TBO.com - TBO is Tampa Bay Online

Fed's Fiscal Crisis Role Up For Debate

ADVERTISEMENT

By JEANNINE AVERSA The Associated Press

The Tampa Tribune

Published: August 21, 2008

WASHINGTON - Thrust into the role of financial firefighter, Federal Reserve Chairman Ben Bernanke has taken unprecedented steps over the past year to battle the nation's worst credit and financial crises in decades.

For many, the verdict is still out on whether he opened the hoses too widely.

Although intended to prevent a broader economic meltdown, the Fed's actions have drawn criticism on Capitol Hill and elsewhere about whether taxpayers are being put at risk and whether expanded safety nets will encourage financial companies to gamble more recklessly in the future.

The Fed's handling of the credit, financial and housing debacles, which have badly burned the economy, is likely to spur debate at a high-profile conference this week in Jackson Hole, Wyo.

This year's forum will examine past and present financial crises and the challenges confronting Bernanke and other central bankers as they try to help stabilize financial markets worldwide.

Sponsored by the Federal Reserve Bank of Kansas City, the three-day conference opens today with a reception for Fed policymakers, economists, academics and international central bank officials. But the main attraction - a speech by Bernanke on financial stability - comes Friday morning, followed by a raft of academic papers and discussions.

At last year's conference, Bernanke was taking heat about whether to start lowering interest rates. He signaled the Fed stood ready to do so. It cut rates seven times from September through April.

The economy is the top concern for voters and of keen interest to presidential contenders Barack Obama and John McCain, who are gearing up for their respective party's conventions. The financial and credit problems are expected to smolder into next year.

The International Monetary Fund has described the financial shock as the biggest "since the Great Depression." But Bernanke - a scholar of the Depression - has said that although the current experience is not "remotely like" that, the ongoing financial distress in the United States is among "the most severe episodes of the post-war era."

Lax Lending For Mortgages

The roots of the current crisis can be traced to lax lending for home mortgages - especially subprime loans given to borrowers with tarnished credit - during the housing boom. Lenders and borrowers were counting on home prices to keep zooming. But when the housing market went bust, home prices plummeted. Foreclosures spiked as people were left owing more on their mortgages than their homes were worth. Rising mortgage rates also clobbered some homeowners.

"As we look back on it, we see that there were just some serious failures in the management of risks," Bernanke told Congress last month. "The regulators bear some responsibility on that."

As financial companies racked up multibillion-dollar losses on soured mortgage investments and credit problems spread globally, firms hoarded cash and clamped down on lending. That crimped consumer and business spending, dragging down the national economy - a vicious cycle that the Fed has been trying to break.

To brace the wobbly economy, the Fed has slashed its key interest rate by a whopping 3.25 percentage points, the most aggressive rate-cutting campaign in decades. But those cuts also aggravated inflation.

The Fed has taken a number of unconventional - and some controversial - actions to shore up the shaky financial system and to get credit, which is the economy's lifeblood, flowing more freely.

Fed's Unconventional Moves

In the broadest expansion of its lending powers since the 1930s, the Fed agreed in March to let investment houses draw emergency loans directly from the central bank. The Fed feared other investment banks could be in jeopardy after a run on Bear Stearns Cos. pushed it to the brink of bankruptcy. As part of JPMorgan Chase & Co.'s takeover of the failing company, the Fed provided a $28.82 billion loan.

In July, the Fed said troubled mortgage giants Fannie Mae and Freddie Mac also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision. Fannie's and Freddie's problems continued this week as concerns over their capital-raising abilities and the prospect of a government bailout caused shares of both to plunge.

The Fed also gave banks another way to tap short-term loans and let investment firms swap risky investments for super-safe Treasury securities. Those programs aim to help squeezed financial companies overcome credit problems so they can keep lending to customers.

Some critics worry the Fed actions could put taxpayers on the hook for billions of dollars and create a "moral hazard," where financial companies might feel more inclined to take extra risks in the future because they think the Fed will ultimately bail them out.

Bernanke has repeatedly defended the Fed's decisions, saying they were needed to avert a financial catastrophe that could have plunged the economy into a deep recession. The Fed chief also has said he doubted taxpayers would suffer any losses.

The Fed "never lost a penny" in past lending maneuvers, he said.

Worried about inflation, the Bernanke Fed halted its rate-cutting campaign. The Fed is expected to leave rates at the current 2 percent, a four-year low, when it meets Sept. 16 and probably through the rest of this year. But Richard Fisher, president of the Federal Reserve Bank of Dallas, wants to boost rates, fearing inflation could get out of hand.

If more Fed members join Fisher's camp next month, Bernanke will find himself trying to douse more fires: a Fed fragmented over when to boost rates and heightened concerns about inflation engulfing Wall Street and Main Street.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT