WASHINGTON: Over a frantic weekend in mid-March, Ben Bernanke rewrote the rule book as chairman of the Federal Reserve. Like a military commander applying overwhelming force, he took steps then and over the next two months that some at the central bank are now calling the Bernanke Doctrine.
Today, Bernanke appears to have quieted many critics, especially on Wall Street, who earlier said he was overly academic and slow to react to market conditions.
But at the same time, new criticisms have surfaced that Bernanke has fanned inflation and contributed to the decline of the dollar by aggressively cutting interest rates. Some say he has put at risk billions in public funds by accepting devalued assets like mortgages and auto loans as collateral for loans to financial institutions. And by thrusting the Fed into new realms of intervention and regulation, he has raised questions about whether he is threatening the Fed's independence.
"It has been a really head-spinning range of unprecedented and bold actions," said Charles Calomiris, professor of finance and economics at Columbia Business School, referring to the Fed's lending activities. "That is exactly as it should be. But I'm not saying that it's without some cost and without some risk."
Timothy Geithner, president of the Federal Reserve Bank of New York, and a close Bernanke ally, defines the Fed chief's "doctrine" as the overpowering use of monetary policies and lending to avert an economic collapse. "Ben has, in very consequential ways, altered the framework for how central banks operate in crises," he said. "Some will criticize it and some will praise it, and it will certainly be examined for decades."
Bernanke's actions have transformed his image as a self-effacing former economics professor.
"I am tempted to think of him as somewhat Buddha-like," said Richard Fisher, president of the Dallas Federal Reserve Bank. "He's developed a serenity based on a growing understanding of the hardball ways the system actually works. You can see that it's no longer an academic or theoretical exercise for him."
Within the Bush administration, Bernanke's willingness to work with Democrats in Congress on measures to prevent mortgage foreclosures has stirred unease. "The fact that he, an appointee of George Bush, has come very close to advocating — though he hasn't quite advocated it — a piece of legislation that George Bush threatened to veto is an illustration of his willingness to put his head on the chopping block," said Alan Blinder, a professor of economics at Princeton and friend of the Fed chief.
One reason Bernanke is sticking his neck out is that he believes the broader economy's recovery depends on the housing sector, which remains in a serious slump. Plenty of new evidence surfaced on Tuesday that this year's spring home-buying season will be dismal, with one report showing that prices fell 14.1 percent in March from a year earlier and another that new-home sales are down 42 percent over the last year.
Among Democrats, Bernanke, a Republican, had previously been criticized by such party luminaries as the two former Clinton administration Treasury secretaries, Robert Rubin and Lawrence Summers, who worried that he was downplaying the dangers of a recession. But that view has changed.
"I think in the last few months they've handled themselves very sure-footedly," Rubin said of the Fed. Many Democrats in Congress agree.
"They say that crisis makes the man," said Senator Charles Schumer, Democrat of New York and the chairman of the Joint Economic Committee. "He's made believers out of people who were just not sure about him before."
To lessen the chances of a financial collapse, Bernanke engineered the takeover of one investment bank, Bear Stearns, and tossed credit lifelines to others with exotic new lending facilities — the Fed now has seven such lending windows, some of them for investment banks as well as commercial banks.
He also allowed the Fed to accept assets of debatable value — mortgage-backed securities, car loans and credit card debt — as collateral for some Fed loans. For the first time ever, he installed Fed regulators inside investment banks to inspect their books.
Much to the dismay of conservative economists, Bernanke has also presided over an extraordinarily aggressive series of interest rate cuts, lowering the fed funds rate seven times, to 2 percent from 5.75 percent, since last September, though it has signaled a pause in further rate-cutting barring a further crisis.
That performance has brought outside criticism as well as dissent within the Fed. Economists who played prominent roles in past Republican administrations, John Taylor at Stanford and Martin Feldstein at Harvard, are among the critics. Taylor, author of the so-called Taylor rule, which calls for a careful alignment of interest rates and inflation expectations, said the Fed's rate-cutting was "risky with respect to inflation and the dollar."
His criticism, and the fact that other economists cite the Taylor rule, has made the Fed somewhat defensive. In a recent speech, Kevin Warsh, a Bernanke ally and Fed governor, said that while the Taylor rule provided a "reasonable description" of the last 20 years, it failed to account for recent conditions.
Feldstein, also in an interview, said the lower interest rates made him nervous as do the new lending windows and acceptance of questionable collateral. These steps, he added, are not likely to help an economy that needs time digesting the housing crisis and lack of confidence among consumers.
"I frankly don't think there is more that the Fed can do to deal with the fundamental problems of the economy right now," he said. "They have done at least as much as they needed to do. They may have done too much."
Also warning against Fed overreaching has been Paul Volcker, the former Fed chairman who battled inflation in the 1980s. In speeches and testimony, Volcker suggested that the central bank's interventions, particularly its direct role in the fire sale of Bear Stearns to JPMorgan Chase in March, could compromise its independence.
Another friend of Bernanke, Kenneth Rogoff, a Harvard economist, said the Fed chairman was taking the central bank into a new era in which it could be difficult to ward off political pressures in the future.
"The Fed has been spectacularly successful at maintaining its independence," Rogoff said. "That's going to be much tougher if they take on a lot of new regulatory responsibilities."
The Bush administration has proposed that, in the future, the Fed be given an expanded regulatory role. But Treasury Secretary Henry Paulson Jr., in presenting a blueprint for reform, has left unclear what powers the Fed would have.
Buy all accounts, the recent actions under Bernanke have been taken in an atmosphere of debate and even anguish.
The policy of lowering interest rates was especially hotly debated within the Fed, according to the minutes of the last meeting of policymakers.
"The Fed has worked hard for 30 years to develop credibility with the public that we will deliver on low and stable inflation," said Charles Plosser, who as president of the Federal Reserve Bank of Philadelphia voted against the two recent interest cuts. "That credibility is hard to earn, but easy to lose if you're not careful."
But both Plosser and the other dissenter on interest rates last month, Fisher of the Dallas Fed, said in interviews that they appreciated Bernanke's efforts at listening to dissent and his creativity.
"These new facilities are Ben's initiatives," Plosser said in an interview. "He has been willing to take a fresh look at how the system works and press the boundaries in a thoughtful way."
Bernanke has impressed many colleagues and lawmakers with his political skills, gently conveying his views behind the scenes to both Democrats and Republicans.
For example, in the last month, he and his staff have worked with Democrats in Congress to produce housing legislation to prevent more mortgage foreclosures, getting well out in front of the Bush administration, which was threatening to veto one version of the legislation.
On another occasion, when the Fed chairman called for banks to write down the principal of delinquent mortgages, his pre-emptive move rankled some in the Bush administration. The Fed chief called Paulson to apologize for not giving the administration an advance warning of his position.
Bernanke, on the other hand, pleased the Bush administration by pressing reluctant Democrats to seek more drastic changes in the governance and capitalization of the two big federal mortgage-finance companies, Fannie Mae and Freddie Mac. "You're never going to have two people with an identical approach," Paulson said of himself and the chairman. "But not only have our goals been the same, I think the way we've come together has been similar. Ben is smart, creative, open to new ideas and always looking around the next corner."
Other associates of the Fed chief say the extraordinary crisis atmosphere of the last year has stiffened Bernanke's resolve, but also caused him anguish.
"Ben is one of these guys who is outwardly calm and has inner stomachaches," Professor Blinder said. "He's under a tremendous amount of strain."
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