountants who have advocated "counter-cyclical" reserve building at large financial firms.

Current policies support pro-cyclical reserve building, which requires big banks like Bank of America (BAC - Get Report), Wells Fargo (WFC - Get Report), JPMorgan Chase (JPM - Get Report) and Citigroup (C - Get Report) building up capital in bad times when crises occur and liquidity dries up. If policy supported the opposite approach, banks and municipalities alike would store capital in good times to use when times get tough.

States, cities and the federal government are now coping with major budget gaps that have led to unions protesting big funding cuts and Congress scraping together stopgap measure to keep the government running.

Bernanke said that "rainy day" funds would give local governments "more 'bang for the buck'" when tax revenue runs dry.

-- Written by Lauren LaCapra in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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